博格華納 (BWA) 2004 Q3 法說會逐字稿

Good day everyone and welcome to today's Beru AG nine months results conference call. For you 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 Freiherr von Maltzan. Please go ahead sir.

Good day everybody. Ladies and gentlemen thank you very much for joining into today's conference call. To begin with I would like to summarize the highlights of the first 9 months.

Group sales were up 13.2%. Organic growth ex-Eyquem contribution came in at around 8%. TSS, our temperature monitoring system and OES sales were significantly weaker than expected. Diesel OEM business and ISS sales are progressing well. We won a major contract in TSS from a European OEM for several platforms.

Earnings were burdened by 4.8 million one-off expenses related to changes in the management board and consulting services connected with the BorgWarner tender offer. Adjusted EBIT margin came in at about the 15% threshold, at 15.2%. Yet, we had to alter our full years sales growth targets to more than 10% from originally more than 13%.

Finally and maybe most important BorgWarner announced its voluntary tender offer for Beru in Q3.

Let me say a couple of words with regard to the BorgWarner bit for Beru. On November 1, 2004, BorgWarner informed Beru that a definitive share purchase agreement for 62.21% and a share purchase option agreement for 0.82%, totaling around 63% from major shareholders had been signed.

BorgWarner has closed its decision to launch a public tender offer for the shares in Beru AG for a price of EUR 67.50 per share and notified the company of this decision.

With the expiry on February 10, 2005 of the extended acceptance period for voluntary public tender offer for shares in our company by BorgWarner. The offer had been accepted for 639, 209 shares or 6.39% of Beru AG shares capital. BorgWarner is now holding a total 6,941,879 shares of Beru AG or 69.42% of the share capital.

I would like to give you now an overview of the most important financial figures for the 9 months and our future targets. Beru AG Ludwigsburg increased its total sales revenues in the first 9 months of the 2004- 05 financial year by 13.2% to EUR 282 million. At this point, earnings were negatively affected by exceptional expenditures totaling 4.8 million connected as I said before with changes in the company's executive board and consulting service related to the tender offer.

Beru's diesel cold start technology, the core division with the highest revenues, increased its sales revenues for the first 9 months of the actual financial year by 13.2% to EUR 131 million, compared with EUR 160 million in the same period of the prior year.

Results in the aftermarket business were below our expectations. In particular, OES sales of glow plugs, the spare parts business with vehicle manufacturers were lower than projected and recorded a double digit decrease compared with the prior year period. This was partially due to the late onset of winter and so far there has been no second restocking due to the mild weather.

Beru's revenues from OEM sales of glow plugs increased however by more than 13% the first 9 months of the financial year. We are quite satisfied with the development of unit sales of CISS diesel instant start system, where sales revenues were higher than projected and almost doubled when compared to a year ago.

In our ignition technology division, we achieved sales revenues of EUR 85 million following EUR 75 million in the prior year period. This growth was almost exclusively a result of the revenues contributed by our French subsidiary Eyquem.

The market environment remained challenging. In Western European, units sales of cars with gasoline engines declined by 7% in favor of diesel. The revenues generated by sales of ignition cars remain stable despite the weak economic situation. We also expect an increase in delivery share at one of the French OEMs. That should increase ignition car volume and also improve profitability of this product in the group.

The development of the aftermarket business outside Europe was weak, partially due to the weakness of the dollar. Sales revenues from ignition connectors and other products however developed satisfactorily.

Development has been below forecast in our most recent division, electronics and sensor technology. However, with post sales revenues of EUR 66 million compared with EUR 59 million in the prior year period, we're presenting an increase of 13%.

Even though Beru achieved strong growth with PTC auxiliary heating systems and anticipates more than double the prior year's sales revenues for the full financial year. customer call offs (ph) did not quite meet our expectations.

Sales of Tire Pressure Monitoring Systems were significantly lower than had been budgeted. With the start-up of a major order to equip several platforms for European manufacturer starting the middle of the year, Beru assumes that strong double-digit growth rates will again be achieved for Tire Pressure Monitoring Systems.

The major order received recently should contribute 15 to EUR 20 million to Group sales revenues in the coming financial year.

On this chart you will find the Group sales split by region. Overall, our sales volume originating in Europe outside Germany has been up. Almost half of our business is now in that region. This reflects the strong position the deal has put up throughout Europe and Beru's leading market position in the diesel cold start technology field.

