BorgWarner Inc (BWA) — Q4 2015 Earnings Call Transcript

Thank you, Melissa. Good morning and thank you all for joining us. We issued our earnings release this morning at around 8:00 a.m. Eastern Time. It's posted on our website, borgwarner.com, on our Investor Relations home page. A replay of today's conference call will be available through February 18. The dial-in number for that replay is 800-585-8367. You'll need the conference ID, which is 25547967 or you can listen to the replay on our website. With regard to our investor relations calendar, we will be attending the following conferences between now and our next earnings release; The Barclays Industrial Conference in Miami on February 17 and the BofA Merrill Lynch New York Auto Summit in New York on March 23. Now, back to today's earnings release. Before we begin, I need to inform you that during this call, we may make forward-looking statements which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. Now, moving on to our results, James Verrier, President and CEO, will comment on the industry and provide a high-level overview of our results and expectations for 2016. And then Ron Hundzinski, our CFO, will discuss the details of our results and guidance. Please note that we have posted an earnings call presentation to the IR page of the website. You'll find the link at the events and presentation section beneath the notice for this conference call. With that, I will turn it over to James.

Thank you, Ken. Welcome everyone, and thank you for joining us this morning for the call. As Ken mentioned, I will share some high-level insights regarding the industry and BorgWarner. I will give a brief recap of our financial numbers, after which Ron will dive into the specifics. For those following along with the deck, I am now on Slide 1. To start, I want to provide an overview of the macroeconomic landscape and industry. At a general level, we are seeing a lot of uncertainty globally, influenced by factors such as oil prices, the strength of the dollar, and issues in the Middle East. However, we also observe a robust auto industry, and I will elaborate on this as I proceed. Despite the macroeconomic uncertainties, we are witnessing strength in the auto sector. I also want to address the situation in China, a crucial market for BorgWarner's growth. As we enter the year, we expect China's GDP to grow in the mid-single digits, with auto production projected to increase by around 3% to 5%. The incentive programs that began at the end of last year are expected to continue throughout most, if not all, of this year, contributing positively to our results. We see a stable outlook in terms of GDP and auto production, which is encouraging for our business growth in China. In terms of production forecasts, our views for light and commercial vehicles align well with IHS projections. In North America, we anticipate production in the 17.5 million units range, plateauing from previous highs. In China, we expect light vehicle production growth of about 3% to 5%, while Europe is expected to see a 1% to 2% growth in light vehicle production. The commercial vehicle sector remains challenging, with little to no growth projected globally for this segment. There are three main areas we are closely monitoring as the year progresses: the outlook for the commercial vehicle sector, the impact of incentives in China, and developments concerning our largest customer, Volkswagen. Overall, many factors are evolving as we had anticipated coming into the year, a trend reflected in our early results. Switching to the regulatory and technology landscape, we continue to see a strong push towards fuel economy and emissions regulations, with no signs of our customers losing interest in compliance with standards like CAFE. The recent updates in Europe regarding emissions standards underscore this push for enhanced fuel economy. The pace of transition towards increased electrification of powertrains is also accelerating. BorgWarner is actively involved in discussions with various customers about a range of electrified powertrain architectures, including 12-volt, 48-volt, mild hybrids, and full electric vehicles. Our current efforts in electrification are illustrative of both our immediate and future prospects. Currently, we expect to ship roughly 15,000 single-speed transmissions for pure electric vehicles in China this year, highlighting our commitment to both present and future needs. Regarding diesel engines, we do not anticipate any significant shift between gas and diesel in the short term, but we recognize an eventual transition towards more gas engines, and we believe BorgWarner is well-positioned to capitalize on that trend. Now, let’s look specifically at BorgWarner. To recap 2015, it was a strong finish for us. We reported $2.1 billion in sales for Q4, a 7% increase when excluding currency fluctuations and the impact of Remy. Our EPS on a comparable basis stood at approximately $0.75, with operating margins at 12.6%, or 13.2% when excluding Remy. In terms of segment performance for Q4, engine sales totaled about $1.4 billion, representing 1% growth reported, or 10% when excluding currency effects, largely driven by strong turbocharger sales. Drivetrain sales for the quarter were $735 million, a 20% increase that included the influence of Remy, though it equated to about 1% growth when adjusted. We noted significant growth in all-wheel-drive systems in North America, while transmission growth in Europe was lower. Looking at 2015 overall, total sales were $8 billion, a 3% decrease from 2014, but rose 4.3% when excluding Remy, FX, and Wahler impacts. Our EPS was $2.70, or $3.02 per share when not accounting for non-comparables and Remy. The full-year operating margin was 13%, improving to 13.2% when excluding Remy. We continued to invest in our future, with capital expenditures at 7.2% and R&D at about 4%, excluding Remy. As we move into 2016, we are optimistic about the year ahead and are reaffirming our guidance for Q1 and the full year, which Ron will elaborate on shortly. We are nearing the completion of restructuring efforts that we have focused on for the last 18 months, and we expect to benefit from this as we progress. We anticipate delivering mid-single-digit growth and strong operating performance. Regarding growth highlights, we are very pleased with the acquisition of Remy, which has proven to be strategically significant. The integration process is progressing well from both operational and financial perspectives. Exciting technology discussions are taking place surrounding the combination of the Remy and BorgWarner product lines, particularly focusing on hybrid vehicle applications. Additionally, we recently announced the GEN-5 electro-hydraulic all-wheel-drive coupling for the Volvo XC90, along with engine timing and VCT products for Hyundai V6 gas engines. Our booking cadence remains strong and aligns with growth expectations, especially as we advance in electrified powertrain development. In summary, despite some challenges in 2015, we are moving confidently into 2016. The business is performing well, and we are focused on driving growth through the adoption of our technology. We are optimistic about meeting the guidance that Ron will now detail. Thank you, and I’ll turn the call over to Ron.

