博格華納 (BWA) 2003 Q2 法說會逐字稿

Good day, everyone and welcome to today's BERU AG first half year results conference call. As a reminder, this call is being recorded. At this time, I would like turn the call over to your host for today's, Mr. Marco Maltzan. Please go ahead, sir.

Hello? Ladies and gentlemen, how are you doing today? This is Marco Maltzan speaking from BERU. Thank you very much for joining into our global conference call today.

Before we get started with the presentation, I'd like to make a few comments on the industry environment which has remained rather weak, yet we are progressing with our ramp up of our new products. Products ISS, PTC and so far, we can say we are fully in line with what we have been communicating for the full year. We'll start with a presentation then we will give you a brief overview on the highlight of the first half year that ended on September 13th.

Group sales rose by almost 10% to a record of 153.8 million euro. We had the strongest growth in our electronic and sensor technology division at 23% of sales in the entire safety system saw even by 78%. We have included BERU AG as of August 2003 in our compilation. We are undergoing a higher taxation of 36.6% in absence of last year's tax-free capital gain from sale of shares. Quantity of earnings improved. We managed to reach EBIT margin of 16%.

We are progressing as far as our restructuring activities are concerned with REMIX and F1 systems. Our group wide productivity action plan is showing positive results. We have started the production of ignition coils for Renault in September. We got a major contract for diesel technology from Renault Nissan and we are in ramp up phase of our ISS and PTC system and the new Platinum Gold 5 platform. Further ramp ups are in progress.

Ladies and gentlemen, as the diesel market has been one of the major drivers for our business activities, we would like to give you an update on recent market developments and the future trend. Diesel penetration in new registrations in Germany has gone up from 29% four years ago to 39% in 2003. September new registration in labs in Germany with pleasing acceleration in diesel penetration, [INAUDIBLE] sales short 10%. Consistently high energy prices and ongoing discussions to provide benefits for diesel, so-called Sun Diesel from sugar beets are truly helpful and provide further impetus of the popularity of the diesel engine among customers or consumers.

In Western Europe, diesel shares the first half of 2003 topped the 42% mark even edging higher. Meanwhile, sales for petrol cars were down 7%, yet car parts in Western Europe are still clearly dominated by petrol cars, a fact we have to consider as far as our spare parts business is concerned.

What might interest you is the recent analysis from the German Automobile Manufacturing Association titled, "Diesel Writeup". With production of diesel vehicles, light trucks and passenger cars are included are forecast to increase 70% from year 2000 to 2010. That is clearly ahead of total market growth expectations and constitutes a summit basis for our business in the future.

I'll now provide you with details on BERU Group's financial results in the first half year. We have increased group sales by 9.6% and 140 points, 3 million euro to 153.8 million euro. The pickup of sales were driven predominantly by organic growth. BERU contributed 3.7 million euro to group sales in the second quarter. In our core business field, we achieved.5% increase in sales and got to a 69.8 million euro. Second quarter sales revenues in the technology area picked up 3.7%.

First, shipments of our diesel system ISS was a new Volkswagen Golf platform contributed. Our OEM business up almost 5%. This was basically in line with the increase in diesel light vehicle production on a worldwide scale. Sales in the business area ignition technology rose in the double digits by almost 12%. 48 million euro from 43 million euro. In spite of, as I said before, 7% minus in petrol preferred costs in production in euro. Reasons were contribution from our recent acquisition [INAUDIBLE] 50%.

The OES business, for example, in France developed better than expected and, as mentioned before, the ramp up of ignition coils for Renault has started. While coming to the electronic technology second we achieved proportionately high growth rate of almost 23%. Sales revenue was up from 29.2 million up to 35.9 million euro. In addition to pickup in sales of temperature sensors, shipments of our tire safety systems were up significantly. TSS sales contributed 14.2 million to sales as compared to 8 million euro in the previous year posting 77.5% growth. [INAUDIBLE] the system, technically speaking is slightly on the increase.

New ramp ups such as [INAUDIBLE] where tech rates are clearly higher than expected as well as an overall slightly increasing penetration has contributed to the upbeat trend. The [INAUDIBLE] by distribution channel, not surprisingly, the market share rose from 37 million euro to 42.9 million euro due to the [INAUDIBLE] position. I would like to remind you that Eyquem has 90% of the sale originating in the after market and OES business.

