Good morning. My name is Stia and I will be your conference facilitator. At this time, I would like to welcome everyone to BorgWarner 2008 third quarter results and new business conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (Operator Instructions). I would now like to turn the call over to Ms. Mary Brevard, Vice President, Investor Relations. Ms. Brevard, you may begin you conference.

Thank you, Stia, and good morning, and thank all of you for joining us today. You should have copies of both of our third quarter earnings release and our new business backlog release that went out before the market opened this morning. They are also posted on our website, borgwarner.com, on investor information and also the home page, if you need to get copies. Our conference call will be replayed to date to November 5. The calling number is 800-642-1687, conference ID 64002844. And a replay is also available on our website. We have a number of conferences in the next couple of months. We'll be on a panel on fuel economy, that Goldman Sachs is going to use that in Industrial Conference on New York on the 6th, the Robert W. Baird conference in Chicago on November 11th, and of course at the Auto Analyst conference in New York, in conjunction with the Detroit Auto Show here in Detroit in mid January. 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. Moving onto our results, Tim Manganello, chairman and CEO, will be providing comments on the quarter and walk you through the new business. And Robin Adams, will be discussing operating results the rest of the year and some comments on next year. Tim?

Thank you Mary and good day everyone. We have a lot to talk about today. The world has changed dramatically since last quarter. The crisis in the financial sector and deteriorating global economic conditions have caused significant turmoil and uncertainty around the world and the global falloff in the auto production has negatively impacted our third quarter performance. These conditions and the resulting rapid deterioration in European production schedules are reflected in our outlook for the rest of the year and for 2009. However, with our technology and growth profile, we view these issues as a 12 to 18 months challenge. As a preliminary look at 2009 calendar year, we expect a build schedule of 11.8 million units in North America and 13.1 millions in Western Europe. BorgWarner sales will probably be flat year-on-year for 2009 excluding currency and our earnings may also be flat. Our message today is a simple one: We have successfully managed through difficult market conditions before and we will do it again. The underlying fundamentals of our business remain strong, our financial structure is strong, we are responding swiftly to the challenges caused by the current environment, or the economic environment, and by responding by resizing our business and controlling our costs. We had operating profits of $51.6 million or $0.44 per share in the third quarter and today we announced a $2.1 billion backlog of new business over the next three years. Our new business provides a good long-term view of our expected growth beyond the current crisis. Let's look at the third quarter. Overall our international sales offset steep declines in the US market due to deteriorating economic conditions. Third quarter sales were $1.3 billion flat with last year. Sales outside the US were up 5.5% excluding currency. And engine group sales were…

Thank you, Tim and good morning everyone. As Tim said, we are facing a challenging global economy for the remainder of this year and through 2009. But BorgWarner has the tremendous benefits of leading technology and a strong capital structure that position us well to get through this difficult market environment. Now, let's look at the quarter from an industry production perspective. During the quarter, the global auto industry grew less than 1% for about 140,000 units. US production declined 19% with a 36% decline in light trucks and SUVs. Western Europe was down 8%, all of Europe was relatively flat. Asia experienced growth of 8%, which is a slowdown from previous quarterly growth rates. As difficult as this market is, this may be one of the best quarters from an industry production perspective that we'll see in a while. BorgWarner's third quarter sales given this environment were flat with last year, are down 5% excluding the impact of foreign currencies. Our sales in the US were down 24% in the quarter, more than the overall US market, but less than the decline in SUV and light truck sales where we have a heavy concentration. Our sales in the US now represent 26% of the total versus 34% in the third quarter last year. Europe now represents 60% of our sales. Our European sales were up 5% versus a Western European industry production decline of 8%, as I said earlier and total European production, which was flat. Our Asian sales were up 10% versus the 8% regional market growth. So you could see, we outperformed the European market and the Asian market underperformed in the US market. The impact of foreign currencies, primarily the euro increased sales by about $65 million in the quarter, again, about five percentage points. US…

(Operator Instructions). The first question is from Rich Kwas with Wachovia.

Hi, good morning everyone.

Hi, Rich.

Good morning, Rich.

Robin, with the restructuring activity, you going to be running around a 7% operating margin. What do you think about longer term in getting back to the 8% plus operating margin over the next two to three years, assuming that production does recover slowly?