North America demands for modern diesel technology is beginning to rise. Beru succeeded in boosting its sales revenues in the world's largest car market by more than 50% to almost EUR 28 to EUR 30 million.

On this slide features a sales split by distribution channel. Unsurprisingly the aftermarket sales rose from EUR 76 million to EUR 85 million helped by the Eyquem acquisition.

I would like to remind you that around 75% of Eyquem sales originate in the aftermarket business. Which is a mild winter in Germany, which constitutes our key market when it comes to the aftermarket business. It was mainly OES sales that have been burdened and did come in below expectations.

At December 31, 2004 the work force numbered 2,657 employees. And that was 1. 3% larger than at the end of September. The ratio of personnel expenses to sale revenues increased by 2.1% points to 31.3%. However this includes the runoff for the departure of one member of the executive board.

Let's move on to material costs. Material expenses increased by 14% to 103.3 million in the first 9 months compared with 90.6 million in the same period of the prior year. Despite rising raw material prices Beru only recorded a slight increase in the ratio of material price to sales revenues, from 36.4% to 36.7%. For the full year we are still targeting materials as a percent of sales to close in the 36.5 to 37.5% rates.

Other operating expenses were higher at EUR 41.7 million in the first 9 months of 2004-05 compared with 39.5 million the prior year period but decreased as a percent of sales revenues to 14.8% as opposed to 15.9% the prior year.

EBITDA adjusted for EUR 4.8 million exceptional expenses increased 7% from 59.4 million to 63.5 million. Including the one-offs, the EBITDA came in at 59.7 million. EBIT earnings before interest and taxes in the actual operating business adjusted for exceptional expenses rose by 7% to 42.9 million. Including the exceptional expenses, EBIT amounted to 38.1 million equaling a 13.6% EBIT margin.

With an adjusted EBIT margin of 15.2%, Beru's profitability remained at a high level but was lower than the prior year margin of 16.1%. Financial income improved to EUR 2.4 million compared with 1.7 million in the prior year period despite the continuation of low interest rates.

Before taxes and adjusted, the increase in earnings came in more than 8% higher, amounting to EUR 45.3 million as opposed to 41.8 million the prior year. Including the one-off expenses stated before pretax earnings amounted to EUR 40.5 million.

The overall effective tax rate increased to 40.5% as opposed to 38% last year partially due to the non-earnings related taxes on assets at Beru Eyqeum and higher sales revenues in regions with above average tax rates. The effective income tax rate of 38% was higher than in the prior year period, which was 36.7%.

Before one-off expenses, net income increased from 25.8 million to 27 million including the one-off expenses, net income amount to 24 million.

Adjusted earnings per share expanded to EUR 2.70 as opposed to EUR 2.58 for the prior year period, which is a pick up of 5%.

Let's move on to the cash positions. The net financial position increased to 73.4 million compared with 67.3 million on September 30, 2004. Our cash position went up from 91.5 million to EUR 96.2 million.

Beru continues to invest substantial amounts in the future of the company. Capital expenditure on tangible and intangible assets increased by almost 30% to 28.8 million as opposed to 22 million prior year period. Due to the expended investments, the free cash flow provided by operating activities of 16.3 million was lower than in the previous year. Still the operating free cash flow reached almost 6% of sales.

Ladies and gentlemen let us now briefly take a look at the market trends and development at the product side that are essential for generating future business in earnings. In our opinion, we have positioned the company with good prospect for the years to come. Especially the diesel trend that continues unabated and has been even showing signs of increasing dynamics in the third quarter. This is a solid base for growth.

Diesel engines are still growing in popularity and may further advance us in 2004. In Western Europe, 30% more cars were sold with diesel engines than in the prior year. The share of new registration in Western Europe accounted for by diesel vehicles rose by 4.8 percentage points to 48.5% as opposed to 43.7%. The share of 44% of our home market of Germany is still below the average for Western Europe, although it rose to 47.6% in the month of December.

Sector analysts such as Automotive Industry Data assume that diesel market share in Western Europe will exceed 57% by 2009.

We have kept on investing nearly 10% of sales into new products and new technologies. How have they been developing?

Sales revenues with electronic Tire Pressure Monitoring System or TSS were way below expectations and also below last year's same figures. One of the main reasons definitely being the lack of clarity regarding the Venim (ph) imminent Amendment to the Tire Safety Rule everybody had been waiting for. That finally has been passed in favor of direct measuring systems technology in the United States in late 2004.

