BorgWarner Inc (BWA) — Q3 2016 Earnings Call Transcript

Thank you, Chris. Good morning, and thank you all for joining us. We issued our earnings release this morning at around 8:00 AM Eastern time. It's posted on our website, borgwarner.com, on our homepage and on our investor relations homepage. A replay of today's conference call will be available through November 10. The dial-in number for that replay is 800-585-8367. You'll need the conference ID which is 76352046. 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 Baird Industrial Conference in Chicago on November 10, the Barclays Automotive Conference in New York on November 17, the UBS Industrials and Transportation conference in Key Biscayne, Florida on November 18, the Goldman Sachs Global Automotive Conference in London on December 8, and finally, the Deutsche Bank Global Auto Industry Conference in Detroit on January 11 where we will be providing our initial guidance for 2017 and updating our three-year net new business for 2017 through 2019. Now, back to today's earnings call. 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 the remainder of 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. We encourage you to follow along with these charts during our discussion of our results. With that, I'll turn it over to James.

Thank you, Ken, and welcome to everyone on the call. Ron and I are pleased to share our third quarter 2016 results with you and provide some thoughts and outlook for the rest of the year. I'll begin by discussing the macro environment in our industry, which you can see on slide 2 if you are following along. The macro state of the world still presents a level of uncertainty. Slowing economic growth globally is on everyone's mind and is creating challenges. The political climate, particularly in regions like the Middle East and during the US election, adds to this uncertainty. However, within the auto space, things have been progressing well, especially in the third quarter. Turning specifically to the light vehicle outlook for 2016, our perspective aligns closely with HIS, which predicts about a 7% growth in China for light vehicles. In Europe, we expect around 2% growth, and the US should see growth between 2% and 3%. We recognize that the US cycle is maturing and moving into a slower growth phase. Regarding commercial vehicles, the global market remains challenging, particularly in North and South America, though we see some improvements in Western Europe and China. I want to highlight three areas of particular relevance to BorgWarner. First, the North American mature cycle and its impact on inventory, especially after Ford adjusted its inventory to align with production schedule reductions. From our perspective, we felt this was well within our guidance, though we will closely monitor for any further adjustments in the fourth quarter. Second, we are observing diesel penetration trends in Europe, which have dropped by about 2 percentage points compared to 2015. We have been preparing for this decline by aligning our products with gasoline and hybrid technologies. Third, we are focused on developments in China, where we experienced strong growth in the third quarter, and we will monitor the effects of phasing out incentives as the year ends. Overall, our guidance has been largely on track, and we are excited about our performance. Moving on to regulatory and technology trends, we continue to see a strong push for fuel economy and emissions regulations, leading to an increased demand for advanced propulsion technologies. Discussions around gas, hybrid, and EV technology have accelerated recently, and we remain very engaged in this transition towards electrification. We are collaborating with multiple customers on various electrification solutions. During our recent investor day, we announced around 19 new customer awards in the hybrid and electric vehicle space, with that number continuing to grow. Our activity remains robust, with strong booking rates across combustion, hybrid, and electric areas. Now, to provide some insights on our financials. I’m very pleased with our third quarter results. We achieved sales of $2.2 billion, up 6% excluding foreign exchange and Remy, which is impressive given the flat global light vehicle production, except for a strong growth market in China. Regionally, we experienced growth in China, North America, and Korea, although Europe’s aftermarket and commercial vehicles posed some challenges. We reported $0.78 EPS, excluding non-comparable items, and a 12% operating margin, which is 12.9% when excluding Remy. Looking at segments, our engine business generated $1.36 billion in sales, growing just under 4%, driven mainly by turbo and variable cam timing products. Our drivetrain segment reported $866 million, reflecting a 48% increase, and if excluding currency and Remy, we had an impressive growth of 11.4%, largely due to robust all-wheel drive sales in North America and Europe. For our outlook for the remainder of 2016, we have narrowed our guidance to reflect the center of the previous range. We’ve had major launches this year, including the Pentastar with FCA, Ford Scorpion, Ford Super Duty, and the GM Duramax, all of which are on track. As we move into Q4, we are confident that our risks and opportunities are balanced, allowing us to maintain our guidance of 3% to 5% organic growth for the quarter with continued strong performance. Regarding Remy, Ron will provide more details on the financial aspects of the recent light-duty aftermarket transaction, which we see as a strategic move to focus on the core Remy business and its rotating electrical expertise in conjunction with BorgWarner's products. The integration is proceeding well operationally and financially, even though sales have come in a bit lighter due to commercial vehicle and aftermarket challenges. Our M&A pipeline remains strong, with power electronics as a priority for us. In summary, it has been a very good year, with consecutive strong quarters where we met or exceeded both top line and bottom line expectations. We are focused on short-term performance while securing future growth. I believe we have a winning strategy centered on delivering advanced propulsion technology for combustion, hybrid, and electric vehicles that positions us for sustainable growth. I remain optimistic about achieving our 2016 guidance. Now, I'll turn the call over to Ron. Thank you.