Next, you will find the group sales split by region. Overall, our sales volume originating in Europe outside Germany has gone up more than 43% of our business in that region. This reflects the strong position that diesel has put up throughout Europe and underscores our leading market position in the diesel [INAUDIBLE] field. The U.S. market was comparatively weak. Weak dollar, strong euro affected business diversely and the OES business came in below expectations. With the ramp up of the ISS, Isuzu and GM in the United States, we expect that trend to change again.

We had, as you know, a substantial increase in the group's number of GEs due to the Eyquem acquisition. As of September 13, the group employed 2,718 employees. Due to stepped up efficiency and cost-cutting at some subsidiaries, personal expenses as a percentage of sales were reduced to 31.9% as opposed to 33.5% the year before. Also, as Eyquem[INAUDIBLE] as a percentage of sales are generally speaking before group average.

Development of material costs, the next chart. Material expenses as a percentage of sales rose to 36% up from last year, 33.5%. This was due to product mix. As planned, increasing sales of PTC heaters and tire safety systems as well as the ramp up of ISS control units, all this has disproportionately accounted for that increase and when compared to output, the trend was more positive.

Other operating expenses totaled 24.2 million euro. As a percentage of sales, other operating expenses that comprised marketing and operating expenses as well as administration were down to 15.7% on last year's 16.3%. EBITDA margin increased from 21.7% up to 23.2%. Coming to the EBIT and EBIT margin, EBIT in the first half year rose from 20.4 million to 24.4 million this year. EBIT margin topped our internal target of 15% and reached 15.9% following 14.5% the year before.

The total we have reached a noticeable improvement in the quality of our results. Slight negative effect comes from consolidation of lower margin business. This is portrayed in [INAUDIBLE] here in the second quarter we reached an EBIT of 14 million. That is 16.6% EBIT margin for the second quarter. When theoretically speaking, 0.5 million restructuring charges and charges and operating losses of operating REMIX and 1.3 million euro write-offs on security investments are adjusted for our EBIT margin would have amounted to an even higher, 17.5%.

Pretax profit, although the weak interest rate environment brought about a fall in investment earnings and financial results to 1.3 million euro, BERU still achieved an increase in pretax profits. Before taxes, earnings were up 1.2% from 25.9 million euro to 26.2 million euros. This result also reflects an improvement of earnings quality as a contribution of shares, sales was reduced from 3.7 million to 0.5 million.

Ladies and gentlemen, due to higher taxation at 36.6% as compared to 30.9% last year, net income was down 7.3% from 17.9 million euro to 16.6 million euros. Reason for the increases in taxations were, first, as of this year, 1/7 of the dividend some paid out is no longer tax deductible. Last, we have hardly had any tax-free capital gain from sale of shares when compared to last year. Last but not least, BERU has a high domestic share of sales and Germany cannot really be regarded as it has a high reputation for high taxation.

Earnings per share adjusted for runoffs increased 12.1% to 1 euro 58 cents as compared to 1 euro 41 cents the year before. Financial strength and financing ability has been maintained at a high level as demonstrated by the cash flow generated. Cash flow just net income plus depreciation plus changes in long-term accruals increased to 28.2 million euro.

Cap ex was at 16.3 million euro, comprised another runoff investment in the construction of the new after market logistic center of around 5 million euro and cap ex for expanding ISS expanding capacities. Therefore, we have invested 4.5 million more in capital expenditure when compared to same period a year ago. Development of the operating free cash flow which we defined, just to recall it is net income plus depreciation plus long-term provisions minus exceptions and minus cap ex, despite this proportionately high cap ex and lower net income, free cash flow from operating activity totalled 11.4 million euro. This amounts to a 7.4% return on sales.

Net cash fell from 104.8 million to 58.2 million. Cash position went down from 128.1 million euro to 86.9 million euro. Reasons for that development where the [INAUDIBLE] acquisitions [INAUDIBLE] and the total dividends. Don't forget our investment in the company's future with a capital expenditure of 16.3 million euro as opposed to 11.8 million the year before.