One of our clients postponed equipping one model in series and offered TSS on an optional basis. This lackluster performance of TSS has also burdened our operating performance. Nevertheless the acquisition of new projects is developing positively. New contracts on the European OEM comprising several model platforms will be starting to ramp up in mid-2005, contributing EUR 80 million to EUR 100 million over a 3-year period.

We are also in talks with another OEM to fit one platform with TSS as an in series feature. Beside Beru is supplying the system as an option for the Audi A8 and the new Audi A6 and will also supply it for the new face-lift of the Audi A4.

In ISS, our Instant Start System we have been winning 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 U.S. demand at Demax has been good. And call offs of the ISS technology came in stronger than expected.

BTC heating technology is still ramping up in the Volskwagen Golf platform and also in the Ford C platform. We have been successful in expanding our customer bases and have one contract (inaudible) and for the first time in the U.S. Ford will equip its F250 platform. Overall, the product Group is doing according to plan but call-offs in Q3 were slightly below expectations.

To conclude today's conference call presentation let me give you a brief outlook on the market and what our revised targets are for the full financial year. For the European Common Market, we expect moderate growth only, if at all. Diesel car production is projected to remain strong at a 5 to 6% annualized growth rate in 2005.

With regard to Beru Eyquem, we will be working on increasing efficiency throughout the processes at our French subsidiary. And we'll proceed with the arrangements for setting up ultra modern 12 millimeter spark plug technology. Last, but not least, we are adding additional Beru products to the Eyquem product portfolio to make use of cross-marketing opportunities in the aftermarket to a larger extent.

Tire Pressure Monitoring Systems or TSS perspectives are brightening ahead of the new contract ramp-up and commencing U.S. legislation. We have discussed that before. Our target here is to regain breakeven.

As far as CapEx concerned, we are still targeting 37 million at Group level. It might come in slightly higher, depending upon delivery time of the equipment ordered. Orders received have increased by more than 10%.

Finally our 4 years target. Management board plans to grow sales revenues by more than 10%. Our EBIT target before one-offs is to achieve at least EUR 56 million.

Now ladies and gentlemen we are ready for questions. Please go ahead.

(Operator Instructions)

Our first question comes from Allen Lyons of Pardigon (ph). Please go ahead sir.

Yes, good afternoon. Can you hear me?

Yes

Okay. I want to ask a broader question really rather than just about today's specific numbers. Which is-I mean it must be a pretty exciting time for everybody to move from being owned by a financial owner to an industry player, especially with the kind of pedigree of BorgWarner or at least controlled by them.

I'm curious-like in your mind looking forward over the next 12 to 24 months. Are there particular areas in terms of growth or synergies or new products or company development that you are more optimistic about? Or feel more free to pursue now than perhaps you did in the past?

Well Allen, as we said when we made the announcement of the takeover pitch from BorgWarner that the board of management judges this takeover, generally speaking very positively from a strategic point of view because, first of all there are no product overlaps to begin with.

Secondly BorgWarner is strong in areas where Beru is not that strong yet as to say-just to mention a few areas like Asia. We are represented in Asia but for example we are not represented yet in China which is perhaps not absolutely necessary at the moment but will definitely be in the future.

I don't have to tell you that a strong presence of BorgWarner in the North America is clear. So we might take advantage of that as far as customer contacts are concerned. So then BorgWarner is focusing on emissions reductions. And we see quite an interesting potential in terms of future product development. As you take for instance our-one of our new products which is a smart glow plug.

We can think about combining the strengths with BorgWarner strengths in emission technology. I'm referring to the turbo charge business just to say as an example. On the other hand vehicle stability is one area BorgWarner is focusing on. And that is a perfect fit for our Tire Pressure Monitoring System.

So here, once again you see a quite interesting synergies for the future. On the other hand we see Beru as well positioned to exploit the growth-further growth in the diesel area. We have then high temperature sensor, a new product which will continuously ramp up.

And so nevertheless, BorgWarner is 69% shareholder. And we have to treat them as a shareholder as we treat all the other shareholders. BorgWarner is now represented on the supervisory board, which consists of six people of which now three gentlemen in this case are represented from BorgWarner. So that is the actual situation.

Thanks. Would it be too-it probably is too early, it was only last week, I guess. Is it too early to talk about your view of the potential growth rate that the company can achieve now that there isn't a financial owner involved? Or the sense like some kind of range or number on the synergies one might hope to capture?