Thank you, James, and good day, everyone. Before I review the financial details, I'd like to provide you some of the highlights as I see them for the quarter. First, we saw good growth. Second, we delivered solid operating performance, and third, we continue to see improvement in CapEx spending and free cash flow generation. So now, as Ken mentioned, I will be referring to the supplemental financial slide deck that is posted on our IR website. Please follow along. First, I'd like to focus your attention on slide 3. Throughout the presentation, I will highlight certain non-US GAAP measures to provide a clear picture of how the core business performed, and for comparisons with prior periods. Specifically, we will be excluding the impact of foreign currency, Remy, and non-comparable items from certain US GAAP measures. When you hear me say on a comparable basis, that means excluding the impact of foreign currencies, Remy, and non-comparable items. When you hear me say on a reported basis, that means US GAAP. So let's turn to slide 4. On a reported basis, which includes the change in sales due to market growth, price, net new business, and currency, and the Remy acquisition, sales were up 17.5%. On a comparable basis, our sales are up 6.1% toward the high end of our guidance range. On a reported basis, gross profit as a percentage of sales was 21.3% in the quarter, but on a comparable basis, gross margin was 21.9% of sales, up 70 basis points from last year. On a reported basis, SG&A was 9.5% of sales. R&D spending, which is included in SG&A, was 4% of sales. On a comparable basis, SG&A was 9.1% of sales, which is up 120 basis points from a year ago. There are three reasons for this increase. First, R&D spending on a comparable basis was up 40 basis points from a year ago as we continued to invest in the future. I would like to point out, it was still at 4% of sales. Second, as we discussed in our second quarter earnings call, we implemented sharp cost controls in the third quarter of 2015 in response to macro uncertainty making the year-over-year comparison challenging, so about 40 basis points of this increase was due to that rough comparison. The remaining 40 points is that increase is due to higher administrative costs in the company. Now, let's take a look at the year-over-year comparison from operating income, which can be found on slide 5. Starting on the right, third quarter 2016 operating income excluding non-comparable items, but including Remy, was $265 million, or 12% of sales. If you also exclude Remy's $7 million of net contribution, operating income on a comparable basis was $259 million, or 12.9% of sales, down 40 basis points from a year ago. On a comparable basis, operating income was up $8 million on $115 million of higher sales, that gives us an incremental margin of 7% in the quarter. This performance is below trend, but was expected due to the higher SG&A spending. From an operations perspective, or if you look at segment levels, another way of saying it, incremental margins were up actually 14% in the quarter. As you look further down the income statement, equity and affiliate earnings were about $12 million in the quarter, up from $9 million last year. Interest expense and finance charges were $22 million in the quarter, up from $15 million a year ago. The increase is primarily due to the $500 million fixed rate senior notes that we issued in the third quarter of 2015. Provision for income taxes in the quarter, on a reported basis, was $49 million; however, this included a $31 million tax benefit related to our non-comparable item and other favorable tax adjustments. You can read about each of these adjustments in our 10-Q, which will be filed later today. Excluding these items, the provision for income taxes was $80 million for an effective tax rate of 31%, which is in line with our full-year guidance. Net earnings attributable to non-controlling interests were about $10 million, up $1 million from the third quarter of 2015. This line represents our minority partners' share in the earnings and performance of our Korean and Chinese joint ventures. So let's take a look at our diluted earnings per share on slide 6. Net earnings, excluding non-comparable items, but including Remy, were $0.78 per share. On a comparable basis, net earnings were $0.76 per diluted share. Now let's take a closer look at our offering segments in the quarter beginning on slide 7 of the deck. Reported engine segment net sales were $1.36 billion in the quarter. Sales growth for the engine segment on a comparable basis was 3.8%, primarily due to higher turbocharger and variable cam timing sales, partially offset by weak aftermarket and off-road commercial vehicle markets around the world. Turning to slide 8, reported EBIT was $218 million for the engine segment or 16.1% of sales; excluding currency, adjusted EBIT was 16% of sales, down 20 basis points from the prior year. On a comparable basis, the engine segment's adjusted EBIT was up $6 million on $50 million of higher sales for an incremental margin of 12%. Now turning to slide 9 and starting from the right, drivetrain segment net sales were $866 million in the quarter. This includes $215 million of sales from Remy. Sales growth for the drivetrain segment on a comparable basis was 11.4%, primarily due to higher all-wheel drive sales. Strong growth for the drivetrain segment. On slide 10, reported EBIT was $87 million for the drivetrain segment or 10% of sales; excluding Remy and currency, adjusted EBIT was 12.4% of sales, which is up 40 basis points from the prior year. On a comparable basis, the drivetrain segment's adjusted EBIT was up $10 million on $67 million of sales for an incremental margin of 15%. Now let's take a look at