博格華納 (BWA) 2003 Q1 法說會逐字稿

Good day everyone. Welcome to today's BERU Q1 Results conference call. This call is being recorded. At this time, I would like to turn the call over to Mr. Marco v. Maltzan. Please go ahead sir.

Thank you. Ladies and gentlemen good afternoon or good morning wherever you are. I know I am familiar with the situation that some of you are on the way for starting your holidays.

Let me start by stating that despite the weak market environment, we are fully in line with our plans for the full year.

I would like to give you an overview of the highlights of the first quarter. Despite negative impact from strike in Germany in June, sales rose 5.2% to €69m. We had a small capital gain of €0.2m from sales of shares. We have a high tax rate of 38.6% and [indecipherable] of last year's tax-free capital gain from sales of shares. Therefore net income has decreased to €7m against €3.2m the year before.

The EBIT margin stayed constant at 15%. Our operating free cash flow was close to 9% of sales.

We were quite successful in sales of electronic tire pressure monitoring systems, which went up by 61% to €6.3m. The Sensor and Electronic business area grew by 23% to €16.1m as against €30.1m last year.

We still have very high pre-investment in Sensors and Electronics and we are on intense preparations from ISS and PTC ramp-up in the fall.

We see positive results from our restructuring going on at REMIX. The position at F1 remains still difficult.

We had a surprising US Federal Court decision, who rejected the Tire Safety Rule might open further potential for direct measurement. This rule [indecipherable].

The French anti-trust authorities have agreed to a BERU Eyquem takeover a couple of days ago. Our most important area is of course our Technology is concerned and generates a higher share at [indecipherable] and we have good negotiations going on with Renault-Nissan.

Ladies and gentlemen, the trend to buying a diesel engine is continuing unabated. In our opinion, the current trend to introduce [DMAX] [convertives], in particular [indecipherable] will foster the trend to buy diesels and set off another quantum leap in technological advancement in diesel technology.

The ultra clean diesel is on its way offering new product opportunities also for BERU. The first six months of 2003, sales in petrol propelled passenger cars in Europe were down 6%. The diesel however has still managed to grow almost 3% to a record 4.4m [units]. Diesel's share in Europe is up to 42.1% from 40.4% last year.

Germany, which is still lagging sort of behind, has grown its diesel share from 37% up to 38% in the first half of the year. New important models will be introduced in September at the IAA Fair, such as Volkswagen Golf, which should trigger another pick-up in diesel penetration by it [indecipherable] traditionally has been well above average.

Market research AID, whose predictions have been pretty accurate in the past, is forecasting a diesel penetration share of 55% in 2008.

Besides the rapidly growing SUV penetration throughout the Western European car market, it is exactly the SUVs and pick-ups that are extremely popular in the United States. There are already more than one and two light vehicles produced in the light truck, typically propelled by a V8 engine.

Without begin too enthusiastic, we are convinced that the driving characteristic of the diesel engine, that is i.e. lower consumption and high taut, provide quite some potential for the US market where more than 50% of light vehicles sold are light trucks.

Looking at this chart you see that the diesel penetration in Europe [indecipherable] is already 90%, the X5 of BMW is 8% and the new and very well accepted [indecipherable] in the United States is already 60%.

From 1999 until 2002, diesel penetration in the existing car parts has went up from 13.3% to 15.7%. This increase in diesel car parts is a very sound basis for BERU's [indecipherable] business in the years to come.

As BERU will profit from its original position as the world market leader in glow plugs. The last part of BERU's spare part business i.e. 70% is ignition technology product for petrol engines as the European car part is still predominantly petrol driven. BERU is therefore well position in both fields. We are the technological leader in the diesel [indecipherable] field and we also have a very strong position in brand as well as technology with spark plugs.

Ladies and gentlemen, let me now give you an overview on the most important financial figures for Q1 and future targets.

The first three months BERU succeeded in growing its sales by over 5% as you are all aware in a persistently weak industrial environment. I do not have to mention that European car sales for example were down almost 3%.

At this stage I would like to point out that these sales figures do not yet include any contribution from the BERU Eyquem acquisition. Sales increased from €66m to €69.4m. We think that due to the June strikes in Germany, €0.5m of sales could not be realized.

Order intake was for the first three months up more than 8%.

Taking a closer look at the diesel cold-start technology, our most important business area. We recorded a moderate increase of 1.2% with €33.6m. However OEM supplies of glow plugs at BERU were up 4.2% as compared to European diesel car production which increased by slightly below 3%.