Technology and outlook, let me spend a few minutes on the Eyquem Acquisition that is used to belong to Johnson Controls Electronics was taken over as of the 31st of July was included in the group of consolidated companies for the first time. Truly positive response from customers to the involvement of BERU which tends to substantially increase production over the next three years was quite pleasing. Production in [INAUDIBLE] currently being redesigned for the planned higher volumes and new product technologies are about to be implemented. This making BERU the largest [INAUDIBLE] company in France and although 0% of sales are generated by the spare parts business.

Integration with the group's structure is continuing as planned. We are currently working on raising synergies in purchasing and stock option plan [INAUDIBLE] in east Germany. We also work at leveraging with other BERU products and improving distribution, for example, by merging the existing distribution structures in France. As a result of the August holidays which are common across the industry in France, not only there, the company contributed 3.7 million euro to the group's sales in the second quarter. Sales for the whole financial year are expected to be 20 million euro and more than 13 million in business year '04 to 05.

New product ramp up is on the way. On this chart, you see the various activities we have. Besides integrating the recent acquisition, the company and management is focusing on ramping up the new products TSS and PTC. On this slide, you can get an impression of the product launches expected in the upcoming quarters as I've mentioned before, there is a ramp up of the ISS and PTC in the new Volkswagen Golf platform had started to gain momentum in September. New projects will follow at Isuzu and General Motors in the United States followed by PTC [INAUDIBLE] platform.

To finish today's presentation, I would like to give you an outlook on what we expect for the full year and what our goals are. We expect the automotive industry environment to be rather moderate throughout the business year. German new car registrations are very close to '92-93 recession levels but we think they should have reached the lowest point in '03. We expect a stronger market for business yield for '05 supported, for instance, by international [INAUDIBLE] new model launches. There were surprising strong September numbers. Incoming orders for Germany were up 16%. Yet, October figures show that positive comp has not been established.

BERU sales and earnings trend is predominantly depending upon ramp up for OEM platforms, diesel penetration, take rates, [INAUDIBLE] and our after market performance. 15 for the full year business year BERU plans to grow sales by 15% including the BERU AG acquisition, and achieve an EBIT margin of at least 15% provided the economic environment does not deteriorate. We plan to invest in cap ex approximately 35 million euro including [INAUDIBLE] roughly 5 million euro and one of cap ex for the new [INAUDIBLE] logistic center approximately 7 million euro.

This business year and next business years are definitely ramp up years. We expect sales and earnings to increase in quarter 3 and 4 based upon new product ramp ups. You mentioned that before and also new contracts we have, Renault coils and PSA [INAUDIBLE]

Ladies and gentlemen, thank you very much for your time and your attention. Please feel free to add any follow-up questions.

Thank you, sir. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch tone telephone. If you are using a phone with a mute function, please make sure the mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and take as many questions as time permits. Once again, please press star 1on your touch tone telephone to ask a question. If you find that your question has been answered, you may remove yourself by pressing star 2. Our first question will come from Thomas Bessem from Citigroup. Please go ahead, sir.

Good evening Mr. Maltzan, I have a few brief very short questions and then one longer subject. I thought it was short-term, the second quarter shown a continuation of free cash flow if you added to your definition as it changes in working capital, basically, can you tell us what you can do to improve the situation by year end? The first short term question, the second short-term question is about material costs. They seem to be higher than what I expected. Can you tell us what they should do in the year as well?

And final short question, could you confirm in terms of restructuring expense in terms of F 1 and REMIX, the end of negative figures this fiscal year and proposed contribution next year? I will ask my long-term question after.

We start with the F 1 and REMIX. We expect them to have a break even by year end. We have our expectation is that we get a break even result by year end that remains unchanged. The second question is material costs. I think if you relate material cost to output, the situation is much more in line. I think it's quite normal and is according to our plans due to the ramp up of products with a higher degree of electronics automatically, the material costs in terms of sales will go up. That is nothing which is surprising to us. As far as, your first question was?

On working capital, it has increased significantly in the second quarter specifically. What can you do to put it down by year end?

