博格華納 (BWA) 2004 Q2 法說會逐字稿

Good day everyone and welcome to today's Beru AG first half-year results conference call. For your information, this call is being recorded. At this time I would like to turn the call over to your host today, CEO of Beru AG, Mr. Marco von Maltzan. Please go ahead sir.

Yes. Thank you very much, ladies and gentlemen, for joining us today to do the conference call. To begin with, I would like to summarize the highlights of the first half-year.

Group sales rose by 17% to €179.8m. Our organic growth, top 10%. Operating performance has been according to plan. Yet the second quarter was burdened by €4.2m of one-off expenses for the departure of a Board member and the extraordinary expenses incurred by the BorgWarner voluntary takeover bid.

Adjusted EBIT margin came in at 14.7%. Eyquem has still been burdening the Group's operating margin by around 1 percentage point.

We have 1 major contract from 2 European OEMs for the development and production of the latest 12mm premium sparkplug technology. Below expectations, TSS tire pressure monitoring performance has been weighing on the operating results as well. They had to finalize the US legislation for the [indiscernible] and it has started to trigger substantial demand for direct measuring systems.

Our diesel business has been strong, especially the US market has been picking up.

Ladies and gentlemen, let me also say a couple of words with regard to the BorgWarner bid for Beru. With reference to the German Wertpapier [Wert und Ubernaame] Gazette, BorgWarner Germany GmbH disclosed the decision to launch a public tender offer for the shares in Beru AG for a price of €67.50 per share on November 1.

At the moment we can only make provisional comments on the announced public tender offer. According to the German Takeover Law, BorgWarner has a period of up to 4 weeks to prepare the offering documents for submission to the German Financial Services Authority, the so-called BaFIN. BaFIN will then examine these offering documents. Subsequently they will be published.

The Management Board and the Supervisory Board of Beru will then issue reasoned opinions.

I would like to give you now an overview of the most important financial figures for the half-year and our future targets.

For the first 6 months, Beru succeeded in growing sales by nearly 17%. Sales increased from €154.4m to €179.8m. The French subgroup acquired in August 2003, Beru Eyquem, made a sales contribution of €13.4m.

The Group achieved organic revenue growth of more than 10%, due to high growth rates in Diesel Cold-Start Technology and the positive business development with PTC and the high-temperature sensors in our youngest division of Electronics and Sensor Technology.

While in operative terms Beru's business developed according to plan, second-quarter earnings were negatively affected by one-offs amounting to €4.2m related to the departure of a member of the Executive Board and costs of consulting services connected with the announced acquisition of the Beru Group by the BorgWarner Group.

Diesel Cold-Start Technology. We have succeeded in further increasing our sales revenues in the core division. The figure of €80.3m for the first half represented an increase of nearly 50%.

Sales trends for the individual product groups and sales channels differed. First, the OES business was stronger as compared to the first quarter. Second, we are rather satisfied with sales of the ISS, where we sell glow-plugs in combination with an electronic control unit in the OEM business. Unit sales were significantly higher than projected. We have a clear lead in this technologically sophisticated segment.

In our division Ignition Technology, Beru achieved sales revenues of €57.4m after €48.4m in the prior year period. The increased revenues were primarily due to the Eyquem acquisition. Beru Eyquem contributed to revenues over the full 6 months, unlike the prior year period.

Unit sales of ignition coils were higher than expected, due to increased market share and product start-up effects with the French customers. We assume that sales generated by ignition coils will increase further in the coming year.

The [indiscernible] field Electronics and Sensor Technology achieved a growth of 17.3% with sales revenues of €42.1m, compared with €35.9m in the prior year period. Growth was driven, among other things, by PTC ramp-up and our high temperature sensor business. The development of our tire pressure monitoring system, TSS, was below expectations. It did not reach the figures of the previous year. I will get back to this issue later on.

Here you will find the Group sales split by region. Overall, our sales volume originating in Europe outside Germany has gone up. More than 46% of our business is in that region. This reflects the strong position that diesel has put up throughout Europe and Beru's leading market position in the Diesel Cold-Start Technology field.