the balance sheet and cash flow. We generated $593 million of net cash from operating activities in the first nine months of the year, and that's up $123 million from a year ago. Capital spending was $355 million for the first half, which is down $64 million from a year ago. As a percentage of sales, CapEx was 5.2% of sales in the first nine months. Free cash flow, which we define as net cash from operating activities less capital spending, was $238 million in the first nine months, up $187 million from a year ago. We are still on track to generate between $400 million and $475 million of free cash flow in 2016; at the midpoint, that's up 50% from 2015. Looking at the balance sheet itself, balance sheet debt increased by $65 million, and cash decreased by $59 million in the first nine months compared with the end of 2015. The $124 million increase in net debt was primarily due to share repurchases. We spent $250 million repurchasing just under 7.3 million shares in the first nine months, already achieving our expected $200 million to $300 million of share repurchases this year. Our net debt to net capital ratio is 35.6% at the end of the quarter, up from 35.2% at the end of 2015. Net debt to EBITDA at the end of the quarter on a trailing 12-month basis was 1.4 times. Now, before we move on to guidance discussion, I'd like to review the sale of the Remy's light vehicle aftermarket business announced earlier this month. As James said, strategically the business was not core. While aftermarket is an important segment for us, this aftermarket business sells to big box retailers, which is a very different business model from our aftermarket business, which sells to wholesalers and distributors. The deal is a win-win for both the buyer and BorgWarner. The buyer has a strategic focus in this market segment. They will invest in this business and combined with this existing business gain a scale advantage. BorgWarner will retain the rotating electric components that complement our strategic focus on hybrid and electric vehicle propulsion systems. We sold the business for $80 million, which is a fair price. From an accounting perspective, we recorded a pretax loss of $106 million due to the revaluation of the business reflecting current market conditions. There are two additional favorable outcomes of the deal. First, it is accretive to margins. Year to date, Remy's margins have been just over 4%. Excluding the light vehicle market business, Remy's margins would have been 100 basis points higher. Second, due to the payment terms with its customers, that business factored the majority of its receivables, which is considered debt by the rating agencies. With the sale of that business, our debt as calculated by the rating agencies is reduced by $75 million. Now I'd like to discuss our current 2016 guidance. Returning to the slide deck, let's start with our sales growth guidance for the full year on slide 11. Note that the baseline for 2015 net sales excludes Remy, which was just under $7.9 billion. We have narrowed our sales guidance range around the center of the previous range. All in, we expect to grow between 15.2% and 16% this year compared to 13.7% and 17.5% previously. A few points on updated sales guidance. Our outlook for organic growth has improved. Market-related growth and new business growth net of pricing is now expected to be 4.3% to 4.8% compared with 3% to 5.5% previously and we expect the impact of currency to be less negative than it was before. However, these favorable items are offset by a weaker outlook for Remy sales, as James said earlier, primarily in the commercial vehicle and the aftermarket business. Net-net, the midpoint of the sales guidance range is unchanged, and I'd like to make one other point here. The assumption is that the Remy aftermarket remains at BorgWarner throughout the end of the year because of uncertainty of exactly when the closing date is going to be on the sale. Now let's take a look at our operating income guidance on slide 12. We are now expecting 13% to 14% incremental margins on our core business sales growth, which is slightly down from our previous guide of 15% to 17%. Incremental margins were about 14% through the first nine months of the year, and we expect our fourth quarter incremental margin to be in the low to mid-teens as well. On a comparable basis, we still expect our operating income margin to be above 13%, and including Remy, our operating income margin is still expected to be greater than 12%. On slide 13, we have our EPS guidance. We expect earnings of $3.24 to $3.28 per share, including a $0.12 per share contribution from Remy, up from $3.16 to $3.32 previously. An improved outlook on the impact of currency and a lower share count are driving the change. Now let's review our fourth quarter guidance, which is simply the remainder of what's left in our annual guidance, starting with the sales growth on slide 14. All in, we expect to grow between 14.3% and 17.8% in the quarter, including between 10 to 12 percentage points from Remy and about one percentage point due to favorable currency. On a comparable basis, our organic growth is expected to be between 3% and 5% in the quarter. From an earnings perspective, as shown on slide 15, we expect earnings of between $0.82 and $0.86 per share in the fourth quarter, which includes about $0.02 per share from Remy. So in conclusion, we had a solid quarter. As James said, this is the fourth quarter in a row of exceeding our EPS and sales goals, and as we look at the remainder of the year, we expect to continue to be on this path. Solid sales growth, strong operating margins, and improved cash flow from a year ago. So with that, I'd like to turn the call back over to Ken. Thank you.