Let me give you a reason for that. One reason is that we have consolidated close to 7 million euro in [INAUDIBLE] and receivables. As I just said, another reason is a major product ramp up occurring in [INAUDIBLE]. When you start with a new product such as ISF or PTC, [INAUDIBLE] and profit stock are initially higher. There's nothing unusual in order to guarantee OEM supply.

Third point is that for seasonal reasons, we always have increased our inventories for the after market, as [INAUDIBLE] the after market keeping the winter season. This is also why our sales in the third quarter and the fourth quarter tend to be stronger when compared to the first two quarters. Once again as an after market supplier, have to have the products in store when your customer calls, you cannot [INAUDIBLE] as requested on the same day, the order belongs to the competition. The [INAUDIBLE] cost of operating our new logistic center [INAUDIBLE] implies a slightly higher inventory level at the beginning that can be scaled down when it is in full operation.

I think you have several extraordinary factors actually adding up to this situation. We are definitely working on improving the working capital requirements and we expected, to answer your question, to come down in the upcoming quarters.

Okay. Thanks a lot. Two more long-term questions actually linked with your prospects of the involvement in the United States. Obviously, your two most attractive issues [INAUDIBLE] tire pressure monitoring you have a big buildup there. Could you update us there both in terms of legislation impact and what you think your business could be in five years from now in these activities?

Well, as far as the tire pressure monitoring system is concerned, you are aware of the decision of the federal court actually led to a certain postponement to the introduction of the system which was scheduled for November of this year. You know that the indirect system was sort of sized and since we are a producer of the direct imagine system which would be beneficiary to us, first time being it is too early to make a final judgment, what we can say for the time being definitely is that this decision should be favorable for our position because put yourself in these shoes of the manufacturer who is just now defining the system of a car and having the same situation I think very likely go from direct measuring systems.

As far as the diesel situation is concerned, I show, presented where we think the diesel trend on the global scale is going up. There are four cars in the industry market data where they think it will go up by 12% in 2010-2012. You know the diesel [INAUDIBLE] could bring definitely a positive impetus for us. Volkswagen will introduce [INAUDIBLE] a diesel engine, 10 cylinder engine which has been very well received here and over there as well and, as you know, this diesel engine is the ideal engine for pickup trucks and that is, as you know, 50% of the total market. So we remain very positive about the trend. We think definitely the trend is there but it will take some time, no doubt about it. But we are counting on this trend.

The other thing is that we will start our ISS sales in North America with General Motors and Isuzu at the end of this year and that is it as far as North American activities are concerned.

Thank you very much.

Our next question will come from Gerhard [INAUDIBLE] please go ahead, sir.

Hi. I'd like to know you has a [INAUDIBLE] forecast for the current year for PTC heaters for 13 and could you also, is that is up to date? And could you also remind us what is the forecast for ISS in the current year was 25 million, how much are these four cars still up to date and how much of these targets you realized in the first half?

That is my first question and the second question is coming back to the working capital. I think looking at the increase in inventories, I find the reasons plausible that you you had a sharp increase in trade [INAUDIBLE] from 48 million a year ago to 66 million so that was 18 million. Could you explain that, please?

Well, let me -- the first question was our PTC ramp up is on track. I can tell you, it is. So, yeah. I can perform the figures which actually we mentioned before. What was the other question again?

What was your PTC sales and ISS sales in the first half?

The first half PTC was roughly 3 million.

3?

Yes. And ISS was 4 million.

Sorry, can I just ask you a follow on question now? You gave the 15% growth forecast for the full year and if you strip out organic growth, what that implies for the second half is growth, sorry, if you strip out the effect of the acquisition that implies organic growth in the second half of 16 million, I think, 1/6 and so it strikes me that you will get that very easily from PPT and also from IIS and that it doesn't really yeah, just strikes me as a very, very cautious forecast even if one doesn't assume a big upturn in automotive production.

You are right. When saying, you know, that we are actually we have higher sales dynamics in the second half of the year and, you know, we said that we will have on the full year scale, 10% organic growth and 5% coming from our acquisition of Eyquem. [INAUDIBLE] as far as our sales in the ISS and PTC areas are concerned, we are dependent on what's happening with our customers, how fast their ramp up is going to take place.