North American demand for modern diesel technology is beginning to rise. Beru succeeded in boosting its first-half sales revenues by two-thirds, from €12.2m to more than €20m.

On this slide, sales split is by distribution channel [indiscernible]. And surprisingly, the aftermarket sales rose from €43.5m to €53.6m, helped by the Eyquem acquisition. I would like to remind you that around 75% of Eyquem sales originate in the aftermarket business.

Personnel. With 2,621 employees, the number of people employed in the Group was around 2% below the figure of the previous quarter. The ratio of personnel expenses to sales revenues increased to 32.3%. However, this also includes the now fixed one-off expenses for the departure of 1 member of the Executive Board.

This leads me to material costs. The ratio of material expenses was 36.1% compared with 38% in the same period of last year. Related to output, the ratio was 34.9% after 35.6% in the prior half-year. For the full year, we are planning materials as a percentage of sales to be in the 36.5 to 37.5% range.

Other operating expenses that comprise marketing, operating and administration costs, amounted to €29.8m compared with €25.5m in the same period last year. As a proportion of the Group sales revenues, they were almost flat at 16.6%.

EBITDA adjusted for €4.2m exceptional expenses increased 10%, from €35.9m to €39.3m. Including the one-offs, the EBITDA decreased to €35.1m.

The EBIT adjusted for one-offs increased by 10% to €26.4m, after €24m in the previous year period. Including the one-offs, EBIT amounted to €22.2m. The solid profitability of the Company, with an adjusted EBIT margin of 14.7%, remained at a high level. However, it was below the level of the prior year period, which was 15.5%.

Due to the dissatisfactory earnings situation at Beru Eyquem, the operating margin was about 1 percentage point lower. Also the weak performance of tire pressure monitoring in the second quarter burdened the operating profit side.

Financial income increased from €1.3m to €1.6m. Before taxes, the Group earned €2.7m more when considering adjusted pre-tax profit, which increased by 10.7% to €28m. Including the one-offs of the second quarter, pre-tax profits amounted to €23.8m.

The effective income tax rate of 37.7% was considerably higher, partially due to the tax on assets at Beru Eyquem, which is independent of earnings. The total effective tax rate increased to 40.3%. Before one-offs, the Group's net income increased by 6% to €16.7m, despite the significantly higher tax rate. Including exceptional items, the Group's net income amounted to €14.1m.

Adjusted earnings per share expanded to €1.67 per share as opposed to €1.58 for the prior year period.

The net financial position decreased to €67.3m compared with €79.7m on June 30, 2004. Our cash position was down from €104.6m to €91.5m, predominantly due to the payment of dividends and to the strong investments we have undertaken in expanding capacities.

Due to the expanded investments, the free cash flow from operating activities of €8.8m was lower than in the previous year. Beru continues to invest substantial amounts in the future of the Company. Capital expenditure on intangible assets increased by almost 16% to €18.5m, and was fully financed out of the cash flow.

Let us now briefly take a look at the market trends and developments at the product side that are essential for generating future business and earnings.

In our opinion, we have positioned the Company with good prospects for the years to come. Especially the diesel trend, that continues unabated and has even shown signs of increasing dynamics in the quarter. It's a solid basis for growth.

From January until September 2004, Western Europe's diesel share has already soared to a spectacular 47.2% compared to 42.4% a year earlier. In this picture you'll see Western Europe is just the red bar above the gray bar. [Indiscernible] you'll see the Western Europe average.

With 42.6%, Europe's largest car market, Germany, still has a way to go to come up to the European average. As of September, diesel figures have shown Germany has reached a 44.7% diesel penetration on a monthly basis compared to 39.5% in September 2003.

In our second quarter, diesel growth as measured in new diesel car production has been hovering about the 6 to 7% long-term growth rate, reaching above 10% growth rate. This trend has been accelerating due to high crude oil and pump prices. As you might recall, hopefully from your own experience, a diesel consumes 30 to 35% less fuel than its petrol equivalent.