The non-engine water heater plugs which we had running out accounted for a minus of €0.6m in sales. Commercial vehicle segments served by BERU have remained weak throughout the quarter. We have also seen US sales coming in below expectations as clients such as International are currently changing over to new engines. There we expect a pick-up in call-offs in the upcoming months.

We have also seen a higher share at [Peugeot] which has started to contribute positively to our sales. We are currently also in talks with Renault-Nissan to provide a joint engine platform.

This leads me to the [indecipherable] Area Ignition Technology with a €90.7m, we achieved stable sales. Although West European markets hosted a telling 6% decrease in new registrations of petrol cars. We had a decrease in sales as far as ignition cars as concerned, yet spark plug sales performed quite well and posted double-digit growth.

The Mexican market was weaker than expected. Here supplies of cable sets to OEM clients did not meet expectations. We are expecting positive impacts from the introduction of the UltraX Platin spark plug for the aftermarket that was launched in Q1 and we expect [indecipherable] from the Eyquem acquisition.

The flush fitted pencil coils from Renault that was originally scheduled to be supplied in late 2002 will finally ramp-up at the end of September this year.

Sensors and Electronics, there we have a 23% increase. The group again recorded strong sales growth in the business here as I said before. Total sales were €16.1m. Sales in tire pressure monitoring increased by 61.5%. Sales of TSS products were up to €6.3m as against €3.9m last year. Also high temperature sensors developed quite well.

Let me briefly comment on the development of personal expenses. The number of people employed in the group was slightly below the previous year's figure. Nevertheless we had wage settlements concluded in spring, which led to a 3.1% increase in wages and salaries. We have further expansions of the development application teams at the Electronics plant in [indecipherable] which meant a high increase in personal costs. Nevertheless, I think that at 32.4% against 32.7% personal expenses as a percentage of sales were down slightly when compared to the same quarter in the previous year.

If you comment on the development of material costs. Material expenses as a percentage of sales increased from 35.3% to 36.3% as planned. The increase was partly due to a higher electronic share, which automatically means a higher share of materials and partly to a targeted increase in stock on hand. BERU usually increases the stock in the first two quarters in order to be well prepared for higher aftermarket sales in the winter months.

As regards material costs, as a percentage of output, the increase amounts to 0.7 percentage points only.

The next chart you see development, other operating expenses at 16.7%, other operating expenses which comprises marketing, operating and administration costs as a share of group sales were up on the first quarter in the previous year.

EBITDA increased from €14.9m to €15.6m which led to an EBITDA margin stable at 22.5%.

As far as earnings before interest and taxes is concerned, we had an increased by 4% to €10.4m in the first quarter. EBIT margin for the quarter again amounted to 15%. A figure we are quite satisfied with and on which management heavily focuses its attention to. As you all know, due to a seasonally lower share of the aftermarket business, BERU intends to have disproportionately lower EBIT margins in the first two quarters when compared to Q3 and Q4.

The operating margin came in at 15.3%. This includes €0.2m tax-free income from the sales of shares in the US markets Impco Technologies and Stoneridge.

At this stage I would like to remind you that last year we had €1.2m income from sales of shares.

Pre-tax profit, that is the group earned 4.2% before taxes recording a pre-tax profit of €11.4m as investment earnings and financial results were almost at last year's level which were €0.8m.

The next chart is the net income. Net income decreased by 14.6% to €7m as opposed to €8.2m which we had last year. This was primarily due to higher taxation. Tax-free income from the sale of shares in the US companies Impco Technologies and Stoneridge was insignificant in comparison with Q1 last year contributing €1.2m to pre-tax profit as I just pointed out.

The sales of shares were not subject to taxes, taxation as a percentage of sales was unusually low at 31.1% in Q1 of the previous year. In addition, taxation increased considerably in Germany due to changes to fiscal law concerning the previously admissible adaptation of corporate income tax credit to dividends. To say it less political, one-seventh of the dividend sum which is €1.6m is no longer tax deductible. This means an additional tax payment of €1.6m this year. In total, taxes as a percentage of sales rose from 31.1% to 38.6%.

BERU will work on making greater use of the options offered by the groups international inter-related production scheme, for example at REMIX in Hungary or [indecipherable] in Ireland.

Therefore earnings per share adjusted for one-offs came in at $0.65 as opposed to $0.70 last year.

Our cash position increased by almost 10% to €128m. This ladies and gentlemen does not yet include the amount spent on the acquisition of BERU Eyquem which was due in Q2.