Rich, I wish I could give you some timing on when we'll get back to a little bit more normalized level of activity around the globe from an economic perspective. But when we do, and I don't know, Tim's a little closer to economic data than I am. He's a whiz on this stuff. But I don't know if it's 2011, but when we get back to that level of activity, we certainly expect our operating income margins back to the 8.5% to 9% level. There's been no fundamental change in this business that when production levels get back to the more normalized level. There's no reason that we shouldn't be back in the 8.5% to 9% level and that's what we expect. Tim, I don't know, maybe you can help.

Yes, we don't expect anything in terms of recovery until sometime in 2010. But let me answer your question, Rich, from a slightly different angle. I've got a couple of operating issues inside this company which are dragging us down a little bit. We're working to fix those operating issues if I can, and when we get those operating issues cleared up, that's actually going to help our margins a little bit, in spite of the fact that the economy may be flat or the production schedule's going to be flat. Robin alluded to one of them in Europe and some of our launches in Europe. So, we've got some low hanging fruit that we're going after in addition to just over and above whatever we're doing in terms of resizing or restructuring.

One last thing, Rich, if you do the math on kind of what I laid out for 2009, you'll see that we expect a margin improvement in 2009 versus 2008. Not that 8.5% to 9% level, but moving back to that direction.

Okay, and then Tim, on the turbocharger front, backlog pretty good, just with kind of the competitive landscape out there, there seems to be a push from the percent of the Japanese competitors, I just wanted to get your thoughts on how you view your position right now. I know the market is growing, there is lot of opportunity for everyone, but how do you view risk of pricing pressure over the next several years?

First of all, I agree with what you just said, but I don't see pricing pressures. There is always market growth, there is all those other stuff. We're actually penetrating the Japanese market; we're penetrating the Asian market. Some of our competitors are picking up some volume, but our market share is in the low to mid-30% level. At 35% market share, 37 % market share, we're not going to get every order, and we don't expect to get every order. So we're going to continue probably because of our technology, we'll slightly grow our market share, we're going to pick up some of the high-tech premium end of the market, because of our leading technology, and the world's going to fight over the other 65% market share probably.

Thanks, and then Robin, housekeeping question, what's your initial outlook for pension for next year in terms of expense in outlays?

You know that's a great question, unfortunately what drives our liability and determines our expense as some people know interest rates at, and I don't know the exact date but close to the last day of December. Given where interest rates are today, we could see a slight decline but in this volatile market who knows where interest rates are going to be in December.

Right, and in terms of cash contribution with the equity markets down as much as they are, how are you positioned with your portfolio?

When we started 2008 in the US, we where in a net funded position, we had an overfunded plans, there was slightly underfunded plan, and obviously with current market conditions there has been an unfunded position growth. Obviously our expectations is eventually the markets will turn around and the liability for our pension plan is kept. There are no new entrants going into the plan, so it's just slowly liquidating. Given our expectation that these markets will come back eventually, we really don't see any need to fund anymore cash into our North American plans.

Okay. Thanks so much.

Thanks Robin.

The next question is from Itay Michaeli with Citi.

Hi. Good morning. Robin can you just quantify some of the start-up and launch cost issues you started in the Drivetrain business and how do you expect that to proceed in the next couple of quarters?

Let me put it another way, as I said most of the start-up costs were outside the US and if you look at that $47 or so million of incremental sales outside the US, we would have expected that to generate anywhere from $7 to close to $10 million of incremental operating income. A good portion of that was eaten up by start-up costs. Traditionally we've been starting, I mean, BorgWarner traditionally has always been in a start-up mode. We continue to grow and we've got a backlog that we continue to put in every year. We're in a little bit of a unique situation right now with building a new facility in Poland, and bringing that up to speed, building a new facility in Mexico, bringing that up to speed, expanding a facility in Hungary and bringing that up to speed, construction, a new engineering center, a technical center in China as well as putting manufacturing production in place. So I think from a historical perspective, we've got a lot more activity going on in new brick and mortar and bringing up operations than we have historically. Having said that as Tim mentioned, we also have a few start-up problems that are not related to investment that we need to work ourselves through.

Let me give you an idea Itay, of what's going on here. Over the next three years, we're probably launching almost 500 programs, and over the last couple years, we've been probably launching at a similar pace. You're never going to hit every one of them right on the mark and you're never going to get a grand slam on each one of them. So we've got a few clunkers out there that we're bringing along that are basically going to have to start shaping up in terms of delivering the profitability that we expect. The other thing is that, like Robin said, we put in a lot of buildings out there. We're pretty much done now with expansion in terms of buildings. We may have one or two based on some new opportunity in China, or something like that, but we're pretty much done with expansions. So you're going to see our building, our construction business slowing down.