Thank you, James. And good day, everyone. Before I begin reviewing the financials, I would like to commend all of our employees for their hard work in the quarter and more specifically a great finish to the year. Also as Ken mentioned, I will be referring to the supplemental financial slide deck that is posted on our IR website. I encourage you to follow along. Now on to our financials. Let's start on Slide 3. Sales on a reported basis were up 6.6%. However, to get a clear picture of how the core business performed, we exclude the impact of FX and Remy. And excluding those items, sales are up 7.1%. Gross profit as a percentage of sales was 21% in the quarter or 21.4% excluding Remy, up 70 basis points from a year ago. SG&A as a percentage of sales was 8.4%. Again, excluding Remy, SG&A was 8.2% of sales, a 30 basis points improvement from a year ago. R&D spending, which is including SG&A was 3.6% of sales. I would like to point out Remy did impact that number by 20 basis points. It was probably 3.8% without Remy. Now, let's look at the year-over-year comparison for operating income which can be found on Slide 4. Starting on the right, fourth quarter 2015 operating income adjusted for non-comparable items including Remy was $269 million or 12.6% of sales. Excluding Remy's $8 million of net contribution to operating income, operating income was $261 million or 13.2% of sales up 80 basis points from a year ago. Excluding non-comparable items, Remy and FX, operating income was up $34 million or $141 million of higher sales. That gives us an incremental margin up 24% in the quarter. A reconciliation of the reported operating income to operating income adjusted for non-comparable items plus Remy can be found in the appendix on Slide 9. For the full year, our incremental margin excluding non-comparable items, Remy and impact of currency was 19%, very good performance despite some operational inefficiencies related to the Drivetrain restructuring activities earlier in the year. As you look further down the income statement, equity and affiliate earnings were about $12 million in the quarter in line with last year. Interest expense and finance charges were $18 million in the quarter up from $10 million a year ago. The increase is primarily related to the $1 billion and €500 million fixed rate senior notes issued in the first and third quarters of 2015 respectively. The provision for income taxes in the quarter, on reported basis was $61 million. However, this included $12 million of net tax benefits associated with the non-comparable charges and an $8 million favorable tax adjustment. You can read about these items in our 10-K, which will be filed later today. But excluding these items, the provision for income taxes was $81 million or an effective tax rate of 30.7% in the quarter. Our effective tax rate for the full year was 29.8% or 30 basis points above our estimate. Net earnings attributable to non-controlling interest were about $10 million in the quarter up slightly from $8 million in the fourth quarter of 2014. That brings us back to net earnings which were $125 million in the quarter, net earnings excluding the non-comparable items but including Remy were $173 million or $0.77 per diluted share. Now for comparisons with prior periods, net earnings excluding non-comparable items were $168 million or $0.75 per diluted share. Let's take a closer look at the operating segments in the quarter. So, beginning on Slide 5 of the deck, as James said earlier, reported Engine segment net sales were about $1.4 billion in the quarter. Sales growth for the Engine segment excluding currency was 9.8% compared with the same period a year ago. Turning to Slide 6. Adjusted EBIT was $230 million for the Engine segment or 16.5% of sales. Excluding currency, the Engine segment's adjusted EBIT was up $19 million on $136 million of higher sales for an incremental margin of 14%. Turning to Slide 7 and starting with the right side, Drivetrain segment net sales were $735 million in the quarter. Excluding Remy and FX, sales growth for the Drivetrain segment was 1.3% compared with the same period a year ago. As James said earlier, higher all-wheel-drive sales in North America were offset by lower transmission component sales in Europe. On Slide 8, adjusted EBIT was $81 million for the Drivetrain segment or 11% of sales. Excluding Remy, adjusted EBIT was 12.5% of sales, an impressive 180 basis points from a year ago. Excluding Remy and FX, the Drivetrain segment's adjusted EBIT was up $12 million on $8 million of higher sales for an incremental margin of 156%. I would like to remind you that in Q4 2014, we incurred about a $5 million to $6 million headwind through restructuring inefficiencies which are behind us now. Drivetrain's 12.5% adjusted EBIT margin matches its best quarter performance ever. It was just three years ago that Drivetrain margins were running around 9%. At that time, we committed to improving the margins in the segment and we are pleased with its progress. Now let's take a look at the balance sheet and cash flow. We generated $868 million of net cash from operating activities in 2015, up $66 million from a year ago. We had a very strong finish to the year generating nearly $400 million of cash in the fourth quarter driven by exceptional working capital management. Capital spending was $577 million in 2015, up $14 million from a year ago. As James said earlier, capital