To be honest, I think one can only speculate. We are right now in the process of setting up our budget for the next business year. So please understand that it's a little bit too early to come up with any sort of guidance at the moment.

But just to quote one example is, we are on one hand an independent company. It's to check where our synergies which can be exploited to the advantage of both companies which can be, for example, on the purchasing side. By just choosing the same suppliers so there might be synergies in the future. But once again, we are two independent companies. And if there are synergies it would have to be beneficial for both partners.

Very good. Thanks for your time.

You're welcome.

We now move to a Markus Remis at the Deutsche Bank. Please go ahead sir.

Hi, good afternoon. It's Markus Remis with Deutsche Bank. Just a couple of questions. The first is related to Eyquem. Maybe you can give us an update on the timeframe until you expect a positive operating contribution. And maybe you can reiterate the targets given earlier of the 10% margin.

The second question is concerning the tax rate. I mean what are you expectations for the next business year? Do you think that a tax rate of above 40% will be sustainable or that it will come down again?

And lastly, can you give us an update on the pick up rate of TSS for the European OEMs, especially for the Germans? And what it makes in terms of revenues?

As far as Eyquem's concerned, I would like to elaborate a little bit on this. You are right that I think the underlying to your question that we were wrong at the beginning when we announced that we would within one year would like to achieve an EBIT margin close to 10%. Last time already I told you, perhaps I don't know whether you were one of the listeners at that time, that our target is the next 2 to 3 years to generate and EBIT margin which is close to 10%. We stick to that goal.

What we underestimated actually at the time to get, we are in the phase of putting in new machine-installing new machinery. And until you get this new machine in first from order to have it become operational it takes longer than was expected in the beginning. And then once you have installed this machinery the task is to increase productivity.

So that is as far as operation is concerned. So that is one for next business year where we really will concentrate on to get productivity further increased.

The other thing which you always have to take into account is the cross-marketing potential. We exploit it already. And which we still will see in the future. One thing is that we could increase our glow plug sales with one French OEM considerably. We are about to get an additional order as far as our ignition coils are concerned.

As I said before, we are cross-marketing out Beru aftermarket products also in some countries under the Eyquem label. So these are all positive impacts from the Eyquem acquisition. But once again, as far as our goals are concerned I stick to what I said last time that our target is to get to 10% EBIT margin in the next 2 to 3 years. So that's your first question.

The second question was related to tax rate. As far as the tax rate is concerned, are you asking what is the expectation for the full year. We think that it will be around 38%. Don't quote me. It could be slightly higher. It could be slightly below.

If you take the overall tax rate, we have this tax professionnel (ph) which is a tax independent from earnings. It's a French tax, which you have to pay on your assets. So that is something which you only slightly can influence. To put it this way.

The other reasons why we had a higher tax rate, we had -let's take for example Hungary. You know that we turned this company around last year already. And now we have begun making profits there. So we start paying taxes which add to a higher degree, which we were not doing last year. So these are little things actually to the fact that tax rate was slightly higher.

As far as the pick up rates are concerned, Tire Pressure Monitoring, if I recall it correctly was your third question. It depends really on the model. It could be 7% on one model, which could go up close to 50%. And even further than that if you take some large SUVs.

As far as our expectation for the next business year is concerned, we think that we can achieve EUR 45 million in sales. And that takes into account that in the middle of the next business year we will start ramping up with this order I told you about from European manufacturer who actually has given us the order for all this platforms, which will be exported to the U.S.

Okay. Excuse me. A follow-up on Eyquem. Can you give us a time frame until you expect a positive operating contribution because if I understand it right the EBIT margin of Eyquem is around 0%? I don't know, maybe you can give us an idea when you will reach a 3% margin? Will it be in Q1 or Q3 next year? Or-

Let's put it this way. I think actually we more or less breakeven, slightly positive. Okay? But I can not give you now a definite quarter where we're going to achieve that. It depends on many things. It depends on, as I said before, we are investing also in the most recent technology for the new M12 spark plug and that is something that is the most recent technology.

Our target is to become one of the market leaders-technology leaders in that field. And that was when we acquired Eyquem that was our strategy. We were not really chasing volume. Our target was to concentrate on higher value added products like the M12 spark plug.

All right, thank you.

(Operator instructions)

We take our next question from Daniel Schwarz (ph) with BHS Bank.