On the other hand we have in the second quarter, in the second half of the year normally a stronger after market than we have in the first two quarters. Always in November, you know, we are lying on our knees praying for cold weather to drive them to the repair shops and replacing their [INAUDIBLE] when it gets cold. That is what I can answer to this question.

Okay. And coming back to working capital, could you -- do you have an explanation for the big increase in trade [INAUDIBLE]?

We have, I think, working capital 7 million comes from Eyquem.

7 million of what?

65.8 -- hold on. Yes, look at the balance sheet. How do you call it. In accounts receivable of 65.8 million of which you have to, 7 million of this are due to Eyquem, okay? The remainder is more or less seasonal. We have higher, we have more sales, I think I said that before, and as I mentioned before, we have to get prepared for the after market business, et cetera, so nothing really abnormal for us. Okay? I mentioned that also we had the ramp up in [INAUDIBLE] and that is for the ISS and PTC so we are absolutely in line with what we actually have planned.

I mean, trade debt has nothing to do with the ramp up. It's totally separate from a ramp up; inventory has to do with the ramp up but trade debt has nothing to do with the ramp up.

Sure, more sales.

Well, I mean, I still don't understand it. I mean, the organic sales increase was 5% or something like that, and even stripping out 7 million from the French [INAUDIBLE].

Organic growth was almost 7% and an increase of 10% out of which 3.8 million were due to the Eyquem acquisition.

I'm sorry.

8% organic, okay?

Yeah, it still doesn't make sense to me. Maybe we can follow it up after the conference call.

Okay.

Your next question comes from Ralph Keintz from Cosmos. Please go ahead, sir.

Good afternoon, gentleman. One question in the same direction as Gerhard was asking. Could you please run us through the difference in payments of the new tire pressure monitoring systems and PTCs and how that compares to the global. One company, Germany, what are [INAUDIBLE] you paid and DSO for the new product. The second question is the F 1. You plan to reach break even in Q4. What is the combined EBITDA loss on REMIX and F 1 if you have that number?

First question was referring to payment terms and they are exactly the same conditions as we are used to. As far as the second question is concerned, REMIX and F 1, we had restructuring losses of 0.5 million euros, if I'm not mistaken.

For the quarter?

For the half year.

Two quarters, okay, thank you

You are welcome.

Now we will take a question from Lars from Deutsche Banc. Please go ahead, sir.

Good afternoon, gentleman. Just one question with regards to your outlook in the presentation.

I didn't get that to you? [INAUDIBLE].

In your presentation, the last page.

Auto, good ahead.

According to my calculations when I adjust for sales, the EBIT in the first half was up roughly 7% and given the fact that you in the presentation said that we should see an increase or increasing dynamics in sales and earnings in Q3 and Q4, my question then is should we expect more increase in EBIT in the second half of the current fiscal year?

Our EBIT target has always been to achieve at least 50% which is generally speaking, not so easy in the industry to achieve.

Of course.

We still have high development costs and pre expenses from new products. I set out with the higher electronics content not due to the ramp up of our new products. Material expenses as a percent of sales will go up, not tremendously but will increase slightly. And we have and I said that before as well that Eyquem has renewed the EBIT margin by approximately 0.7 percentage points.

I think the faster we managed to ramp up ISS and PTC as earlier we will reach break even with these products and will definitely be a positive margin driver. As I said before, that depends on our clients ramp up procedure. As you were writing, we have a higher contribution from the spare parts business in the cold season in the last two quarters.

So top line and profitability are also depending on the development in the after market business as well. So we stick to what we said before that our target is minimum 15% EBIT margin. We are just halfway through the year, so I cannot say more for the time being.

All righty. Thank you.

You are welcome.

Now we will take a question from Torstan Zimmerman from HBTC, please go ahead.

Yes, good afternoon. My question is related to intangibles and the second is positioning at half year.

I will have to check that, 9.4 million.

All right. And the other issue about EBIT margin, the question is you will switch to ISS at the end of the year, we all know you normally had substantial profits that you can't book under ISS that you have been under to book under German debt, so one reason under the EBIT margin for the full year?