spending in 2014 and 2015 was above our trend. We expect to return to normal spending levels beginning in 2016. Free cash flow, which we define as net cash from operating activities less capital spending was $290 million in 2015, up $52 million from 2014 and $41 million above the high end of our guidance range provided in October. This positive trend is expected to continue. We expect to generate between $400 million and $475 million of free cash flow in 2016. At the midpoint, that is up 50% from 2015, $200 million to $300 million of free cash flow will be used to repurchase shares in 2016. Looking at the balance sheet itself, balance sheet debt increased by $1.23 billion and cash decreased by $220 million. In 2015 compared with the end of 2014, the $1.45 billion increase in net debt was primarily driven due to the Remy acquisition, capital expenditures, dividend payments to shareholders and share repurchases. We spent $315 million repurchasing 8.1 million shares in 2015 and that's on schedule for executing our $1 billion share repurchase program by the first quarter of 2018. Our net debt to capital ratio was 35.4% at the end of 2015, up from 12.8% at the end of 2014. Net debt to EBITDA at the end of the year on a trailing 12-month basis was 1.4x. Now, I'd like to spend some time on our 2016 guidance which is unchanged from our initial announcement. I'm going to go through the same numbers presented at the Deutsche Bank Global Auto Industry Conference that we did a couple of weeks ago. I would ask you to please bear with me. I think as a management team we thought this is really important to go through this and it will be very detailed but nonetheless we think it's very important that I do this. So, let's start with sales growth guidance for the full year. I want to remind everybody the baseline for 2015 net sales excluded Remy, which was just under 7.9. So, starting point is without Remy. So net new business pricing and market rate growth are expected to drive 2.5% to 5.5% sales growth. Currency is expected to reduce sales growth within a range of 230 basis points at the low end and 80 basis points at the high end of the range. Those two items combined to equal 0.2% to 4.7% of expected sales growth for our base business in 2016. The Remy acquisition should add 13% to 13.5% growth leading to 13.2% to 18.3% growth for the total company. From an operating performance perspective, we are expecting an 18% to 20% incremental margin on our core business sales growth. Included in this are $15 million to $25 million of tailwinds from the Drivetrain restructuring and increased efficiency related to the completion of that activity. These tailwinds will be partially offset by about 5 million in higher compliance and other corporate expenses. On a comparable basis, we expect our operating margin to be greater than 13%, up from the prior year for the 7th year in a row. The Remy business is expected to deliver mid-single digit margins this year. Its net distribution to operating income includes cost synergies and purchase accounting adjustments. So our consolidated operating income margin is expected to be above 12%. We expect earnings of $3.11 to $3.32 per share on a consolidated basis, which includes about $0.13 per share from Remy. Excluding Remy, we expect earnings to be $2.98 to $3.18 per share. Now, let's review the first quarter guidance starting with sales growth. Again, this has been unchanged from what we gave guidance a little while ago. We expect new business pricing and market related growth of about negative 3% to a positive 2.7%. As we said in January, we do expect higher light truck related volumes in North America but this will be partially offset by two European transmission programs that begin phasing out in the fourth quarter. We are also layering in risk associated with the market volatility in China. Currency is expected to reduce sales growth between 380 basis points at the low-end and to 240 basis points at the high-end of the range. In 2015, the euro was at its highest point during the first quarter. If our currency assumptions for 2016 are correct, the impact of currency will be relatively severe in the first quarter but less throughout the year. Those two items combined equal minus 4.1% at the low-end and 0.3 at the high-end of our core business. The Remy acquisition should add 12.4% to 13% growth leading to an 8.3% to 13.3% growth for the total company. We expect earnings of $0.75 to $0.79 per share on a consolidated basis, which does include about $0.03 per share from Remy. Excluding Remy, we expect earnings to be $0.72 to $0.75 per share. So let me summarize 2015. 2015 was a good year for BorgWarner. We grew mid-single digits. We expanded our operating margins, we also completed the Remy acquisition. We completed the Drivetrain restructuring and we made capital investments that set the stage for continued growth and improved operating performance going forward. Now, as we look into 2016 and beyond, we see improvements in a number of key areas. First and most important is the intensity around new product development to support the impending electrification trend James mentioned earlier. I have never seen this intensity higher in this company since I have been here. There was no question in my mind that this will drive growth for many years. Second, operating income and cash flow will go higher. And finally, the future is bright for BorgWarner.