Right, thanks, and just a couple of quick follow-ups on the 2009 back of the envelope. Should we be still using about 23% contribution margin on the new business next year? Also if you could comment on what you're seeing in steel. I know it's always been typically a $25 million to $30 million headwind for you. Just wondering if that's changed at all in the last month or two?

Itay, on the incremental margin on the upside, as we've always said, we're looking anywhere between 15% to 20%. If it's in a developing part of the world, if it's new sales in Poland, for instance or Mexico or China or Hungary, Korea, India, it tend to be more closer to $0.15 on the dollar because we are putting infrastructure in place. If it's on more established facilities, it's $0.20 on the dollar. We've been trending closer to 15 to 20. But the midpoint of the range is a good starting position. On the downside as we've said, our target is $0.20 to $0.25 on the dollar. Most of that decline has been in the North American market. What we're experiencing now is declines in Western Europe, where some of the labor costs are little stickier, and therefore it takes a little bit longer time to shed. So as I said, as we look to 2008, instead of that $0.20 to $0.25 on the dollar, we're actually experiencing about $0.27 in the last six months of the year. But those are fair incremental, detrimental. On the steel side, as we said in July, we experienced raw material price increase about $6 million year-to-date and we expected a good $10 to $12 million in the third and fourth quarter, primarily related to steel. You saw the third quarter actually came in at about $13 million, which was steel. We are seeing, obviously, as everyone's seeing, some pullback a little bit price on steel, but we will expect some impact in the fourth quarter. As I said, in 2009 right now, commodities we expect in general to be less of a pressure on us from a cost perspective, and the big hitter for us is nickel. With nickel at about $5 a pound plus or minus around that range, we expect to get a pretty sizable benefit versus a cost penalty for commodities in 2009 versus 2008.

Great, thank you so much.

The next question is from Brian Johnson with Barclays Capital.

So, again, sort of hitting the decremental margin point, if you look at Drivetrain in the quarter, it looked more like $0.75. How do we kind of tease out the start-up cost, operating issues from the volume related impacts?

Well, I think if you look at it from my perspective, it is really simple. I recon most of that decline was in the North American market, if you see that. So, we would have expected no more than $0.25 on a dollar decline in operating income related to the volume decline. So, the rest is start-up for new facilities, China and Mexico particularly, and then launch problems in North America and in Europe, as I said earlier. We had some launch problems in Europe that are dodging us. So that's the difference, the whole difference there. We should have lost $0.25 on the dollar on the decline in sales in the quarter and we didn't. The rest is start-up and operational issues.

In Europe going forward to next year, do you get to the point in European productions, where you're operating leverage would become nonlinear, for example unionized workers or other costs that don't scale as easily?

Well, I'm not so sure I quite understand your question, but I'll answer it, the way I think it is. You asked and that is, in Europe there is a lag between when we announced an employee will be leaving the company versus when they actually leave the company because and every country's got different laws. So there is, you know, there is an announcement, then there is a period, where they're still working, but they'll be phased out after so many days. It could be 45 days, 60 days and 90 days. I don't know if that answers your question or not Brian.

Yes, the point being if the production decline is slow and relatively foreseeable, do you have one operating margin, say 20%, 25%, and if it's so, overnight you have another say 35%, 40%?

Yes. If it's slower, we can react on a more even pace and take it out over the time, and match the production cuts or schedule declines to our manning levels feel with a little bit, with a lot closer or a lot tighter gap. If it's overnight, like what happened in September, we had a waterfall drop in schedules in September and we just can't get the people out that fast in Europe.

Brian, that's why when I talked about our change in guidance, I said our sales dropped about $325 million from our last guidance and our decremental margin, we're looking at more like $0.27 on the dollar versus our traditional 20, 25 because as I said two thirds of that decline is in Europe and to Tim's point, those labor costs are a little bit stickier and it take a little bit more time to get out of the system.

Right. On the backlog, could you possibly break it out by year? You mentioned 600 for '09 and also give a sense of the production guidance. I think we know what you're thinking '09, but 2010 and 2011 that you based it upon?