Operating free cash flow for the quarter at €6.1m was lower as compared to last year's €8.8m. Net operating free cash flow before investment acquisitions reached almost 9% of sales at €6.1m. For the full-year BERU Group plans on generating somewhere between €25m to €30m in operating free cash flow.

I would like to remind you that CAPEX in Q1 this year was €6m and compared with the quarter last year it was only €3.2m.

Finally I would like to explain how we plan on running our business in the future and what strategic approach BERU is taking vis-a-vis the market. I will also give you an update on new product development, technology trends and what we are currently working on in [indecipherable], engineering and R&D.

Ladies and gentlemen for us it is a clear goal to grow our business but, and that is most important, grow profitably at a sustained 50% EBIT margin minimum. How do we plan to get there?

We are working on expanding our [indecipherable] margin aftermarket business, not only by transferring our aftermarket activities to new market, but also by leveraging new products into our existing sales channel and finally by acquisition.

I will talk about the Eyquem position in a moment. BERU invests almost 8% of sales in R&D, production innovation is the key. This year we will have PTC and ISS ramping up and TSF increasing penetration. The spark plugs and regenerating systems for particular filters are concepts we are currently working on.

Third, BERU is set up to grow its core deal business, but also the applied electronics side. Consistent structural growth in the diesel field in Europe [indecipherable] potential for the diesel in the United States, but also in parts of Asia will help.

If you take the ISS, we are also significantly increasing the value sold in [cars]. BERU is still doing most of its business in Germany and Europe. Expanding both businesses in the growing car markets of Asia and our successful aftermarket business concept on the European and worldwide basis is a key driver.

Here we will also exploit cost savings potential from moving labor-intensive productions to low labor cost sites such as [indecipherable] in Hungary where hourly wages are 10% when compared to the Germany equivalent.

With respect to ongoing discussions about [clean] diesels, we can honestly say that technological advances for diesel engines are in full effect and BERU is taking an active part in it. Reducing emissions and improving performance and fuel efficiency is a constant challenge. The tightening new legislations, [indecipherable] 4 and [indecipherable] 5, opportunities arise for new product application.

We think that for example, the [indecipherable] [filter] will become a widely used feature in the foreseeable future. This field, BERU will for example provide high temperature sensors purely as the leading products. The advanced engineering we are working together with German OEM on regenerating modules for their [indecipherable] [filter] as it makes sense to position the [indecipherable] behind the [indecipherable] catalytic converter, a regeneration module is almost indispensable.

As I have said before, I would like to comment on the acquisition of BERU Eyquem. French Anti-Trust Authorities last week have agreed to the takeover and we are now focusing on the integration of the business.

BERU is now the No. 1 spark plug manufacturer in France. The company will be included in the scope of consolidation as of August. We have discussed our primary target to grow the aftermarket internationally and tighten relationships with the French manufacturer.

We know Eyquem quite well. Eyquem has already produced certain [indecipherable] for BERU. The company has 90% of its sales in the spark plugs aftermarket business. That is the business BERU comes from. That is the business ladies and gentlemen, we know well and where we have been successful in.

Let me add that we are also working on leveraging the sales channel with existing BERU products such as our glow plugs.

Let me also briefly also point out the products that PTC car interior heating system is a good example for product innovation as it grows in [indecipherable]. Again, we are combining electro-mechanical parts, the heater grid, with applied electronics. The electronics will always be the carrying vehicle. PTC will start to ramp-up gradually in major numbers in the new Golf platform, following the IAA fair in September. PTC heaters will be included in the Electronics and Sensor Technology business. In Q4 the focus platform will start to contribute as well.

As far as our tire pressure monitoring system, TSS, is concerned, we have received contracts to supply two more models from Audio, starting in early 2004 and late 2004 respectively. The system will be an add-on option, but every car that will go into the US market will get it. BERU has already equipped the A8. We also find the take rate for example in the new [indecipherable] are almost twice as high as expected.

The surprising decision by a US Federal Court last week to reject tire safety rules can be regarded as a positive signal for the manufacturers of direct measurement systems such as ourselves. In particular, European OEMs that are currently in the decision making process, which technology to use, might tend to use direct measurement systems for the medium car segment as well tracing this high degree of uncertainty with ABS basis. Time is running short as the US legislation commences in November.

To give you an overview on the US scenario where we work with [indecipherable]. The orange arrows indicate the current ramp-up scenario including the percentages of the newly registered cars that will have to equipped going up from 10%, November 2003 to 100% in 2006. As far as the final decision schedule for 2006 is concerned, the Federal Court decision has changed the situation.