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

So a question about the incremental margin on a core basis, is the target of 13% to 14% something we should consider for the long term in a stable production environment? Is that still in the mid-teens, Ron?

I'd say it's still mid-teens, Rich, but the question is how you define mid-teens, is it 16, is it 14, or 15? It's in that range, 14 to 16 is what I would say, all right?

Okay. I know you plan to provide the outlook for 2017 in January, but last year when you updated the backlog, it seemed you took a more rational view of the market and your long-term growth. As we look ahead to 2017 and 2018, and considering we're now 9-10 months into the year with a clearer perspective on how 2017 might unfold, is there anything we should consider from a macro perspective that could potentially impact your backlog contribution for 2017 and 2018?

Yes. Let me try to take a shot at that for you, Rich. So I think I would say, you know, maybe a couple of things that may be helpful. Let me say the discipline and the methodology and approach that we used for '16, we feel good about, and the reason we feel good about that is Ron and I both alluded to, we've been hitting our numbers pretty well with some fluctuations in the market. We've seen noise in the market place, we've seen launch noise and macro noise and we've been executing really well in that mid-single-digit organic growth area or range. And so we'll be applying that same approach, that same methodology as we march towards '17 and '18. I would say a general level launch cadence, launch volumes has played out pretty much, you know, there's obviously puts and takes, so that gives me at least comfort that the methodology is solid, the business strategy is very solid, the win rates are very solid. So we'll go through all of that mathematics, as you can imagine, in the fourth quarter as we get ready for January. But I would say at a high level, there's nothing fundamentally there that's different than where we were thinking a year ago, and I would just say you and we should take comfort in the way we've executed this year, both on the top line and the bottom line as we get ready for a net new business in January.

And then James, just one last quick one, thanks for that color, on China, what's kind of the going assumption at this point? Is it that come year end the government goes cold turkey with the subsidy or is there any expectation just internally as you're thinking about it, there may be some additional subsidy or some kind of incentive that continues into '17?

Yes. Our thought, Rich, right now is that it would continue; you're right, through the fourth quarter. And we're continuing to test and question and evaluate whether there will be any continuation of that into '17. It's a little early; we don't know. Our modeling would probably suggest that it will not continue on into '17, but things can move in that part of the world very quickly, as you well know. But we're more than likely to believe it won't continue incentives into '17, but we're watching it closely, Rich, in case that moves.

I have two questions, one more short-term and another that revisits some topics from your Investor Day. Regarding the short to midterm outlook, could you provide some insights into the engine segment? Many investors were anticipating slower growth there due to Ford's production challenges and the shift in diesel mix in Europe. Additionally, with softer commercial vehicle demand, could you explain some of the factors influencing engine revenue?