Well, I can give you the breakdown on the backlog by 600, 700 and 800 approximately. As far as production schedules, I'm just happy to look past 2008 and 2009, right now. I'm just going to hold with what I've said, and that is, I think things are going to be flat through, or maybe slightly down. 2009, I think is going to be slightly down from 2008. Probably a better way for me to phrase 2009 is, 2009 will probably look like the third quarter of 2008. But we'll have a whole year of the third quarter, not just one quarter of it. That will go for the full year. 2010, we may start to see some recovery. I think it will probably be in the middle of 2010. Some people, I hear think it's going to start to recover in the third quarter of 2009. I guess I'm trying to be as realistic as I can in the way we size this company and run it for the next 18 to 24 months.

Would it be fair to say that the 2010 backlog is based on a lower industry production environment than winning that big backlog that included 2010 last year?

Yes. I tried to say that in my write up or my overview, and that is, this year's backlog at $2.1 billion, is based on lower volumes than last year's volume, last year's backlog at $1.95 billion. So, if we had the same sales projections for 2009 and '10, that period that we had last year for 2009 and '10, our backlog that we just announced would actually have been higher.

Right. Any kind of organic CPV number you could point to?

No, I don't know.

We've stayed away from content per vehicle because it depends on the vehicle, it depends on the content.

A lot of our product is of option. So, there's about a billion combinations. So, for us we actually just do a bottoms-up forecast on almost every product line we have.

Okay. Thanks.

The next question is from Chris Ceraso with Credit Suisse.

Good morning, thanks.

Good morning.

Good morning, a couple of items. You mentioned the difference in the contribution in Europe versus the US or North America. The headcount reduction there looks like relative to what you're doing here, is that because those jobs are sticky or because you need to keep people around because a disproportionate amount of your new business is in Europe or should we expect over the coming year that the European headcount declines will have to catch up to what you've done here?

Well, first of all, you're right on the stickiness. Second of all, you're right on the last point. There will probably be more to come. We just need a clear picture. There is going to be probably more plant wide shutdowns in Europe and maybe some layoffs, because the customers are taking plant wide shutdowns in Europe. They are taking a number of the OEMs in Europe. We are taking complete holiday shutdowns for a large part of December and at least half of January. So, 500 is not the final number for Europe.

We also do have new business growth there. So you're right on all counts.

Okay. Robin, can you just remind us, I've looked through my notes real quick, but what's the math on nickel, is it just round numbers based on the decline that you've seen in the price? How do we walk through an EBIT change?

Well, previously we were buying components with the equivalent of about 10 million pounds of nickel. That's dropped a little bit. As you remember when nickel prices went up, we said we're working on trying to move the composition of some of the alloys to reduce the penetration of nickel within those products. So we're somewhere down in the 7 million pounds a year range right now.

I always have trouble with European production numbers, everybody adds it up differently. Do you have your expected volume in percent change terms maybe on a PAN Europe basis as opposed to just a volume number for Western Europe?

Well, I have a percentage decline from 2008 to 2009, Western Europe year-on-year probably around 12%.

Total Europe, about 6%, Chris, if that's your question.

I have Western that was I gave. What I said was Western Europe. Oh you wanted both, okay.

A 6%?

6% for total Europe down.

Okay. Then last one, what was your foreign exchange assumption under the old backlog, the $1.95 billion?

1.95, 1.40, $1.40 to the euro.

Okay and the new is based on 1.25?

Yes. As Tim said it was $1.25 to the euro.

Okay. Great. Thanks a lot.

Thank you, Chris.

The next question is from Rod Lache with Deutsche Bank.

Most of my questions have been answered just a couple quick ones, the SX that you've got in the backlog is it 125 all the way through?

Yes.

Okay.

Yes. It's consistent.

Did you say that the European revenue was up 5% X foreign exchange? For the company?

This quarter?

Yes.

Yes.

That's excluding foreign exchange?

Right.

Okay. So it's 15% or something with it? Lastly, just maybe we could just refine that walk that you're thinking about for next year. How much savings are you anticipating on a year-over-year basis from restructuring? You know, just net of hedging in other factors that you've got in raw materials. ]What are your thoughts on that factor on a year-over-year basis, how much of a plus could that be?

Well as I said, it is on the back of the envelope. I didn't have enough room for all those calculations. But, obviously we do expect some improvement. What I think of the restructuring, I'd like to think of it this way. It's taking detrimental margins for instance that in the quarter were third quarter where 27% to 28% and getting them back in line in the 20% to 25% range. So, what I don't want is people throughout these numbers of saving $60 million a year, and if sales were flat, you know, I could give you a number of what we're going to save, but sales are not going to be flat. We're going to see a continuing decline in sales in our North American operations and to give you a number of dollars savings I think would end up being misleading. So what you really need to think of is a more reasonable detrimental margin on the sales decline versus what we've experienced this year.