Although on a still low basis, the US has started to turn into an increasingly interesting market for diesel engines. Here as well, growing customer awareness and record-level pump prices had demand go up. Beru increased its sales revenues in North America in the first 6 months by nearly 66% to €20.2m. Demand was particularly strong for ISS for use in large diesel engines for sport utility vehicles and pick-up trucks. Unit sales were higher than expected.

The JD Pollock truck illustrated shows that diesel share is in light -- in light vehicle sales is bound to reach 4% at the year-end, posting a sustained upbeat trend from 1999 to present levels.

With the upcoming change in legislation, Korea has become an increasingly interesting diesel market as well.

Ladies and gentlemen, we have kept on investing more than 8% of sales into new products and new technologies. How have they been developing?

Sales revenues with electronic tire pressure monitoring systems were way below expectations and also below last year's sales figures. 1 of the main reasons definitely being the lack of clarity regarding the imminent announcement to the tire safety rules everybody had been waiting for. They finally have been passed in favor of direct measuring systems technology in the United States in mid-September. 1 of our clients had even postponed equipping 1 model.

This lackluster performance of TSS has also burdened our operating performance. Yet the acquisition of new projects is developing positively. For example, Beru has received an order starting in the 2005/06 financial year to equip an additional Audi model with a tire pressure monitoring system. Beru is already supplying the system as an option for the A8 and the new A6, and will also supply it for the new facelift of the A4.

VolksWagen has awarded Beru a follow-up order extending to the year 2010. Starting in the next financial year, an additional Bentley model will be equipped with TSS.

In ISS we have been winning almost every contract out there so far. Ramp up is progressing well, supported by increasing diesel penetration. For example, in the VolksWagen Golf platform. Also in the US, demand at DeMax has been good and call-offs of the ISS technology came in stronger than expected.

PTC technology is still ramping up in the VolksWagen Golf platform and also in the 4TC platform. We have been successful in expanding our customer base. 1 contract is from Hyundai. And for the first time in the US, Ford will equip its [S2S50] platform. Overall, the product group is doing according to plan.

Let me elaborate a little bit on the tire pressure monitoring system. Following a series of accidents caused by faulty tires, as early as August 2000 the US authorities called for the mandatory introduction of tire pressure monitoring systems in all new vehicles. December 16, NHTSA presented the new stricter regulations 1 year after being called upon to do so by the US Federal Court, which are then the new standards.

Last autumn the US Federal Court first suspended the possibility to choose between the less expensive but also less accurate indirectly measuring anti-lock brake sensor-based technology and the superior directly measuring technology. Consumer protection experts argued that the more expensive directly measuring system was safer. Directly measuring systems, such as our tire safety system, measure the exact tire pressure with the aid of a microchip in combination with temperature and pressure sensors inside the tire, and give warnings on tire pressure loss, 1 of the main causes of severe tire bursts.

The US Transportation Authority, NHTSA, was requested to revise the system requirements. The introductory schedule, which originally called for an initial fitting ratio of 10% of all new vehicles as of 2004, was also subject to revision. What's the situation now?

Guidelines stipulate that drivers must be warned at the latest after a pressure loss of 25% in 1 of the vehicle's tires capable of 4 tire under-inflation detection. The 1 tire 30% option has been eliminated. In essence, requiring an upgrade of ABS-based technology. Indirect measuring systems currently do not meet NHTSA provisions.

What came rather surprising was the speed introduction scenario, which stipulates that 50% of all newly registered cars and light vehicles in the United States must be fitted with a TPMS, with the first year commencing September 1, 2005. 90% in the following year and after that 100%. Applicable to all passenger cars and light vehicles sold in the United States. After all, some 70m vehicles are sold annually in the United States, which will be subject to this regulation. German manufacturers export 600,000 vehicles per annum to North American -- to North America.

We assume that new stricter regulations of the US Transportation Authority will lead to a significant rise in demand for directly measuring tire pressure monitoring systems. Since the announcement of the regulation details for the US, the Company has recognized a sharp increase in customer interest and expects rising installation rates in the future. We are currently in negotiations with several automobile manufacturers for new contracts.

To conclude today's conference call presentation, let me give you a brief outlook on the market and what our plans look like for the full financial year.