Yes, I can provide some insight on that, Brian. You are correct; the commercial vehicle segment is not contributing positively. In fact, the overall situation regarding commercial vehicles shows no growth, which affects our engine business. Comparing year-to-date figures from 2015 to 2016, we see a slight decline of a couple of percentage points in Western Europe. Throughout the year, we've indicated that such fluctuations do not significantly impact us. The key question is whether this downward trend will persist; we believe it will, but we are well-equipped to handle it with the growth we’re seeing in gas turbos. In the last quarter, the main contributors to growth in the engine segment were turbochargers and variable cam timing, which performed well globally, without any specific region performing exceptionally. Regarding Ford, going back to our last earnings call, there were concerns about Ford lowering expectations. We managed that within our guidance, and we delivered on that front. Some of Ford's recent updates over the past few weeks make us feel confident that we have addressed any potential challenges as we head into the fourth quarter. I hope this provides you with some helpful insights, Brian.

Yes. In the long term, several investors have noted that our forecasts for powertrains indicate that electric vehicles in China, as well as in Europe, will exceed IHS projections. Mary Barra mentioned on the previous call that she anticipates rapid growth for EVs in China, making it the region with the highest penetration over the next decade. A couple of things to consider: while you mentioned being neutral on this, are you observing any signs in your quoting activities in China regarding EVs? Will consumers skip the hybrid phase and opt directly for EVs? Additionally, as a non-Chinese company, considering that many subsidies in China favor local brands, how do you plan to compete in the emerging new energy vehicle market there?

I think if you go back a little bit to Investor Day, and I can maybe use that as a reference point, I would say nothing has materially changed since Investor Day, which is not a surprise because that's only a few weeks out. I would say from a China perspective we'll see a combination; it will use hybrids and electrics. I don't think there will be no hybrids in China. I think there will be a balance, but I would tend to agree with you that the intensity and the drive towards pure battery electric vehicles is probably strongest in China than any other region of the world. That's not to say it's not going to get adopted in Europe and North America, but there is a strong push for pure electrics in China, and we've been announcing that we're benefiting from that. You know, single space transmission technology is adopted on a number of those vehicles that are out there, and we've got other products going on it, but directionally, I would agree, Brian, that it's the fastest area which is penetrating the most from a pure EV, but I would not say it's without any hybrids because I think there will be hybrids for sure in China.

This is a follow-on to questions on pure electrification. Could you just maybe discuss how you balance the risks given that some of the targets have been thrown out by some of the Germans, which I think we all see as somewhat aggressive? There's been a history in the industry of overestimating penetration for electrification, given consumer adoption has seemed to trail what regulators and some of the emissions would call them ideal. It seems like you're taking a very gradual pace, but just how do we think about sort of the pace of investment if, let's say in 2020 some of these volumes are less than expected?

Yes. It's a very good thought, and I would refer us back to the conversations we had at Investor Day, and it goes something like this. BorgWarner has an extremely clear strategy around being the leader in propulsion, in advanced propulsion technology for combustion, hybrids, and electrics. And to your point, Chris, we know that those penetration rates of the different hybrid vehicles and the different electrics are going to move around. Nobody has a crystal ball to know exactly what the penetration rate is on any of those platforms. What we're doing, and we will continue to do, is position ourselves to offer product offering for all of those architectures and support the customers as needed and we're putting ourselves in a position with the portfolio that we have that if hybrids accelerate a little faster than electrics or electrics go a little faster than hybrids, we will be great because we're going to grow with any of them. We're going to grow on hybrid content, we're going to grow on electric, and we're going to grow on combustion. So I appreciate your point. I think there is some uncertainty out there, and that's what we're looking frankly speaking to take advantage of by offering a broader portfolio than anybody else, that we can participate and it will play out as it plays out. BorgWarner will continue to grow in that mid to high single-digit growth rate independent of shifts with the different propulsion architectures if that helps you.

No, that's great. Is it fair to say from your initial comments about some of the conversations accelerating clearly over the last six months or a year, is that fair to say that’s both in call it mild, hybrid, 48 volt as well as sort of higher voltage plug-in and EV that you’re seeing accelerations in both categories?