Here is what [indecipherable] stated in his decision to appeal the current option to [indecipherable] ABS based system. The [NHTSA] decision to allow indirect systems was unreasonable. For each case on which an indirect system detects, there will an occasion on which it fails to detect.

Ladies and gentlemen it is for you to judge. I think it is too early to get enthusiastic, but should marked volume for direct measurement systems extend to 100% of the market, BERU could profit from higher volumes and additional contracts by deal with the agreed royalty business model which is for the moment €2m [indecipherable] increasing trend.

This could also have a spillover effect on the European market as well. We will have to wait and see what happens while making use of the current uncertain situation when approaching clients.

Ladies and gentlemen, the next chart is to remind you how the corporation works. It is going to have a lower cost of production. BERU will receive R&D and engineering compensation and we get a licensing fee [indecipherable] per model produced which will continue to our earnings directly.

As I said before, by late 2005 we expect €2m in licensing fees. We expect new contracts by this decision by the Federal Court. This will provide further potential to increase the royalties income.

Following the recent [indecipherable] the contract all three major German OEMs that are active in the diesel field have taken the decision to use the new instant start technology which is quite a break-through. This slide shows the ramp-up scenario of major contracts in the second half of the business year that will contribute to higher growth dynamics and our diesel cold start technology division.

We are currently negotiating with a German OEM to equip another volume platform with this ISS system.

That brings me to the last chart of the presentation, the outlook. We expect the weak economic and industry environment to continue in 2003. However Diesel and Electronics growth will continue unabated. We think that as German new car registrations already at 1992/1993 recession levels, we should have reached the lowest point in 2003. We think that a stronger market next year will be backed by new models which will be launched at the IAA Fair.

For business year 2003/2004, the BERU Group plans to grow sales by up to 15% including the sales generated through the Eyquem acquisition. The [EBIT] margin is targeted to stay about 15% benchmark despite potential dilution from acquisitions and higher electronics content in our sales mix.

Total CAPEX planned at approximately €35m including Eyquem and including €7m one-off for aftermarket logistic [indecipherable].

As far as 2004 is concerned for the OEM business, this will be a ramp-up year. We are going to have increasing sales earnings dynamics based upon new product ramp-ups starting in Q3 such as ISS and PTC and new contracts as the Renault contract, [indecipherable] Audi TSS in Q4.

The group will extend its [indecipherable] premium brand with high margin aftermarket business internationally and focus on integrating [indecipherable].

Ladies and gentlemen, the [IAS] accounting principle will be applied from the end of business year 2003/2004.

That has brought me to the end of the presentation. Thank you very much. I would like now to hand over to Q&A. Thank you.

Thank you sir. Today's Q&A session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your telephone keypad. We will take questions in the order received and will take as many as time permits. Again, please press star, one to ask a question. Our first question will come from Thomas Besson from Citigroup. Please go ahead sir.

Hi, Citigroup Smith Barney. A few questions, the first one is on the surprising decision in the US to reject indirect systems. If we make the [indecipherable] that indirect systems are not going to be allowed at all, can you please elaborate [indecipherable] scenario what kind of potential you think you have directly and indirectly in addition to what you said before? What effectively is the new [position] compared to what it was before this ruling?

As far as this court decision is concerned, it actually was taken I think a couple of days ago. I think many of us have been surprised by this decision to begin with. I think it is too early to judge and to give you very accurate figures which will be the outcome, or the sales impact for us. I think when we definitely think that due to the certain [indecipherable] in the market right now, we think that we have got additional contracts from European manufacturers. On the other hand, we think that our corporation agreement which we have with the [indecipherable] Corporation will definitely take advantage of the situation. This means that we expect a higher royalty income in the years to come.

Okay. Another more direct question, your tax rate has gone up quite significantly in the first quarter. Can you give us guidance for the full-year tax rate and [indecipherable] for the next two years? Should we expect a tax rate more in a range between 36% and 38% of the 35% or 34% we [indecipherable]?

Well I think we expect or we think the tax rate will be, if I take it on an annual basis will be somewhere between 36% to 37% which will be in the year afterwards, it is difficult for me to say, what will we do in order to reduce this tax burden is definitely take advantage from our various plans we have in low cost countries. We are on a daily basis checking which products we can actually move to, for example, Hungary or Ireland in order to reduce the tax rate accordingly. I think on an annual basis, the tax rate will be somewhere between 36% to 37%.