The European car market is posting moderate growth only. October was down 3%. The German market showed first signs of modest recovery in October, plus 4.5% in October. Diesel penetration currently growing by more than 10%, which is about 6 to 7% long-term compounded growth, with German OEMs benefiting disproportionately.

Beru Eyquem, preparing production ramp-up for our first major 12mm technology sparkplug contract ramping up next business year. Plus increasing efficiency.

Positive perspective for TSS ahead of September 2000, since the ramp-up deadline. €45m plus target for '05/'06 -- for business year '05/'06.

CapEx including Eyquem technology ramp-up, €35m to €37m for the total year. Increasing orders received, up 15%.

Ladies and gentlemen, our full-year target is to grow operating profit before exceptional items by at least 13%, in line with the planned growth in sales revenues. Exceptional items comprise the one-time expense for the change in the composition of the Executive Board and the expenses incurred for consulting services connected with the BorgWarner Group's announced takeover offer.

Including these exceptional expenses, we aim to achieve an operating income of at least €59m.

Thank you very much for attending the conference call today. Please feel free to go ahead with any follow-up questions you might have. Thank you.

Thank you sir. [OPERATOR INSTRUCTIONS]. And we'll take our first question from Craig Abbott from Commerzbank. Please go ahead.

Yes, good afternoon. Craig Abbott from Commerzbank. I wanted to come back to the issue of your -- this really strong rise in diesel sales that you saw in North America in the second quarter in particular. I was just wondering if you could give us a little bit more detail about how much of this was due to your GM/Isuzu joint venture and how much of this was due to call-ups on the American OEMs for other models. Thank you.

Well, I think you can say the increase we have seen in the US is mainly referring to the ISS system. I think we have been growing up by 66% from €12.2m in the last [period] to approximately €20m. Okay?

Yes.

So this is the major shift -- the major impact in the US, is the increase in ISS systems and -- but definitely we also have increasing on -- as far as regular production is concerned as well. But the major part in the US is due to the ISS system.

So ISS sales are being sold exclusively via the GM/Isuzu joint venture, is that correct in the US?

Yes, that is correct.

Okay, thank you.

Thank you. We'll now take a question from Ralf Woller from HVB.

Hi, it's Ralf Woller from HVB. Just 1 quick question on your capitalized R&D. Am I right that the capitalization ratio has risen by 2 -- roughly 48% in the second quarter? And can you just a bit elaborate why this activation ratio has risen, when I'm right it was roughly 24% in the first quarter? And what can we calculate for the full-year for the capitalization ratio?

I think -- do we have a figure for the first quarter? I think on an average we are in the first half is 36.3%. If you take the first half, okay? And compared to last year, where we actually were around 23.9%. You were right that we have a higher capitalization rate in the second quarter as opposed to the first quarter. That is -- well, I guess it's due to the -- it depends also what we are -- the work that is done in the development department. And we are working, for instance we have the new 12mm sparkplug technology, that is 1 thing. The other thing is the smart glow-plug we are working on. And you know these are all development costs which have to be capitalized.

As far as your question is concerned for the full year, we expect that to be around 35 to 40%, the capitalization rate. Okay?

So the net effect might come to roughly €9m to €9.5m in the full year?

Yes. Yes.

Thank you very much.

Thank you. And from Deutsche Bank we'll take a question from Markus Remis now.

Hi, good afternoon. Markus Remis with Deutsche. 1 question on the TSS system. You didn't reach breakeven in Q2, so the question is when will it be back in the black? And can we go for a full-year breakeven? And do you still stick to the target of flat revenues for the full year compared to last year?

Yes, we -- as far as the revenues for the total year is concerned -- or are concerned, we expect that to be at last -- at previous year's levels, eventually slightly below. The reason is, as I tried to point out, is the fact that due to this period of uncertainty, which we had experienced through the late decision of NHTSA, it takes some time until the manufacturers know and also the application materialize an order to be ready for the new application. So we are quite positive to get new contracts in the next couple of months.

So that will definitely have an impact on '05/'06 revenues, where we think that should go up around €45m. And I think breakeven, we think that in '04/'05, at the end of the year, we should be around breakeven.