Okay. So you're thinking that the detrimental margins come down, and what about on the raw materials?

As I said, we expect the benefit for raw material.

Yes.

2009 versus 2008. Primarily nickel is the big driver.

Didn't you hedge some of the nickel though?

About 10% to 15% is hedged with actual hedges. The rest, there is some pass through, but there is a floor on the pass through.

Okay. All right, thank you.

The next question is from John Murphy with Merrill Lynch.

Good morning, guys.

Hi, John.

I just wanted to focus on the balance sheet a little bit here. First, just on your write down of the goodwill for BERU. Is that written down to zero at this point, there is no more future write downs?

No, it's not written down to zero, it's written down to fair market value, there is still some goodwill there.

Okay, then Robin, on some of the debt that's coming due, you got $200 million coming due in February of '09. Should we assume that you're able to generate cash from operations to fund that, or is that something that might need to be rolled or paid for by the revolver?

Actually it's more like $140 million public debt that comes due next year. We've got the three options you mentioned right now, the public debt market, which is probably be our first option, given that the market settles down a little bit, we'd go to market and refinance that with public debt. If not, we have that revolver to draw on, as I said its $600 million underutilized. Right now, on the balance sheet we have just about the right amount of cash to be able to pay that off with cash. As I said, we expect to generate cash flow in the fourth quarter, so we'll have a little bit more cash than what we have on the balance sheet today. So we have the capability to pay it off with cash, draw down the revolver. Our preference will be to go to market and refinance that in the debt market.

Okay. When we look at the current revolver of 600 million, it looks like it matures in July of next year. So, I mean, it looks like you'd have five months. So, when we look at it, I mean have you had any discussions with the banks to renew that because it's looks like in the past that you guys have been renewing the revolver at least a year in advance. It seems like this would have renewed already, I mean is there anything that's going on there in mortgage, had advanced talks?

All of our major banks, including your firm, have been in to tell us that they have.

I have no knowledge of that, Robin.

Yes, I know that. That's why I'm telling you.

I know that.

Including your firm, they've all been into assure us that the credit markets are available for us. We are a very desirable partner, and they have reiterated the credit commitment to this company. So we're not concerned at all. The reason we have not refinanced that yet is just we don't like pricing in the market right now.

Got you. Then, just on the backlog, I mean, it's a great number. I was just wondering, have you seen in quoting activity if there's been any pullbacks in request for proposals or anything like that from some of the major manufacturers, or this just been a slowdown out there in spend?

John, not at all. In actuality we're probably more active than we've ever been and working on new technology and advanced programs, we're quoting projects all over the world that are related to fuel economy. I got arthritis, I just came back from China, and I'm still feeling the trip, but I just came back late last week, beginning of this week, and there's going to be more activity for BorgWarner in China than I ever imagined. Whether it's all targeted to fuel efficiency, whether it's on a dual clutch side or it's on the turbocharger side or variable cam timing, or on-demand cooling. So, the manufacturers still have to meet all these stringent requirements and all these customer demands for better fuel efficiency. The programs aren't backing down.

Tim, as far as the auto makers that are most active, just curious in the backlog, I mean I know you don't give exact customer mix, but I mean, is it a very, very small percentage that's the Detroit three in your backlog?

Actually, I can give you some kind of an idea. On the backlog for 2009 to 2011, I'm happy to say that the number one participant in the backlog is Ford, and about half of that is in North America and half of that's in Europe. Then it's followed by a number of the traditional customers that we've always had in Europe, Volkswagen, Audi, Daimler, Renault/Nissan, BMW, GM, Hyundai, Chrysler, then we get into some of the off highway guys with Cat and Deere. We got a good cross section.

But John, the overall backlog is about 10% of the North American big three. So, it keeps declining as a percentage of the total.

Great. Thank you very much, guys.

Thanks John.

The next question is from Patrick Archambault with Goldman Sachs.

Hi, good morning.

Good morning, Patrik.

Yes, most of my questions have been answered; I guess just one incremental one on, launch costs. How do you see that playing out next year? I mean, obviously you've had a lot, and experiencing a lot of incremental costs right now. Is that something that becomes maybe a bit of a tailwind or just given, you know, the new business ramp you have, which is substantial, is that going to be flattish or maybe even negative next year? How do you think about that?