Okay. On CAPEX, well I may have misunderstood something, but I thought you were saying that you had paid somewhere between [indecipherable] for Eyquem. You were saying in the presentation that the CAPEX will be around €35m or something. What [indecipherable] because you already have €6m in the Q1. So are we going to stop [indecipherable] Eyquem or --?

No. We said in the past that we will without the acquisition of Eyquem we will have a CAPEX of approximately €30m. Due to the acquisition of Eyquem that will add another €5m. So total CAPEX will be €35m. That does not include -

Purchasing price?

Yes, the purchasing price.

Okay. One final question if I may. You mentioned the long-term potential of diesel in some countries in Asia and in the US. Can you just give us an update on your view on this specific objective to date? Which of the US [indecipherable] you think would be the main supporter for [indecipherable] in the US?

As far as the United States is concerned, we are actually quite optimistic that there is a clear trend to go for diesel cars. The reason for that are many fold. To begin with you have to meet in [indecipherable] consumption regulations and since the diesel engine consumes 30% to 35% less than the petrol driven cars, that is one major reason.

I think if you look at the quotes of various CEOs quite recently, Mr [indecipherable] made an announcement that he thinks in the United States 50% of the cars should have diesel engines. Why such? First of all, you have a very high taut but low revs. You have as I said before a low consumption rate and one out of two cars are today already light trucks.

Many of the American car manufacturer companies [indecipherable] are getting prepared for the diesel coming up. The [indecipherable] has been very well received and the [indecipherable] has been very well received in the United States. That is a car that has a [taut] of 750 [indecipherable]. [Indecipherable] has announced quite recently that the [indecipherable] will be introduced to the United States with a diesel engine.

If I add all these things up, I know for instance that Ford has set up an engineering team to develop a diesel engine for the United States. There are many trends also from the legislative point of view to make diesel more attractive. What we think is that we do not want to become too enthusiastic about it, but we think the trend is there and we are quite positive that it will materialize in the near future. The penetration today is somewhere between 1% to 2%. Whether that will go up to 12% by 2012, I do not know. I think that is at least what JD Powers has forecasted. One thing is clear, we will participate in that trend in any occasion.

As far as the Asian market is concerned, Korea has just changed their legislation, which now favors the buying of diesel-preferred cars.

Thank you very much.

Our next question will come from Craig Abbot from Commerzbank Securities. Please go ahead sir.

Yes, good afternoon. Actually the first of my two questions has been answered on the tax rate. The second question I had was regarding the ignition technology division. You have told us that you had double-digit growth rate for the actual spark plug and you mentioned that this was driven basically by the launch of the UltraX Platin product. I assume in Q1 we of course had the initial stocking by the retailers. I guess my question then is two-fold, first of all should we expect double-digit growth rate for spark plugs over the course of the next couple of quarters? Secondly, could you kind of us give us a broad indication of what the sales for the division would have been had you not had the launch of this new product line in Q1? Thank you.

I think it is too early to give you an outlook of the future for two quarters. Indeed we launched a new UltraX Platin spark plug which was introduced quite recently. We think the trend is positive but it is too early to give you a more clear and concrete figure on that.

What is interesting is that definitely as you might have seen that prices of this new spark plug are much higher and therefore also the margin is quite interesting.

Okay.

Our next question will come from Tom Borland from ABM Amro. Please go ahead.

Thank you. I have a few questions. First of all you have talked about strikes in Germany. There has also bee strike action by [Hyundai] in Korea which I think maybe still ongoing. I wonder if that has had any impact on BERU's operations there?

Secondly, returning to this US Court decision. I think we, like you, find this rather mystifying. We already know there will be an appeal against the ruling. Have you any idea of a timeframe when we could expect when the next ruling is, because between now and November obviously it is not now very long?

Thirdly, I wonder if you could explain perhaps in a bit more detail the rise in other operating expense in this quarter compared with last year?

Lastly, perhaps a little more detail on F1. From what you say I guess F1 was loss making again. Will that remain the case for the rest of the year? Do you further [inaudible] F1?

As far as the strikes in Korea are concerned, I think one could almost say the Koreans are always on strike. You are right, our business was slightly hampered by strikes going on at Hyundai, but the impact is not of a major size. As far as the US court decision is concerned, it is difficult for us at the moment to give you - we do not know much more than you do and we do not know the timeframe when there will be [indecipherable] going on.

On the other hand, the decision led to an uncertainty among European manufacturers and that is something that we, as I pointed out before, will use in our discussions when we talk to the European manufacturers.