Okay. Let me add 1 question on this €4.2m charge. Is it fair to assume that maybe €3.2m stems from the payment to a Board member and €1m stems from the consulting expense?

Let me answer the question in the following way, because you know I'm not allowed to disclose the details of the contract which has been signed. And the major part of the €4.2m are allocated to the Board member.

Okay. And a third question, and the last 1. On the situation at Eyquem, will we see positive margins in Q3 already or will it take even longer, maybe even until the next business year?

Well, I think the Eyquem situation is such that when we -- if we include the restructuring costs we are around breakeven, slightly in the red perhaps. Our target is for the full year that we -- I think we will end up with an EBIT margin of between 2 to 3%.

Okay, thank you.

Welcome.

Thank you. [OPERATOR INSTRUCTIONS]. We'll now take a question from Tom Enni(ph) with Dresdner Kleinwort.

Hi, good evening. Concerning Eyquem, can we expect a restructuring charge this year? Like a major restructuring charge, to get it back up to at least 10% profitability?

No. We invest around €5m to €7m in CapEx in order to modernize the plant and that is actually what -- that is going according to plan. And we will continue to invest over the next couple of years around €5m plus/minus, I would say. So as I said before, we expect an EBIT margin including restructuring charges of 2 to 3%.

Okay. So what you're saying with the CapEx thing here is that the main problem with Eyquem is simply the machines are unprofitable or out of date or --? I'm a bit confused where the problems are at Eyquem.

You know we were -- When we took over that we were too optimistic at the beginning, because we underestimate the transition period. Just to give you an example, we change to SAP 1 month ago, and that is something -- and from AS400, which is something which is quite new to this Company. And it took actually -- or it takes a little bit longer than we actually expected at the beginning.

So what we're doing is we are optimizing the material flow and we are investing in machinery. The Company was owned before by Johnson Controls, and Johnson Controls did not invest into modernization and new technology over the last couple of years. But we were aware of that when we bought this entity, and so that was not a major surprise to us.

On the other hand, you also have to see that in the context that due to this acquisition we managed to get cross sellings with other products with the French OEMs. So we could increase our glow-plug sales with the French manufacturers, just to give you an example. Otherwise, we have new contracts. I mentioned the contracts we won from 2 OEMs, which is actually related to the 12mm sparkplug technology. That is a major breakthrough for us and it confirms that we are on the right track.

Okay. Thank you.

You're welcome.

When I come to the next -- my next question is personnel expenses. Even if I add back the full restructuring charge of €4.2m, if I look in your second quarter personnel expenses I would still see an increase, despite your saying lower number of employees. I was wondering if you could explain why that is.

I think personnel expenses -- I just have to --

The ratio would decrease but the overall expenses would increase, but I would still say that -- I'm just curious of why that would be.

You have to take into account that when you compare it to the first 6 months of last year we were actually buying products from Eyquem. So that went into material expenses and today that has -- since this belongs now to us. So the personnel expenses from Eyquem go straight into our personnel expenses. Okay? And then we have the normal salary costs -- salary increases in Germany and Europe. These are the major influences. Okay?

My next question would be just if you could explain why the immaterial investments and the cash flow were up.

Intangible assets you were --?

Yes.

Yes. Well they are -- first of all there is a part of the capitalization of R&D costs, which I think is at €5.2m. Okay? And then we have -- That is the major part, and then we have €2.7m which has been -- which was a negative asset, which has moved to the equity part and automatically you increase tangible assets in this half-year. These are the 2 major impacts.

Okay. My last question would be towards your outlook. You're saying -- maybe I'm -- I wasn't sure exactly what the [rating] was before but you're saying now at least 13% revenue and earnings increase. However, at the same time it looks like the situation at TSS has worsened since you first gave that outlook. I was wondering, it looks like things are actually improving at TPMS.

No. We can compensate part of this reduction in tire pressure monitoring by better sales in the ISS and the diesel cold-start field. And we over-compensate that. So what I'm saying is we expect revenue increase by 13% and before extraordinaries that should be in line, also on the operating side, [that side] at least €59m as far as EBIT is concerned, minimum.

Okay. Thank you.