Yes. It's a good thought. If I go back, maybe look at a six-month period, Chris, to use your reference point, I would say generically the shift away from diesel is intensified and increased. We don't see it as a clip event, but I think it's fair to say the shift away from diesel has probably increased over the last six months. I think that the focus on 48-volt mild hybrids and plug-in hybrids is about the same. I think that's a strong trend, and it's continued strong. And I think we've seen a stronger voice in Europe and China around pure electric vehicles; probably the move is, if you wish, over the last six months, and again, we feel very good about that. Again, it reconfirms the fact that there will be these shifts, and we're well positioned to take advantage as the shifts occur.

So I apologize I joined the call a little bit late, so maybe some of this color has been provided before, but so as we see these slightly faster shift away from diesel that you just described, in the near term, I understand in the mid-term obviously you’ve a lot of hybrids and electric vehicles, but I guess in the near term can you just remind me what sort of the content impact is between if it's an automaker replaces a diesel vehicle with a gas vehicle? What would be sort of that near term content impact?

You're correct. Earlier, I mentioned that if we compare the year-to-date figures from 2015 to 2016, diesel share has decreased by about 2% in Europe. We expect this trend to continue gradually, but we're not anticipating a sudden decline. The real question is what types of vehicles are replacing the diesel ones. In our opinion, most are being replaced by turbocharged gasoline vehicles, which is beneficial for BorgWarner. We're not observing a significant shift toward naturally aspirated vehicles; instead, it's primarily turbocharged gasoline and occasionally turbocharged gasoline hybrids. In the short term, this has a relatively minor impact on us, affecting some of our emissions products, but overall it's not significant for BorgWarner, especially given the gradual pace of the transition we've observed. Looking ahead to the mid-term, say in three years or more, we don't see this as an issue at all for BorgWarner. So in summary, the impact is quite small.

That definitely helps. So I guess in this context where I guess the mix shift seems manageable, so if you're invested anywhere, essentially suggesting a mid to high single-digit organic growth rate going forward, that would imply obviously a bit of acceleration versus your guidance for this year and sort of like 4% to 5% as you look to I guess we're entering 2017 do you feel comfortable about being able to get this acceleration in organic growth even with sort of like some of these small mix head wind?

I think a couple of points, Emmanuel, I would point to. First of all, we feel very good about where we're at right now. You know, it's coming towards the end of October. We still will talk to you in January about our guidance, and we're delivered on that. We're in four good quarters now. So we feel good that we're hitting our stride on executing that mid-single-digit growth organically which is excellent. I think one of the things that I would say is as we start to think about '17, '18 and '19, one of the things we articulated at Investor Day is I want people to think that we're going to operate in a band of mid- to high single-digit growth rate. So that means that maybe a year or two where we're at high, there may be a year or two where we're at mid. It's not a linear upward curve or arrow if that makes sense to you, Emmanuel. I don't want think people we’re going to be running 3, 4, or 5 and then we got a 6 and then we got a 7, then we got an 8, then we got a 9; it's not that way. What we’re saying is we’re confident and comfortable in our strategy, in our portfolio, and our technology that we will consistently be able to deliver in a mid-to high single-digit band and external factors will move us a little bit in the band, Emmanuel, of that mid to high single-digit band. Does that help a little bit for you?

Yes, absolutely, but just to clarify, you're not expecting a sudden surge; any given year should be in the mid to high single digits, am I right?

That's a good way to think of it, Emmanuel. Yes.

I apologize I got on the call a little bit late, so I've got a few questions that you may have talked about a little bit already. Just first on schedules here in the near term, particularly in North America, there appears to be some disparity strategies where some companies like Ford are cutting production pretty quickly, you try to adjust inventory down relative to demand, and some companies are not. I'm just curious what you guys are seeing as far as schedules and volatility, and as you look, you know, on 30-60 day releases, are there significant changes that have been occurring or volatility that are tough to handle or is it really pretty consistent and they're giving you a good heads up and seem logical so far?