You were referring to the other operating expenses. First of all, these expenses include marketing planning operating costs and administration. I can tell you there is nothing extraordinary. That is just one month comparing to last year, this is sort of [indecipherable] going into this quarter and last year it went to the next quarter. There is nothing extraordinary in the operating expenses.

The fourth question was related to F1. F1 actually broke even in some months already, but this was a rather strong month. The target remains the same, to break-even this year. The management is positive to reach this target, although it is not going to be easy to achieve.

Marco thank you very much.

Our next question will come from Patrick Juchemich from Sal Oppenheim. Please go ahead sir.

Hello. Two small questions. The first one relates on the order intake which grew by 8.2%. Could you please give us a more exact [specification] which sectors benefited the most?

Secondly a question on the ramping-up scenario, which I think is quite crucial for the success of the business? Thank you.

Excuse me the line was pretty bad, could you repeat those questions, excuse me?

Okay. Firstly referring on the order intake, which was up 8.2%. Could you please specify which sectors benefited the most?

Secondly on the ramping-up scenario of your [novelties] which I think is quite crucial for the success for the business year?

Okay, diesels and electronics were definitely the areas where the order intake was the most important. As far as the ramp-up of the new product is concerned, well you know that diesel supplied to the new [Golf] platform and not only with our ISS system but also with the PTC system.

This is to a certain extent out of our control, it is the steepness of the ramping-up program of the OEMs, but we are quite positive that particularly the [Golf] platform will be ramped up quite quickly according to what Mr. [indecipherable] just announced a couple of days ago.

Okay, thank you.

Our next question will come from Fredrik Westin from West LB. Please go ahead sir.

Yes, hello. I have two questions. The first one is on your material costs. You mentioned that ignition cost sales declined and perhaps this has had a positive correlation with material expenses as well. I guess the 36.3% that we see in this quarter was more due to a ramp-up of a lot of products namely the tire pressure monitoring system. If I look at the electronic content for your ISS and PTC products, should this [indecipherable] not increase in the future, then make your EBIT margin that you are targeting even more ambitious?

You are referring to the material costs. Actually when you compare it to the total output, the increase is I think 0.7%. What we do normally in Q1 and Q2 is to increase stocking order to be well positioned for the aftermarket business, which is actually quite active in the last two quarters.

As I said, the material costs and percentage wise is actually exactly according to our planned level. You are right, I think where we finally end up with the material costs, well it depends also on the ramp-up of the new product. One thing is absolutely clear and it depends also on the product mix, which I think is quite understandable.

On the other hand, 15% EBIT margin is our target and it is an ambitious target, but we said 15% EBIT margin minimum as a goal and we stick to that.

Okay. A follow-up on the inventory issue. You have picked up inventory [indecipherable] in the first quarter this year, whereas last year it was only up by around 17%. My question is how much comes from the ramp-up for the new productions or the new products and how much from the seasonal build-up? What would the capital for the inventory be going forward?

I think the increase mainly stems from the expansion in the aftermarket business, which is mostly seasonal, and these are the main factors actually behind it.

Okay, right then almost twice as high as last year?

Yes. I think the expansion of the aftermarket business is going up. On the other hand we have the ramp-up of our OEMs and all this together contributes to this increase. Ramp-up of PTC and ISS is [indecipherable] September starting point and I would say this is quite a normal situation right now. There is nothing spectacular about it.

So that [indecipherable] come down in the next quarter - the inventories for those products?

I think we definitely will work on it. On the other hand, we are quite aware of the fact that the Electronics content will go up. As I said if the level we have reached is quite in line with what we expected, we will have a high Electronics content so automatically this will go up.

Thank you.

Our next question comes from Thorsten Zimmermann from HSBC. Please go ahead.

Good afternoon. I do have a question on the licensing agreement with [indecipherable]. How long have you fixed it, in terms of the overall contract and how long is pricing fixed or the royalties you get out of it?

Well I cannot disclose to you all the details of the contract right now. There are pricing adjustments in it and as far as the situation of contracts is concerned, I would say that it is a normal condition. We get a fee [per censa] produced and this contract has been signed on the promise that it is a long-lasting contract.

Could you give us an idea, 10 years, 15 years?

These contracts can be - I do not have all the details in my head. Normally these sort of contracts are subject to revision. If one or other party actually wants it let us say after three years or five years, that depends. That is our understanding and as far as [indecipherable] understanding is concerned, it is a long-term contract.

All right. A small one [indecipherable] V8 adjustment. Where would the other 0.3 come from? Is it a tax rate or --?