Thanks, Ron. Now, let's move to the Q&A portion of the call. Melissa, please remind everyone of the Q&A procedures.

Good morning. This is for Deepa Raghavan for Rich Kwas. A few quick questions. What is your incremental margin assumptions by segment for 2016?

We don't provide that kind of guidance by segment. We just give the total company guidance which is on the deck that I was referring to earlier.

Okay. Secondly, could you also give us early read on integration synergies from Remy?

Sure. Back in the announcement in last July, I believe it was, we gave guidance that the synergies on the cost side were going to be $15 million. I would say we were on track of hitting that goal at this point. We didn't give any synergies at this point on the sales side but we are getting momentum there as well and now we have more clarity as we go forward.

Okay. This is for 2016?

The cost synergies were 2016.

Okay. Thank you. That's all I have.

Good morning.

Good morning.

Let's see here. Can you talk about Remy as we look into 2017 and 2018 and specifically your revenue growth expectations and your margin expectations?

Yes, I can address that, Brett. From a revenue standpoint, our growth outlook is quite similar to BorgWarner’s overall. We expect mid-single digit growth for 2017 and 2018. Starting from this mid-single digit growth, we anticipate being able to increase that to high single digits over the next two to three years, although it is still early in the process.

As you aim for high-single digit growth, is that influenced by purchase accounting, or is it primarily related to restructuring, or is it a mix of both?

I would say it's not purchase accounting coming off. It's more operational driven.

Is there a step function improvement as a result of purchase accounting at some point in time in the near future?

There is, but I think it's 18, maybe 18 or 19. Some of the items are removed after three years, while others last 10 years. There is a long tail for that, so we won't see some of those benefits for a while.

Okay. Hopefully, we will be on a beach by then. Regarding the margin drivers for 2017, what are the one to three key factors, and do you expect them to increase or decrease? It seems like they should increase, but I would like to know your thoughts.

So Brett, you are referring to 2017, not 2016, correct? I want to ensure I understand correctly. We consistently target mid-incremental margins, aiming for mid-teens incremental margins on our sales growth. This is higher than our current nominal value, which would lead to improved margin expansion. However, I have to acknowledge that the Drivetrain segment is still not performing at the level of the Engine group, so there may be additional benefits there. I’m also considering the Remy discussion we just had and the contributions from Wahler going forward. I don’t have all the specific numbers, Brett, but I believe there are several favorable factors I mentioned.

Okay. Do you see any particular headwinds?

We don't see any headwinds at the moment. We expect commodity prices to remain stable, including oil prices. I don't see anything impacting us right now.

Let's discuss the share repurchase from the quarter and what your expectations are for the future run rate.

Before we did $220 million a quarter, $350 for the full year, obviously, we are very heavily weighted in the fourth quarter. We purchased a lot. We intend to stay at a healthy pace right now as well, I would say that in the first half of this year, 2016.