Well, I'll talk about the facilities and maybe Tim can talk about the operational launch issues. But the Poland facility should be up and running early 2009. The investment in China will stretch into late 2009, early 2010. The investment in Mexico will stretch to late 2009 early 2010.

Mostly complete.

Yes. This will become a board fairly soon. So, those are the major expansion activities. Tim, do you want to talk about individual product launch working through?

Well, I think that what we typically have is, I think the launches will be just normal and that will be covered by our normal start-up costs and everything else and that's pretty much covered in just our normal operating conditions. So, I don't think anything's going to be any better or any worse next year than we've seen in the past. I think it will be just probably on a percentage basis just reasonably flat. We had a couple of projects like I said earlier, we have a couple of programs we've launched already that, we've got to go back and tighten up and clean up to get pull some of the margin out of it.

Okay. I guess, that's helpful. Not to ask for more detail from your preliminary guidance than you're willing to give, but any kind of thoughts then on kind of CapEx and D&A for the next year? Because it sounds like both of those will be up.

You know our guess estimate for this year on capital is about 375 and given the backlog, we could see a little bit of increase with that but certainly, it's not going to be a 50% increase. As I said earlier, we will generate positive cash flow again in 2009. Depreciation will inch up a little bit. Capital spending could inch up a little bit, but not significantly. We're going to have a strong year from a cash flow perspective.

Okay. Perfect, thank you. Last one, sort of housekeeping one here, you know, in your cash flow statement there's a line item in investing of payments for businesses acquired of $59 million headwind.

Yes.

I guess I assume that the BERU purchase was part of that, right, which I think was 35? I just wanted to see if we could kind of reconcile to the other piece.

That's almost entirely BERU.

Okay. I guess I was just a little confused because you said, I think it was the purchase of the stock was 35, but I guess there were other cash.

I'm sorry, I said 55.

You said 55, okay. All right. Thank you, that's all I had.

The next question is from Himanshu Patel with JPMorgan.

I just had two questions, what is Western European production in the fourth quarter doing?

Hold on a second. Himanshu, I'll give you some, are you talking fourth quarter of 2008?

Yes, if you have western and total Europe that would be useful.

It looks like, its for us, not for us but our estimate is from the third quarter to the fourth quarter in Western Europe. Its gone about 200,000 units.

Do you have a year-over-year percentage?

Yes, well the fourth quarter is down about 23% from the fourth quarter of '07 to fourth quarter of '08.

That's for western.

Western Europe.

Right, okay. So, I guess I am just going back.

When I gave you the 200,000 units that was third quarter of 2008 versus fourth quarter of 2008, which is (inaudible).

So, just going back to the earlier comments, it looks like your '09 guidance is based on total Europe being down 6%. I mean, that sort of suggest that you are assuming Eastern European demand is sort of flat, slight up next year. I am just wondering is there any risk to that, I mean just given what's happening in some of the Eastern European financial markets right now, would you guys be worried that Eastern European demand could actually decline next year as well? Therefore, maybe total Europe production for '09 isn't all that different than Western Europe production for '09?

Well, I think you probably are right. There's probably some downside in Eastern Europe. We don't have that much baked in right now. But we're getting a lot of growth in Europe still on dual clutch transmissions and turbocharging. So, we're probably going to be okay, how should I say this? We're probably not going to see the full impact of the declines. But, I think there will be softness in Eastern Europe, you're seeing that right now in Eastern Europe and you're seeing it in Russia.

Is there a big content difference for you guys, East versus West or is it, I mean, I'm just trying to understand if Eastern is really the source of disappointment next year, is that kind of a small issue for you guys, just because your CPV may be a fraction of what it is in the west?

Well, what happens is that we have some plants in Europe that they are actually shipping to Eastern European OEM plants. But mainly, like we ship to a Volkswagen plant and Volkswagen builds it in Germany. The German vehicles are built by Volkswagen are shipped to the Eastern European countries and to Russia, or actually other parts of world. So certainly for us, we kind of see some of that. Our sales kind of go through a Western European build schedule, you know, what I'm saying?

Okay.

So we don't really ship to, yes, we do have some plants like in Hungary and soon to be Poland, or we're shipping from a Hungarian plant to a polish plant or a Hungarian plant to a OEM's Hungarian plant. But most of our productions is shipped to a western European assembly plant for vehicles and then they export to some other country.

The reason we focus more on western European number is that we think that's more important for our outlook than total Europe.