Adjustments include one-off, these are 0.2 to share sales and from some provisions, but nothing abnormal no. We can give you the details of that later on if you do not mind.

The last one is concerning the outlook. You say you expect to grow the top-line by 16% and if I am not mistaken in previous calls there was also a statement concerning profitability to low profit proportionally to revenue. Is that still a goal?

Our goal is to have an EBIT margin minimum of 15% at least. That is our target. As far as sales are concerned, our goal, our internal goal is 15%. These are two, I think, ambitious goals but we -

All right, thank you very much.

Our next question comes from Ralph Jainz from Cazenove. Please go ahead sir.

A very good afternoon gentlemen. Three questions from my side. On the other operating income, it declined by €0.3m, but the shortfall from selling shares was actually €1m. Can you just point out what the underlying increase was?

Secondly, a comment on the share pricing. Last time I think you had about 50,000 at an average of 42. Can you just update us on the progress there?

Just on the ignition [indecipherable], you are in this very unlucky situation where you just sort of sit there with your capacity in place waiting until Renault sorts itself out. At [indecipherable] what is the quarterly operating cost base you have to maintain until that volume is starting to come through?

The ignition [indecipherable] you are right, we have invested I think approximately €2m. I do not have to tell you that we incur the costs for this and fortunately by September now the new order will start.

As far as the share buyback program is concerned, I think we are holding only a few shares and you pointed out 50,000 and while we have a share buyback program we will bring you this program at the next general assembly. One of the reasons was actually to offer that as an incentive scheme for the employees, but nothing has been decided yet so far.

Your first question was on the other operating income, am I right?

That is correct, yes.

We will have to come back to you.

That is no problem. Can I just ask for clarification on the first two answers? Are you implying (a) that you are not actively buying back shares in the market right now; and (b) the €2m you mentioned for the ignition business, you mentioned the €2m, is that just money [sunk] in terms of a capital investment or is that an indication of your actual underlying operating cost base?

That is the investment. It is the investment we made into the machinery. The first question - could you come back to that?

Yes, just on the share buyback. You are putting in a way, which implied that you are actually not currently actively buying back any shares in the market. Can I just confirm that?

We have bought in the past, but very few parts. I think at the moment we are not buying right now and we have to prepare, we have not decided yet whether we are going to introduce an employee program, so it is a little bit [indecipherable] on that.

Thanks, I appreciate it.

Our next question comes from Rolf Woller from HVB.

Hi, Rolf Woller. Just one follow-up question on the F1 development. You mentioned that it is not really good at the moment. What were your restructuring costs in the first quarter, because last year you disclosed to us that the restructuring costs were at €0.6m for the first quarter.

The restructuring costs for the first quarter was close to zero.

Okay. Do you not expect to break-even this year with F1?

This is clearly the target. We have months where we broke even, but we also had months where we are still in direct. The target remains the same to break-even by the end of the year.

Okay, thank you.

Our next question will come from Hendrik Emrich from Berenberg Bank.

Yes, good afternoon. I have one question on the [indecipherable]. As far as I know for the [indecipherable] systems you get the [indecipherable] your competitor in this segment, Siemens. Are you still happy with this business relationship?

Yes. You know [indecipherable] and we are actually quite happy about it because we have some financial stability now. Therefore we actually are happy that this company is now backed by a big German company.

There are no plans to change it in any way.

No, not for the time being.

Okay. Just one quick follow-up on the Formula 1. If they will fail to break-even this year, are there any plans or possible [indecipherable] or --?

No, not for the time being. We were actually quite successful in the last couple of months by introducing the TSS system to the Formula 1 activities that we are really exposed to high tech and very demanding technology. We are sticking to the goal to break-even this year and try to make everything possible to get there.

Okay. Thank you.

Our next question will come from Robin Maxwell from [indecipherable]. Please go ahead.

Good afternoon gentlemen. I have got a number of questions and I will only ask you three. Your predecessor, sorry I have got an echo on this line so I apologize if I am a bit slow, but your predecessor was talking about the importance of incentives to the US at the petrol pump level i.e. getting diesels right into position at the petrol pump is a major key to market penetration there. I have heard briefly there are either local government and federal government incentives now being put in place. Could you please help me understand what the situation is there?

The other question I have got is on the Electronic and Sensor business in the first quarter, I think that was about 23% of group sales. Can you just confirm roughly what that percentage will be at the year-end?

The last question I had, I just want to understand a bit better to what extent ISS will cannibalize diesel's cold start in any way, shape or form?