Yes, hello. I have two questions. First question. Did you feel some kind of slowing in diesel demand due to bottlenecks in the supply of diesel particulate filter in January or February?

And the other question is. I understand TSS was weak in the running year. But did your view on the politic impact of the NTSA ruling in the U.S. on your TPMS sales in general changed or is it the same?

As far as your first question is concerned we haven't seen any slowing demand which we could allocate to this diesel particulate filter issue.

The second question is clearly we won this contract from the European OEM manufacturer shortly after the announcement of the NTSA decision. We are actually expecting other manufacturers to make up their minds, how they will go about it until the middle of this year. So I think I'm quite positive that in the next couple of months we will have most likely a higher order backlog.

But as I said before this final decision came in September 15, if I'm not totally mistaken. And it was a 4 to 6 week's period where people could object to it. There were to my knowledge only little objections. So the only thing which could happen is that the ramp up deny which is pretty steep could perhaps slightly modified. But until now we do not have any hint that this will happen. So we base our assumption on the fact that the new rule is now valid. And I said before the OEMs, which are still a little bit hesitating, will have to make up their minds rather shortly.

As far as diesel engine production is concerned. We have high growth in the third quarter actually. So diesel engine production was pretty high. So this was perhaps the comment to your first question. Does this answer you question?

Yes. Just perhaps on the first question. And you don't expect any slowing in the future then?

No, we'd expect as far as TSS is concerned that we would be in the magnitude of around EUR 45 million in the next business year.

No, I mean with regard to diesel.

I w ith too regard to diesel. No, I do not expect- On the contrary, if you, I think diesel is continuing to grow. The increasing prices for raw materials on the one hand and the fuel price on the other hand. Very quick fast moving developments on the diesel technology side. So we expect diesel to continue to grow as it has been over the last year. Some countries even faster than that.

And did you feel you are also supplying I think the high temperature sensors for diesel particulate filters? Did you feel higher demand for these sensors?

Yeah, we do.

Okay, thank you.

You're welcome.

(Operator instructions)

We now have a follow-up question from Markus Remis of Deutsche Bank.

Hi. It's me again. Just a little follow up. I didn't catch the number you mentioned with Eyquem, the percentage of sale in the aftermarket. Maybe you can repeat that?

It was approximately 75%.

Seventy-five percent. Okay. And do you expect any further expenses related to consulting for the take over in Q 4.

Let's say to a certain extent, yes. Mostly on the legal advice and consulting. But relative to what has been the expenses it will be of minor importance.

Alright. Thank you.

You're welcome.

And our next question comes Tobias Fahrenholz with Berenberg Bank. Please go ahead sir.

Yes, good afternoon gentlemen. I've got one further question. Could you maybe comment on the pricing preferring each of the seconds. Has it increased recently? Or how do you see the development there?

Well, this is an interesting question. Too be quite frank I think you can read it in the press that our customers are also suffering from the high exposure to the dollar. And since the Euro's strength continues to strengthen that is something. So that is a normal pressure which automatically comes from the OEMs to the supply. I think this pressure we have always been exposed to. Our strategy was to sort of escape this pressure by maintaining our position as a technology leader. But there to nick-- to deny such a pressure and even increasing pressure, would not be correct or definitely, there is pressure and there is also an increase in pressure, but there are also ways to try to go around, but it is not becoming easier.

Do you see the highest pressure then in the electronics segment and not so much in the diesel technology segment or --?

I would not differentiate there. That is, I think, it is about the same.

Okay, thank you.

We have another follow-up question from Allen Lyon with Paridon. Please go ahead sir.

Hi, thanks for take it--for making a time for a second. I just, I do not know if you have generally have had to do this, but can you give us some guidance for the - I see the revenue in the EBIT guidance for the year ending March, '05. Would you care to or are you at a position to give us some guidance for the year ending March, '06?

No, to be quite, quite honest, not yet. As I said, we are in the process of preparing our budget, so I think we will come up with a guidance, let us say, around May.

Okay, thanks anyway.

Your welcome.

It appears there are no further questions at this time. Mr. Von Maltzan, I would like to turn the conference back over to you for any additional or closing remarks.

Ladies and gentlemen, thank you very much for hosting our conference call and attending our conference call to be precise. Thank you for listening and I wish you a good day or good evening wherever you are right now. Bye, bye.

This concludes today's conference call. Thank you for your participation. Have a nice day.