I would say in general, visibility is about the same as it typically kind of was, if you like, 45, 60 days. I think in general we've been getting good communications and good visibility from all of the OEMs here. We're not getting too much last minute kind of cuts and those types of things. Obviously like you and everybody, we're going to pay a lot of attention to this because as you start to come towards the year-end, but I would say to use a phrase, you know, the discipline around scheduling and releasing has been pretty good. An example for us would be when we had this exact same call last quarter that was at a time when Ford was kind of suggesting releases, reductions, etcetera, and we talked about it then that we believed we had that well contained in our guidance, and I think it's fair to say we delivered on that, so that's encouraging. And I mentioned earlier in the call, John, I'm not sure if you were on, the latest news from Ford, so to speak, we feel that's contained in our guidance which essentially was unchanged as we went into this quarter. So I think generally, John, it's reasonably well disciplined. We watch it and pay a lot of attention to it, but so far so good.

Then underlying the results, I mean Remy seems to be doing relatively well, maybe little bit ahead of expectations, is there anything that's changed there as you're getting deeper into it or is it really running in line with your internal expectations?

Yes. I would say, John, generally it's running well. Overall it's running well. The top line has been a little softer through the year. We saw that, but that was pretty much end market driven on commercial vehicle and after markets, so that's just you know the macro driven. But on the OE side pretty much as we expected. I think from an operating point of view, John, it's been running well and I think I would say we're incrementally positive on our dialogue with the customers, particularly around, the combination of Remy's rotating electrics with mechanical know-how around P2 hybrid modules that we talked about at our Investor Day. I think that continues to go extremely well for us globally, by the way, Europe, Asia, and North America. So overall really good, Ron gave a couple of comments earlier, John, if you weren't on; you know, it's a really good thing that we can completely this transaction on the light-duty retail aftermarket business, that's just not core to us and I think that will allow us to focus more on the core, so I think that's another incremental step forward with Remy. As Ron alluded to, that helps the margin profile as well of the business. So, yes, it's going well, John. You know, a lot of work ahead of us, but it's going well.

Okay. And then just lastly, as we think about cap allocation, Ron, I mean, there's a growing concern that we're getting closer to peak, and given how strong items are, it's hard to argue that, we might have some more upside, but we're getting close, and there's a lot of concern about what the downside could mean here in North America or in Europe with the Brexit risk or China ultimately slowing down. With all of those kind of potentially choppy environments that may or may not occur, but thinking about them, would you consider maybe getting a little bit more conservative on capital allocation, meaning maybe building up a little bit larger of a cash cushion to take advantage of whatever opportunities might, you know, prevail themselves as the cycle ultimately does turn?

So, John, you're correct. I can tell you that internally over probably the last four months or so we've had discussions about liquidity. I'll use the term liquidity, right, because that's what it comes down to at the end of the day and how you preserve liquidity through a cycle and how much liquidity do you need going through a cycle, and so I think you're absolutely correct. I know inside BorgWarner we are looking at the liquidity numbers and making sure that we're very liquid through a cycle. So, yes, you're correct, we are looking at this.

Okay. But would you favor potentially building that up pretty significantly relative to buybacks now so that you could potentially take care of more advantageous opportunities over time? I'm just trying to gauge how you're going to allocate capital here in the near term, ultimately rather than the longer term.

Yes, I know what you're getting at, John. So let's refresh ourselves here. We are about 2/3 into the $1 billion buyback program, correct? And I think it's safe to say that we're going to give a lot more color here in January as far as what we're thinking, and I think you're right, in the context, I would say that we are considering maybe a more conservative posture, but we have to weigh that against other items, maybe M&A activity potentially, and also the peak cycle that we're in, and there's a couple other factors we have to look at as well, so I would say, though in general we're probably more biased to the conservative side right now, but we'll give more color in January.

This is Joe for David. I don't want to steal your thunder giving the '17 updates, but if I use those backlog numbers you provided last January, it would kind of foot to a number that would be closer to 3% after price, and so I just want to make sure your comments on targeting mid to high, is that something that's returning, talking about revenue growth that returns as soon as '17, and does that imply that maybe the backlog numbers are trending a bit better than what you provided at the beginning of the year?

This is James. Ron can weigh in after me. You're right, we're going to do it in January, so we got a little bit of time here, and we're going to work our way through it. The way I view it strategically, Joe, is we talked a lot at Investor Day that with our propulsion technology, we're comfortable that we're going to be a mid-to high single-digit growth company on an organic basis and we reminded everybody I think at the Investor Day it will fluctuate in that band of mid to high single-digit growth. I would say there's been nothing materially or substantially that's changed for us to change that view. So what that all translates in exact dollars and percentages of organic growth for '17 and '18, Joe, we've got a few more weeks of work to get to that point, but we're comfortable in this mid to high single-digit organic growth for the future.