No, we would change to ISS at the end of the year, you're right. The company's philosophy and target always has been to achieve 50% EBIT margin and I leave it the way it is [INAUDIBLE] We work on that. As far as the change to ISS is concerned, as soon as we know if there is major impacts, we will let you know, you know, before hand.

Last question, so when do you expect to break even on ISS and PTC, in which quarter?

In PTC, I think we will break even in the quarter of business year '04 or 5. Always depending on the ramp up and our customers and as far as ISS is concerned, we think that we will break even at the end of this business year already.

Thank you.

Let's say the first quarter of the next business year.

Thank you, very much.

Your next question comes from Tom Boyland of [INAUDIBLE]. Please go ahead, sir.

Thank you. just, I want to give perhaps some note of caution about the outlook for the second half and given that you've mentioned a couple of times how dependent you are on customers as far as ramp up of the production of ISS and PTC is concerned. Have you seen any sign that perhaps Volkswagen with the Golf Five is going to proceed slightly more slowly than anticipated? We've heard of Volkswagen having a few shifts to the production of Golf 5 and I assumed that would actually have a beneficial effect upon you. Are you concerned of that or the new focus that things may proceed more slowly than you expected?

Our expectations have not shifted. [INAUDIBLE] have been accepted and we are highly positive about the development of the ISS of our ISS sales. So, you know, you call it being cautious. I say once again we don't have any incidents to question right now that we won't reach our unforeseen things. Once again we are just halfway through the year.

Okay. Thank you.

You're welcome.

We now have a follow-up question from Gerhard [INAUDIBLE]. Please go ahead, sir.

You mentioned the pickup of intangibles in the first half. Could you repeat that, please?

The figure was 9.4 million euro.

9.4? For amortization of intangible assets?

Amortization. Hold on. We have to check that.

And the second question is in the interim report you mentioned your authorization of share buy back of up to 1 million. To what degree have you done that already as of today?

The time being, we have done nothing.

Okay.

Any other questions? Hello?

Yes, sir. Our next question is from [INAUDIBLE] Monroe from LBDW. Please go ahead sir.

Hello, this is [INAUDIBLE] Monroe with LBDW. We saw a shift, an increase in bank liabilities in the cause of the last term. Might this be a beginning of a shift in capital structure toward a higher gearing ratio?

No. That is not intended in this way.

Okay. Thank you, very much.

You are welcome.

Next question from Hendrick Enmick from [INAUDIBLE]. Please go ahead, sir.

Good morning, gentleman. I have a question on share holdings and [INAUDIBLE] shares to get a better feeling on the future development of proceeds of possible sales. If I am not mistaken, you had proceeds of 0.5 million in the first half?

0.5 million, right. Only a couple of shares left now.

Okay. So the majority is sold and [INAUDIBLE].

Yep.

Thanks.

As a reminder, if you'd like to ask a question, press star 1 now. Thank you. Next question will come from Frederick Weston from [INAUDIBLE]. Please go ahead, sir.

Good afternoon. I have a question on your profitability by segment. If you look at after markets, I assume the market decrease from Q1 to Q2 is due to the acquisition but on the other hand your OEM business grew favorably, actually increased from Q1 to Q2 which looks strange considering ramp up costs. How do you expect the margin to continue in the OEM next year?

I think that should not be estimated as quarterly trends. That is, one quarter could be more favorable than another one. That depends pretty much on sales of customers and the qualities so will definitely be some fluctuations in various segments. So, that is something which we expect that can happen that can go up in one direction or else in the other direction, depends on the quarter. But lastly, you know that it is in line of what we expect.

Second question. An update on the corporation in the U.S. and expected income from licensing fees.

You know that we have this corporation is we have [INAUDIBLE] should contribute 0.25 million euro. License fees which will go directly to the bottom line of the company by late 2005. So nothing else which has changed.

A quarter million?

No, 2.5.

Thank you.

As a final reminder, if you'd like to ask a question, please press star 1 now. Thank you. We'll pause for just a moment. We have no further questions in the queue at this time, Mr. Maltzan, so I pass the call back over to you for closing or additional remarks. Thank you.

Okay, ladies and gentlemen, thank you very much for joining our conference call and I wish you a nice day or evening, wherever you are, thank you very much. Bye-bye.

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