You're welcome.

From Thorsten Zimmermann with HSBC, [inaudible] question.

Thank you. My question has been answered.

Thank you.

Thank you. We'll now take a follow-up question from Craig Abbott with Commerzbank.

Yes. 2 follow-up questions, actually. The first 1 was just getting back to the TSS sales, the decline in TSS sales in the first half. How much of this is due to delayed orders and how much of this maybe is attributable to, say, the take-up rates with your existing contracts in Europe maybe having slipped this year in the first half?

And the second question is getting back to Eyquem. You've given us EBIT margin guidance for this year, including the restructuring costs of 2 to 3%. Are you in a position to give us a broad range -- broad indication of what type of EBIT margin you think you can achieve in the next financial year?

Thanks.

As far as TSS is concerned, well, that's a little bit difficult to answer. I think uncertainty played a major role and I think has very little to do with whether that take rate has gone down. On the other hand, you -- the customers are getting more price aware and so it might just go a little bit due to this. But I really have problems to really to quantify that in detail. You know we have also to take into account that we have 1 OEM who actually postponed the introduction of [inaudible]. That also has an impact on our sales.

As far as Eyquem is concerned, I think we should get to an EBIT margin in '05/'06, next business year, between 5 to 6%.

Okay, thank you.

Thank you. [OPERATOR INSTRUCTIONS]. We'll take a follow-up question from Tom Enni with Dresdner. Please go ahead.

Yes, thank you. Regarding the 12mm sparkplug business, you've said that you expect volume of 2.5m to 3.5m units. I was wondering if you could quantify that in euros.

No, I'm not quantifying that in euros. Well, you should have in mind, as far as sparkplug technology is concerned and ignition technology is concerned, that sales to OEM is the entry door for the aftermarket business. And with a certain lead-time you reap the benefits with an attractive margin in the aftermarket business. So for us it was essential to win this contract and we're actually quite proud in having done so.

Okay. In relation to that question, I'm curious about the -- what you call the OES business, the Original Equipment Service business, to OEMs aftermarket business. Is it right to assume that these margins are close to your straight OEM margins?

That depends on the product. I cannot generalize. That's truly different from product to product.

But they are definitely less profitable versus your direct aftermarket?

Yes. Generally, slightly less profitable, yes.

Thank you.

Ladies and gentlemen, I'll have to -- perhaps 1 more question.

Thank you. And we'll take a question from Angelo Manka with Redbrick Capital. Please go ahead.

Hello gentlemen. Just a question about the tire system safety product. I saw that you estimate next year sales of €45m in this segment. I was just wondering, isn't it a little bit conservative if you consider the estimates of the market size you mentioned in the press release of roughly $1b? Once the market is up and running, of course, but even assuming a 50% take up of these new systems in the US we could consider a market worth $500m in 2005/2006. Thank you.

Well, you have to take into account the following. The average, 50%, penetration rate or 9% [monthly] penetration rate, it's an average over the entire year. So at the beginning of the year this might be -- the average might be much lower than that. And one should always take into account that you cannot just be on the OEM side, just order tire pressure monitoring systems and hope you get it 4 weeks later. So that takes a certain lead time, doing the application work, doing the testing. And so I think €45m from today's point of view is quite realistic.

So it is just a €50m increase versus current sales basically, on an annual basis?

Yes. But you have to take the time, the lead and the time lag into account.

If I may, what kind of market share would you think you'll be able to get of this new market opening in the US at the very beginning? How are you positioned versus other users, manufacturers of --?

You know we have 2 or 3 [access], so to speak. We have the 1 access that we deliver to the European manufacturers, who then export to the US. And as far as the US market is concerned, we have this cooperation with Lear, where actually Lear is producing the systems and we get paid for the application or development work and [indiscernible] license fee on each single sensor sold in the US. So there are 2 different business models and this you have to take into account. I cannot really tell you what market share exactly, what we are going to have at the moment.

Okay, thank you very much.

Thank you, ladies and gentlemen. I have to leave and thank you for attending our conference call. And if you have further questions you know Stephan Haas is always available. So thank you very much and have a good day. Bye bye.

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.