Well, I guess my question is, that I mean, you did $39 million in the first I think and $25 in the second and $67 in the third and then you did $220 million in the fourth. And so do I model $50 million per quarter or do I model $200 million per quarter? I mean if you were me, what would you do?

I think at this point it may be more linear at this point to model, okay.

I guess, I'm not sure what that means.

Well, like 50:50 number you gave out, I would say at this point.

Okay, cool. Perfect. Thank you very much gentlemen.

Appreciate it, Brett.

Hi. Good morning, everyone. Thank you for reviewing the guidance again and providing more detail on the various regions and factors affecting our outlook. To summarize, it seems you're anticipating industry volume growth of approximately 1.5% to 2%, which could be counterbalanced by annual price declines. If we consider the midpoint of your organic growth guidance, it remains around 4%. In other words, how do you view the additional content you plan to introduce in the city? Is that a reasonable interpretation?

Yes. This is James, Joe. That's a really good summary. I think markets are close enough to offset each other, which implies about 4% of organic growth. That is a good summary.

Okay. And then, so, it was in the range it's mostly volume or sort of timing of some of the programs come on that are going to take us from the high-end to the low-end?

Yes. Let me explain it this way. The primary factor driving our organic growth is the net new business. I want to highlight that the performance is particularly strong in China and Asia. We're also experiencing positive product launches in North America and some notable program launches in Europe. This is what is fueling our growth. As we mentioned in Detroit, we have approached the volume and timing of these launches cautiously to ensure a practical rollout, and we have also factored in some macroeconomic pressures that we discussed previously. Does that help clarify things, Joe?

Yes, that is helpful. I apologize if I missed this, but could you clarify the incremental flow-through volume on powertrain for the quarter, which was well over 100%? Additionally, can you remind us about the timing of the European restructuring you have undertaken and how it will impact this year? I believe you should reach the right run rate in the second half; is that correct?

Right, Joe. Two questions. First to talk about the Drivetrain incremental margin of 156%. In my script, I pointed out that in Q4 of 2014, if you go back to transcript you will see $5 million to $6 million headwind. And you would have saw that actually sales erupt and incremental margins down a year ago. That's behind us. So what you're getting, are you're getting $6 million of flow through that we didn't have a headwind on in the fourth quarter of this year versus last year.

Okay.

So that $12 million, half of it is in one area right there. Then as we move into 2016, if you recall, Q1 of 2015 experienced about a $9 million headwind, with $3 million of that in the first quarter and another headwind in the second quarter as well. Clearly, we will have those headwinds behind us in the first half of the year and will benefit from tailwinds there, which have strong incrementals. Then, as you mentioned, we will level off in the second half of the year to more normalized margins. Hopefully that helps.

Sorry, but those headwinds you faced last year were for some of the costs associated with moving equipment and some other restructuring. I guess what about the benefits from the actions you've taken like when do those start coming in like aside from the non-repeats of the costs you incurred?

Well, right now they are starting to come in. Remember, I also said that we were running at 9% margins. We are now up in the 12s. We have been benefiting over time as this volume comes into play. So we are seeing the benefits now, and the inefficiency headwinds are diminishing, making it a combination of both factors that is lifting those margins into the 12 range right now.

Okay, great. Thanks very helpful.

You're welcome.

Good morning, guys.

Good morning.

Just a first question and I don't necessarily you won't agree that we are facing down the barrel of the abyss in the cycle here but clearly the market is indicating some extreme concern of a downturn hitting very soon. So, if we were to think about a downturn of 5% in volume and then maybe 10% in volume, could you just sort of run through how would you think about reacting from an operating standpoint as well as maybe capital allocations standpoint?

Yes, let me have John discuss the operating side. Firstly, the good news for us is that, as we assess the global situation of the company, our temporary employees are in a much healthier state compared to before. Depending on the region, 10% to 20% of our workforce is temporary, which allows us to respond quickly and adapt on the labor side. In Europe, we have more progressive agreements in place than we did previously, so I feel confident about adjusting our labor strategies. Additionally, we have become quite adept at flexibly managing discretionary spending based on past cycles. These are the two key areas we can adjust quickly, aiming to manage our business with a target of around a 20% rate, which is aligned with our sales outlook. I want to emphasize that our operations worldwide have detailed plans ready, specific to each region and plant. Therefore, I feel prepared to handle any pressures that may arise.

I understand capital allocation depending on the cash flows, we will have to reassess what we do with capital allocation, 5%, 10% might have some impact I think, we would have to watch, John. But I don't know 10% will become more stressful, I guess, 5% probably wouldn't.