I'm going to add just a little bit color in the numbers, Joe. I believe the mid-point guidance of the backlog for 2017 was $500 million of sales. I don't know what your starting point is, but I get quite a bit higher number than the one you just gave us on the call when I did the quick math here. I was not as low as you were, so you may want to fine-tune your number crunching here a little bit.

Okay. And then one more, if I shift back to '16, it would seem like the contribution from new business has to be stronger than those original numbers for just talking this year because you have customers that probably haven't produced what the plan said they would at the beginning of the year of highway markets have been weak. Is that fair? And if it is, can you maybe provide some color on what's tracked better within the new business backlog this year?

I would say, Joe, you're right; the net new business for '16 has run a little better than what we'd expected, and I think you summarized it pretty well. You know, we didn’t remember, we didn't factor much in at all for commercial vehicle, so we weren't expecting much, and guess what we didn't get much. You know, if you look at it regionally we've run pretty strongly in North America and Korea has been pretty good and China has been pretty good. So I wouldn't say it's one product or region, but intuitively, you're right, we're running a little better on the net new business for '16 and what we guided to at the beginning of the year.

Guys, maybe just to elaborate on that last point, so, again you don't sort of provide the backlog today, but if you could sort of back into at least directionally where it's trending, and it does seem like it's coming in better. So I was wondering if you could maybe high level sort of critique your own sort of internal approach you've taken towards given the forecasting and whether that should give us confidence in some of the prior or the outer year backlog numbers you gave earlier this year?

From my perspective, we established our methodology and discipline at the beginning of the year. We opted for a more cautious approach to our launches, considering both volumes and sales timing, and decided to factor in a broader macro perspective. I believe this was a wise decision, as we have consistently achieved our targets at a mid-single-digit growth rate throughout the year. The backlog is performing better than we expected, which is positive. As I mentioned earlier, we will maintain the same discipline and methodology as we approach 2017. When examining our backlog at the start of the year, it aligned with mid-single-digit growth, with a target range of 4 to 6 for the three-year period, and we are currently executing within that range. This gives us confidence as we plan for 2017, 2018, and 2019. We still have work to do on the details, but I feel reassured by our strong execution this year in achieving our growth objectives, which should also provide you with some assurance as we move forward.

Let me give you some numbers. I believe that in January we gave mid-point guidance of about $315 million of backlog and I think the current guidance is around 355, 360, so we are performing better than we indicated in January; that's nearly a year ago, so we're some $40 million - $50 million higher in numbers.

Right, despite a number of adversity and headwinds.

Yes, despite a lot of puts and takes as James was saying. At the end of the day, we still performed better than we anticipated in January.

Okay. A last quick one, there was a report earlier this month which indicated that some automakers, and this gets back to sort of engine shifts in Europe, that they may have to meet real-world emissions scraps for smaller engines and upsize engines to help meet those standards. And I always thought that your content generally moves with the size of the engine, so, A, is that true, is that a potential benefit for you, and, B, have you seen any of the future sourcing actually revert back to some larger engines?

That's a good thought, Joe. I'll give you a couple of thoughts. The term that we're hearing a lot is right sizing, which is a good way to think of it. So it's right sizing the engines. What I would say is it's not dramatic shift, so it's not like they're taking one-liter engine and replacing it with a 2.5-liter engine. So it's subtle shifts they make out from 1.6 to 2 or a 1.8 to a 2, so we’re seeing that. We’re seeing that adjustment; it's a good word for me, and what we see is fundamentally the technology on the engine is very similar. So if it's a turbocharged direct-injection engine with variable cam timing they are shifting that from maybe a 1.6 to 1.8 or a 2, and that's helping us. Generally speaking, your observation is a good one, Joe; the larger engines are generally slightly beneficial for BorgWarner, so this is a net-net a good move for BorgWarner; it's helpful for BorgWarner, I'll put it that way. So I'd like to thank you all again for joining us. We expect to file our 10-K before the end of the day, which will provide details of our results. If you have any follow-up questions about our earnings release, the matters discussed during this call, or our 10-Q, please direct them to me. Chris, please close out the call.