Understood. Okay and then can I just go back to the product launch issue? You guys brought that up a couple of times. Can you give us a little bit more granularity on what exactly are those issues, any way to quantify the costs in the current quarter and sort of what happens in the fourth quarter, is that behind you by Q4 or does that linger into 2009?

I'll take, as I said, we have some product launches in Europe and a product launch in North America that as Tim mentioned are struggling. I think again the way to quantify it is we're not going to talk specifically about the cost of those issues other than to think of, again, our non-US sales in the quarter, what the incremental margin we would have expected out on those sales versus what we got. A good portion of that is new facility start-up, which is normal, and then the remainder is operational issues of some product launches. I'm not going to break it down between 5 million and 3 million here, or 6 and 4, or 2 and 8. But generally, if you look at it from that perspective, that's the issue and that's the size of it.

When does it get resolved?

It's up to Tim.

Okay. As quick as I can get it fixed. We're working on it. I can tell you right now, there's an issue on DCT, one of the DCT programs we've got in North America, and everyday their plant is improving. So these are things that have to get fixed reasonably fast because they just make [deal]. We're ramping up problems and when you're in a launch mode and you're ramping up, you got to fix problems fairly fast because they cripple if you're ramping up, you don't fix your problems.

Yes.

So these are things that are getting a lot of attention.

Okay. Then one last question. Tim, I think in Paris you had also mentioned that the production schedules in Europe were falling off a cliff pretty fast in the month of September. What's happening now as you're sort of midway through the fourth quarter? Are they sort of coming in more in line with what was expected or are you still seeing a lot of last minute production cuts in Europe?

No, we're not seeing as much last month, I think there is just slight declines more and more and the other and so we're not seeing this huge cliff drop-off. We're probably seeing some tapering off now. We know we've done well in the fourth quarter, we don't see major shutdowns and that's going to spill over into the third quarter. I don't know if we have seen or have projected all the shutdowns we may end up with in terms of what our OEMs will end up doing.

Yes. Okay, great. Thank you very much.

Sure.

The next question is from Brett Hoselton with Keybanc.

Good morning.

Good morning Brett.

How are you doing?

Doing all right.

Good.

As I see, cash uses, I know have your typical priority list here, the question is simply do you think there is any potential alteration in that priority list? In other words, would you be more interested in a share repurchase or increasing your share repurchases activity given your solid balance sheet and current stock price?

Well, let's just say this, a couple analysts I've talked to think we should do that, and they continue to bug me about it, but I won't mention any names, but it's not you, Brett. But there is some really nice buying opportunities out there for some technology. We're looking and we're working it. We said that every quarter for umpteen, last 18 months or so, but good things come slow. As you know, we're a disciplined buyer. We're still looking at acquisitions, is the short answer. We're obviously going to reevaluate, like we do every year, we'll reevaluate our dividend policy, and we've still got, up until now, we've had six or seven years of increasing dividends year-on-year. We're doing small amounts of share repurchases right now, but nothing that's out of the ordinarily from one year to another. We actually think we have better uses for our cash than buying back shares. But that's never ruled out. That's never completely off the table and it's not ruled out.

Can you expand on your acquisition comment? In other words, either size or number of acquisitions or potential product interests or timing of acquisitions, anything along those lines?

Yes. Small to medium-sized, nothing greater than medium-sized. No bet the farms, nothing that's going to rock the boat. We like our credit rating, we like our investment grade credit rating and we want to keep it that way. I think in this environment having cash is a really good thing. There is a lot of companies that are very envious of our cash position. We want to keep it that way. I would hope that some are more sooner rather than later, Brett.

Then you've obviously talked about some potential restructuring or additional restructuring actions here. It sounds like you're obviously thinking about that. Can you kind of talk about when you might be able to provide some more details, or is that something you might be able to update us on in lets say a month or is that something more along the lines January time frame?

I expect you think more about January, because right now we kind of know what we know for the year and there may be uninterrupted plant shutdown, or I should say unscheduled plant shutdowns that we'll have to react to. But we'll probably do that with our own shutdowns. But in terms of manpower balancing and so forth, I think we're probably going to have to wait until we get a better look at what's going to happen next year. So, we probably have more to say about that in the January presentation.

Right. Thank you very much.

Sure, Brett.

The final question is from David Leiker with Robert Baird.

Hi, good morning.

Hey, David.

Good morning Dave.

Hi, Rob. Actually, I want to clarify something, did you make a comment earlier that operating margins will be up in '09 versus '08?