Okay. And then just a second question, I mean Ford announced this morning that they are launching four new SUV's in the North American market and actually maybe beyond that. FCA is talking about adding truck capacity or changing over car capacity to truck capacity. So it just seems like the whole world is moving towards these cross-over in trucks. That should be good for your content. Can you talk about what you are seeing in the market and what kind of potential you have both in engine and Drivetrain as we see the shift going forward?

I believe you are correct, John. Currently, I'm referring specifically to North America. Generally, the mix of trucks to cars is slightly favorable for us. It's well established that this varies somewhat by customer. We are quite satisfied with our position on the Ford platforms, particularly the F-150. With FCA, we are in a good spot, while with GM, we are somewhat less well positioned, but we are actively working to improve that. Overall, we have a balanced portfolio in terms of Engine content and Drivetrain content. On the Drivetrain side, we are strong in transmission content, and our transfer capability is solid. Regarding the Engine, a significant shift has been the increase in turbocharged engines for these vehicles, which benefits us positively, and we are also gaining good content related to Engine timing. Overall, this creates a favorable environment for us.

And on margins, any color there on the delta between the car and crossover and truck?

Not really much of a difference there for us, John. It's pretty consistent cars to trucks and region to region actually which we've set fairly consistently so it doesn't change that much for us.

Okay, great. Thank you very much.

Thank you.

Good morning. Yes, I wanted to talk a little bit about the transmission business. The short-term question like a mid-term question, the short-term question is, what's behind the lower transmission component in Europe. You talked about maybe some programs being phased out, there are replacement programs coming later in the year. Are there any trends we need to think about in terms of AMT versus traditional, planetary versus CBT going on?

There is a couple of moving pieces on that transmission Europe aspect. One aspect is, one of our German customers did inventory shifts in Q4 and we saw a little bit of that in Q1 on transmission related products. And you have seen that's been in the news publicly so you probably know that. That was an element of it. The other element of it was European transmission programs that are phasing out for us. The replacement programs, I would say net neutral to negative for BorgWarner. It's hard for me to speak to the exact detail because of the customer. Importantly these were planned, this is all part of our net new business assumption. It was all expected for us, so it's not a surprise. It's nothing knew. And I would say a high level brain it's a signal of a significant shift in transmission architecture. This is not people making massive moves between stepped automatics to DCT or automated manual. I think it's more specific program by program for a couple of customers.

And then, second question which you kind of touched on but maybe just kind of pull the pieces together, X Remy a fairly incremental margin which means pricing or restructuring or some benefit. Can you kind of elaborate on the margin improvement ex-Remy and the Drivetrain and the cadence of that as we think about the rest of the year.

Okay, Brian, so, the incremental margin for the quarter 24% was primarily driven by the Drivetrain segment being up 156%.

Yes, that's 156 in Drivetrain.

The Drivetrain significantly contributed to the overall company performance. While we recorded a 14% to 15% increase in engine sales, it is important to note that we faced about $6 million in headwinds last year that impacted us. From the $12 million increase in operating income, a substantial portion was due to the absence of these inefficiencies. Additionally, the business is on an upward trajectory, which is a key aspect of the restructuring. In the previous year, we encountered headwinds in the first two quarters, but by Q3 and Q4, those challenges eased, and we began to see improvements in our incremental margins. Therefore, the first half of 2016 should benefit from favorable conditions as we no longer face those inefficiencies, with a return to more typical incremental margins expected in the second half.

Yes. Finally, can you provide insight into the contribution from Remy within the Drivetrain, particularly comparing traditional Remy products with new growth opportunities and how these efforts have progressed since the deal was closed?

Yes. Let me talk to that a little bit, Brian. I think what we have alluded to so far, we feel comfortable, as we look out into the next couple of years that Remy is going to deliver good mid-single digit type growth for us. As you can imagine, that's primarily driven off the existing portfolio products into new channels. So what I mean by that is, this two primary channels of growth for us with the current portfolio. One is customers. They have a relatively narrow band of customers. With BorgWarner's breadth of coverage on customers that's going to drive content with their existing products. The second growth driver for us is a regional play where they have a strong position in North America, they are well positioned in China but quite weak in Europe. So that's going to be a series of opportunities for us to sell current portfolio of products. And that will drive the content growth over the next two or three years. Then to your point in parallel to that, there is a lot of discussions that we are having with customers around combination products of the Remy architecture and BorgWarner architecture. I'd say there is a number of areas and we can talk more about this offline. But the most prevalent area of discussion right now is the notion of a P2 hybrid architecture, so combining clutching know-how together with the motor know-how and we got a lot of interest in that. That's likely to be a revenue stream that's probably four to five years out but it's very active and driving it. So hopefully that gives you a sense of both the shorter-term growth levers then the longer-term growth levers.