Okay, your first question was referring to the discussion in the United States. [Indecipherable] introduced a law, which actually gives incentives to the user of diesel engines. This actually has been introduced earlier than expected, it was actually due by I think late this year and they did that already earlier. These incentives also go for interest [indecipherable].

That means that if I own a petrol station, I actually can get an incentive to basically reconfigure my petrol station?

Yes.

So the diesel pump and the petrol pump are next door to each other?

Yes, I think the [mineral] industry definitely get incentives and how that will then be passed on to the gas station owners, we will see. There is definitely an incentive for the mineral oil industry for infrastructure measures.

Okay.

The second question was Electronics and Sensors --?

By the yearend?

I think it will be roughly close to 30%.

Okay.

Your third diesel cold start?

Yes, I did not quite understand to what extent if any, ISS will cannibalize diesel cold start as we go forward?

What we do with ISS is that we add to our classical glow plug business an intelligent control unit. If you take for example the [Golf] platform, [indecipherable] the old [Golf], the [Golf] 4, we had its share of 50% in terms of delivery to our glow plugs to this platform. The new platform we have 100% share and we have a higher value per car because we have the ISS, the electronic steering control unit which goes with it. Okay?

Okay. That is very useful. I have just got one last question sorry. In your quarterly report, I have only read the English version and there is just one sentence I just want you to clarify, these new ISS and PTC products should reach the break-even point as soon as possible. Now I am sure we would all love that to happen, but could you just help me define that a bit more clearly?

It depends clearly on the ramp-up situation with our OEMs and as far as the ISS is concerned, I think that will be [inaudible] early 2004 or 2005. As far as the PTC is concerned, that will be about roughly the same.

Okay. Thank you very much.

Our next question will come from Aleksej Wunrau from LBBW. Please go ahead.

Aleksej Wunrau, good afternoon. In the beginning of the presentation you mentioned the aftermarket business with glow plugs. May I ask how long the life cycle is, so how long the time lag between OE and aftermarket business is? Do you expect a peak in aftermarket business or a follow-up of the aftermarket business following the high growth in the segment?

What are the margins and are these margins higher in the aftermarket business?

I think normally the cycle is three and a half to four years I would say. The aftermarket, if you look at the existing car parts, the aftermarket will follow the diesel boom, with a time lag if you like of three to four years.

On the other hand, when you hand in your car for revision and normally the guy at the garage changes your glow plug automatically, so even if perhaps from a classical lifetime point of view that is not necessary, or even he changes all the glow plugs although perhaps one should have been changed. I think that is an interesting point for us. On the other hand 70% of the existing car parts are still petrol cars so we are actually quite well positioned in both areas, in glow plugs and in cold start and classical ignition technology for spark plugs [indecipherable] concerned.

Thank you.

Our next question comes from Nathan Kohlhoff of Bankgesellschaft Berlin. Please go ahead.

Yes, good afternoon. I just have two questions. The first one relates to commercial vehicles. You said that the business development they were unsatisfactory and I was wondering if you could perhaps quantify how much that impacted on your negatively your sales on the diesel cold start division in the first quarter.

Secondly I had a question about your dividend policy and if the new law about the tax deductibility of dividends, if that will in any way change your dividend policy?

Let me start with the second question first. As far as dividend policy, we and the supervisory board proposed to the general assembly to pay dividends of €1.1 per dividend per share. As far as this tax legislation is concerned, that should not have an influence on our dividend policy.

As far as your first question is concerned, I would say 10% to 15% of our sales in diesel cold start technology go into trucks. That is around; let us say 1m or something like that. Okay?

Okay.

Once again, if you would like to ask a question please press star, one now. Thank you. We have one further question from Lars Ziehn. Please go ahead.

Yes, good afternoon. Just one quick question regarding taxes. How much of the tax effect which you quantify at €1.6m for the full-year has been booked in the first quarter? The next question would be is that adjusted [indecipherable] result or not?

The first point is that I think it reflects proportionately. So one quarter of this €1.6m is already in the accounts.

Okay. I would assume that is not exactly not - is that adjusted in the [indecipherable] results?

I think it is not adjusted.

All right. Thank you.

We have no further questions in the queue at this time. Mr. Maltzan I will pass the call back with you for any closing or additional remarks. Thank you.

Okay ladies and gentlemen thank you very much for listening to this presentation. Those who are planning on vacations, I wish you nice vacations and talk to you soon. Thank you.

That concludes today's conference. Thank you for your participation.