Yes. I did make that comment. We expect an improvement in operating income margins '09 versus '08. If you look at the equation, Dave, sales flat excluding currency, currency will be negative in order to generate the same type of income year-over-year. We will need some improvement in operating income margin.

Okay.

The one good thing about currency-related sales decline, incremental margin's only about $0.09 on the dollar.

Yes. But I was going to ask about that is there any reason to expect that number to be different going forward than what we've seen here in '08?

The incremental margin on the currency?

Yes.

No, that's going to be in the 8% to 10% range consistently. But basically, it's the operating income margin, close to the company, and it's where our operating margin is on average for our non-US operations.

Then, a clarification in the comment on guidance, you say earnings flat year-over-year. Is that excluding currency as well?

That includes the impact of currency. So that's why I say, you've got sales flat, you've got a negative impact from a currency perspective, so on a reported GAAP basis sales will decline next year.

Right.

We expect net income, earnings per share, even with the currency impact, to be definitely flat with this year's guidance.

Okay.

This translates to some margin improvement.

Right, okay and I'm following you. What kind of tax rate do you think you're going will be looking at in '09?

Still about 25%.

Okay. Then on the backlog, now, you usually kind of update what your actual, what's your estimate in the actual new business has done in the current year. So historically you pull some of that forward into the current year. Did that happen here as well or you can discuss some sense on what happened in '08 in terms of new business?

David, the way '08 is in the third quarter and expected during the fourth quarter, we're trying to sort out a lot of things, and how much of this is new business is not on our top priority list right now. I mean we'll work to it eventually, but frankly, as Tim said, we're looking at a 27% decline in production activity in the fourth quarter and we're trying to focus Western Europe. Trying to focus more on that then some of the other metrics that we might have had a little bit more time to focus on.

As Robin said, we've been a little busy.

I understand.

I think I can help you there, Dave. If we'd had continued on for the full year at the same pace we ran at the first half, some of that backlog would have been pulled forward. But I think we ran at a fast pace in the first half of the year, you know as you know with record sales and profits, but then in the second half of the year things really slowed down. So I think what happened is that because the second half of the year is so slow, there probably wasn't much pull-forward.

Right. Then the last item here, you've put together a great slide in your investor presentation though and keep new programs and that backlog, that you guys do.

Yes.

Conferences, here in the next couple of weeks, what are some of the new things that we'll see pop up on that chart?

David, that chart includes on the top programs, quite a number of turbocharger programs. Tim can talk to you.

Yes I got a number of turbocharger programs, dual clutch programs, control modules for transmission that may or may not be dual clutch. Some variable cam timing projects that over and above the one I talked about in the backlog with the Ford 3 liter, there is some other variable cam products in there. There is an all-wheel drive project in there, some timing drive projects in there. A good cross-section, but I will tell you David, a fair amount of turbocharging.

Okay. Then, I guess one last item here, on the commercial vehicle. I think your business is about 15% commercial vehicle right now, is that number correct?

Yes.

Is that North America or Europe?

Global.

Global. What do you expect in your '09 comment in terms of that end market?

We're seeing weakening in that market, David. I don't have the exact numbers.

Weakening may not be the right word.

Yes, okay. It's all relative, but certainly...

In your comment about flat guidance, X currency, what do you have kind of built in there?

We have a decline in medium-duty, heavy-duty truck builds, I just don't know what the percentage is.

There is some talks of 20%, 25% declines in Europe. Are you looking at that magnitude?

You know, again, David, I am sure we're looking at some strong declines, I don't know if it's 20%, 25%, but we are expecting and we are starting to see already in the third quarter and expecting to see in the fourth quarter further declines in that segment of the market.

Okay, great. Thank you.

Hey, Dave, I can help you a little bit more on that backlog. There's, on the turbocharger side, on the higher tech side of the turbocharger business is about 35% in the backlog, about 20% in the transmission side with a fair amount of that dual-clutch. On the timing drive or the variable cam timing decline, that's a little less than 15% range. Then there's the rest of the product lines are in that 5% range.

Great, all right. Thank you very much.

Sure.

Ladies and gentlemen, we've reached the end of the allotted time for questions and answers. At this time, I would like to turn the conference back over to Ms. Brevard for any closing remarks.

Thank you, and thank all of you for joining us. If you have any follow-up questions, please direct them to me. Sorry, we ran out of time today, we actually went over our time. So, thanks for the great questions. We'll conclude the call now. Thank you.

That does conclude the BorgWarner 2008 third quarter results and new business conference call. Thank you for joining. You may now disconnect.