Thank you.

Hi, everybody. A couple of housekeeping things first. Just I apologize for asking this again, but in the Drivetrain business, can you clarify what the combined benefit is of the non-recurrence of the headwinds plus the restructuring savings that you expect for 2016?

If you refer back to our full-year guidance, which was presented in the slide deck at Deutsche Bank, there is a slide that indicates we have a tailwind of approximately $10 million to $20 million for the year, as opposed to a headwind we faced in 2015. This tailwind is what supports the incremental margins of 18% to 20% for the company this year, compared to the typical mid-teens range.

I understand that part. That's the non-recurrence of the headwind. However, there is an additional aspect regarding the savings from some of the restructuring actions you have implemented.

If we look back, we mentioned that the benefits were expected to yield about $30 million in operating income gains moving forward. Over time, we have likely been realizing some of those benefits as margins have increased from 9% to 12%. This means we have been experiencing some of these advantages as we progress, partly due to lower labor costs.

Okay. So, a lot of it is we are seeing it in the numbers on that part of things?

Yes.

And can you remind us what your R&D assumption is for 2016?

It's currently 4%, but to be honest, with Remy joining us, it may be about 10 basis points lower. I'm being very precise here.

Okay. Got it. And then, just lastly on the organic growth, is it correct in, you know, if we are looking at 2.5% to 5.5% that's basically all engine this year because the transmission programs that are phasing out? And when we look at the organic growth over the course of the year, it's starting off obviously below the full year forecast. So, what kicks in over the course of the year that causes the acceleration?

James here. We are experiencing growth in both the Drivetrain and Engine segments. The two phase-out programs I mentioned are actually quite small. To provide more clarity, our growth tends to ramp up throughout the year, as our launch activities are usually more concentrated in the latter half. We have initiatives across both Engine and Drivetrain, including the DCT uplift and Solenoid activities in China, as well as other real drive launches with a Chinese OEM. In North America, we are also launching a super duty project. It's a diverse mix, and I want to emphasize that it's not solely focused on the engine; both segments are involved. The activity is primarily concentrated in China and North America, aligning with our recent new business announcements.

Okay. Great. Thank you.

Thanks, Rod.

Yes, good morning. I have a couple of questions. Regarding Wahler, if I understand correctly, you’ve extended the timeframe for margins to align with the corporate average to about three years. This should be the final year for that, right? How significant is that factor in the guidance you presented, which indicates an 18% to 20% growth? I didn't see it specifically mentioned, and it seems like it could represent an additional area of earnings potential compared to other factors.

Sure. So, the guidance that we've issued implied about $8 million nominal value of extra operating income related to Wahler. The other thing I want to clarify is, when we purchased Wahler, we said two to three years. And we also said after we got into the business it was going to be more like three years, not two years. And that would still take us into 2017. It's where the run rate would be where we are happy where the business should be.

Got it. And is that $8 million considered incremental? Is it just the contribution, or how do we view it in terms of the margin contribution?

Yes, the margin improvement, correct.

Got it. Okay. And then the other question I had is, James, in your earlier comments, you mentioned not seeing any changes on the regulatory front. There does seem to be an initiative by some OEMs to try and change the cafe standards right at the mid-cycle review, which I believe is happening this year. It's not to say that this may not have as much of an impact on internal combustion engines as it will on perhaps EVs, but I wanted to get your opinion. Is that sort of incorrect, or do you believe that initiative is not going to be successful? A bit more perspective would be helpful.

I would be happy to provide some insights. Our perspective is that while the mid-cycle review is planned, we do not anticipate significant adjustments or changes to the plan based on various inputs we have. There will certainly be substantial discussions, especially with gas prices being low. However, we believe that major changes are not likely. We expect things to proceed as planned. As I mentioned earlier, there is a clear push for alternative powertrains and a spectrum of options. We are not seeing a retreat from advanced internal combustion engines, which remain a priority. There is considerable activity and launches related to advanced gas engines, along with a strong push for pure electric vehicles and various hybrid configurations. We see a general movement towards execution of standards with some minor adjustments, and each OEM is developing a range of architectures to meet their goals. We are actively engaged in discussions regarding these various architectures. That's our current perspective.

I mean it sounds like it's more based on what you are hearing from your customers rather than an opinion on sort of regulators?

Yes. I would say it this way, Pat. Clearly we are engaged very deeply with all of our customers. That's a real strength source. But we talk to regulators, we talk to different business groups, different industry groups. So we are taking a large variety of inputs, it's not just our own narrow self view, if that makes sense to you, but it clearly is driven off a lot of what the customers are doing. Because they are the ones that are working with us on what the architectures need to look like.

Got it. Okay. Thanks for the color guys.

Thanks Pat.

Hi. Good morning. A couple of questions on backlog, first on China. Now for the tougher backlog developments in China in 2015 which included delay of some vehicles, lower sales in production of others. I'm curious if the stronger trend of sales and production in China in Q4 and so far in 1Q might be possibly impacting your backlog in any way. Are you seeing any signs that earlier delayed vehicles might be coming back on the schedule or vehicles from which you've trimmed yourself in production expectations or maybe selling faster being produced in higher quantity?

I would say, I will give you this sense that Q4 is a good quarter for us in China. We had about 20% growth in the quarter in China very strong and as I alluded to earlier, part of that was some of the incentives. And we are seeing that strength roll into Q1. So, it's still early in the year. We feel comfortable in the net new business announcement. We feel comfortable with our guidance around growth. I'd say if anything I feel incrementally a little more positive about China than I did a few weeks ago. How much of that is going to translate into real revenue by quarter and by backlog, we will see how that plays out. But I would say I'm feeling more comfortable around China after a strong Q4 and the incentives flowing into Q1. And you know, Ryan, a large part of our backlog is China related. So I think it's a net help for us right now.

Okay, great. Think this is the last question on backlog relative to Remy, on the revenue synergy which you talked about earlier, given your comment that you are making progress there but haven't quantified the opportunity, is it fair to say then there are not any such sales synergies included in the backlog through 2018? And then what is the timeline for realizing such synergies if they occur. Is there a chance it could positively impact the backlog within the present window or would the benefits more likely accrue beyond 2018?

In the recent new business we announced a couple of weeks ago, we did not include those synergies, Ryan. To be transparent, we had only owned the company for a few weeks, so it was too early to incorporate them. I would suggest giving us some time as we navigate this year. Looking ahead, I believe the contribution from Remy to our net business will be stronger than it was this time. We hope to take some time to work through the details and engage with our customers. I expect to see an increase in Remy's contribution to our growth in the next new business. We need a little more time to determine when that will happen and to what extent, but I am feeling very positive about the direction it’s heading.

Okay. That's great color. Thanks a lot.

Thank you.

Hi, guys. This is Adam Schmitz on the line for David.

Hi, Adam.

Just first on the Remy cost synergies, can you outline some of the low hanging fruit that you expect to occur in 2016 and now that you had the business in house for a few months what are the longer term opportunities for cost synergies?

So when we made announcements about a year ago, we identified corporate governance cost is a really easy one to grab. Obviously, they don't have a Board of Directors any more and the executive group is gone. That was one. Another was cost synergies on our purchasing side. That's the one that will take more long-term, I would say. Over time, we'll get those benefits. But those are the two main ones we pointed out at the time. Then there was another one, just basic redundancy, I would call active corporate, not the corporate officers but corporate staff itself, some redundancy cost there. We said that we need to get about $15 million full year run rate which in 2016 we would see about half of that.

Okay. And then last one from me, James, as you alluded to the company saw a kind of number of market headwinds in 2015 outside of just China, off highway, Brazil among others. Can you just talk about some of the biggest headwinds you saw in 2015 and kind of where you see those affecting the company in 2016?

Yes, you mentioned the two main challenges we faced. One was that China experienced lower overall growth, which was influenced by our launch activities, and the other significant challenge we encountered was in the commercial vehicle sector, which was a global issue. Brazil, in particular, was likely the most affected market. As we approach the new year, our projections are based on a light vehicle production growth of 3% to 5% in China and no expected growth in commercial vehicles worldwide. These are our two main assumptions as we move forward, and they have informed our guidance for the year.

All right. Thanks, guys.

Thank you.

Thank you.

I want to express my gratitude for your participation. We plan to submit our 10-K by the end of the day, which will include details on our results. If you have additional questions regarding our earnings release, the topics covered during this call, or our 10-K, please feel free to reach out to me. Melissa, please end the call.