博格華納 (BWA) 2005 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the First Quarter Results 2005 2006 of Beru AG and conference call on the August 18, 2005. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Mr. Marco von Maltzan. Please go ahead sir.

Thank you very much. Yes hello ladies and gentlemen, thank you very much for joining into our conference call today. Let me outline straight away the highlights of the first quarter '05 '06. We increased our sales by 14.5% year-over-year. A successful rollout and ramp up of new products and existing products as well as an increase in German and European after market sales contributed to the higher than expected sales. And on top of that we had some accruals which actually, due to the fact that some billing was done in the beginning of the quarter which actually should have been done perhaps at the last quarter, but you cannot always put some -- do these billing on a precise moment.

Diesel Cold Start Technology achieved a strong growth of 21%. Ignition Technology expanded moderately by 2.5% but outperformed general market trends. Electronics and Sensor Technology increased by 19%. The Group increased EBIT in line with sales revenue with an EBIT margin of 13.8%. Beru attained once again a similar higher profitability to the prior year period.

First quarter net income increased by the rate of 18% year-over-year. I would like to give you an overview of the most important financial figures for the first quarter and future targets. Beru increased its total sales revenues as I said in the first 3 months of the '05 '06 financial year by 14.5% to €97.9m thus achieving a higher growth rate during the period under review than was targeted for the full year.

The first quarter of 2005 was fixed total sales revenues in Beru's most important market, Europe, and excluding Germany for a moment, increased by 23.7% to €48.5m. In Germany, Beru's domestic market sales revenues grew by 8.5%, it was faster than the market as a whole to €29.4m. In North America sales revenues were only below the prior year level at €8.3m mainly as a result of transfer assets.

In Asia sales revenues developed very positively with an increase of 24.3% to €8.7m and also in Europe and other overseas markets was a plus of 25% to €3m. The Group therefore successfully implemented its strategic growth of expanding its presence in international markets. Export share of total revenues increased to 70% as opposed to 68.3% year-over-year.

OEM sales once again posted a strong growth to €66.5m after €56.7m in the first quarter of last year. Beru succeeded in systematically expanding its after market sales revenues in the first quarter by a rate of 9.5% to €25.3m. 25.8% of total sales revenues were thus generated in the after market. Beru also posted pleasing growth in its general industry sales segment where sales revenues increased by 7% to €6.1m. The Group has succeeded in stabilizing its revenues and earnings in the second.

Beru's core division of Diesel Cold Start Technology recorded exceptionally high growth in the first quarter of this financial year. With 21.2% increase sales revenues reached a record level of €44m as opposed to €36.3m year-over-year.

The OEM business with car manufacturers recorded strong growth of 17.3%. Diesel Instant Start Systems played a significant part in this positive development. Beru succeeded in raising its supply chain with a French carmaker. We also profited from the decision in favor of the Diesel Instant Start System by the Volkswagen Group and Daimler Chrysler.

In addition there were also positive developments of sales to Korean producers and start ups for the ISS at DMAX in the United States. It's a joint venture between General Motors and Isuzu.

Beru's Ignition Technology Division which supplies products for gasoline engines achieved moderate 2.5% growth to sales revenues of €28.9m in the first quarter. Beru succeeded in further expanding the revenues generated by this division despite a difficult market environment.

The French sub-group Beru Eyquem, which was acquired in August 2003, run the whole Group sparkplugs production out of Chazelles. Beru became the number 1 supplier of sparkplugs in France with the Eyquem acquisition.

First quarter sales revenues of Beru Eyquem were below our expectations in the first quarter. The French sub-Group achieved a positive EBIT in the first quarter but profitability is not yet satisfactory. We have the objective to achieve a satisfactory EBIT level within a 2 to 3 years time frame. The ramp up of newly developed 12mm sparkplugs and additional international after market sales both support business growth.

Our youngest division, Electronics and Sensor Technology, achieved a 19% increase in sales revenues to €25m in the first quarter as opposed to €21m year-over-year. The main source of growth was PTC auxiliary heating systems. Sales revenues from this important product grew by 56% to €6.7m, as from €4.3m same period last year.

Equipping new models for an important German manufacturer played a major part in this growth.

Sales revenues from our electronic tire pressure monitoring system, of our TSF system, were slightly below the prior year level at €5.6m as opposed to €6.1m year-over-year.

Low equipping rates and order postponements due to the new scenario for the monitoring production of type pressure monitoring systems in the United States were the main reasons for the decrease.

Growth in the Electronics and Sensor Technology Division led to an overall slightly higher ratio of material expenses to sales revenues due to the high share of electronics. The ratio was 38.4% compared to the 37.7% in the prior year quarter.

Related to output, sales revenues plus changes in inventory, the ratio was 36.3% as opposed to 36% year-over-year. We expect this ratio to increase also for the full year due to the purchasing price situation and plant growth in the area of Electronics.

Employee and personnel expenses as of June 30, Beru employed a total of 2,740 people. The workforce expanded by 2.6% compared to the year earlier, although the ratio of personnel expenses to sales revenues of 31.5% was slightly below the prior year ratio of 32.3%.

The other operating expenses amounted to €50.4m in the first quarter compared with €13.6m in the prior year quarter. A development that is in line with the systematic expansion of business volumes. Related to Group sales, revenues, other operating expenses of 50.7% decreased slightly however.

The quarterly EBITDA amounted to €21.2m. The Group's EBITDA margin reached 21.7%, up from 20.6% a year earlier.

As far as the EBIT is concerned in the first quarter '05, '06, Beru succeeded in increasing its operating profit in line with sales revenues. EBIT rose by 14.4% to €13.5m with an EBIT margin of 13.8%. The Group maintained the prior year’s high profitability.

Earnings before taxes amount to €14.1m. Financial income of €0.6m was lower than in the prior year quarter. Net income in the first quarter increased by 18.2% to €9.1m as opposed to €7.7m the year earlier.

And last but not least, earnings per share increased to €0.91 compared to €0.77 in the prior year quarter.

The operating free cash flow developed positively and rose to €10.8m. CapEx was lower than the prior year and amounted to €6.3m in this quarter as opposed to €9.3m in the quarter the year earlier.

The net financial position improved to €79.5m compared with €78.1m at the end of the past financial year on March 31st, 2005.

The Group maintained a strong cash position with €100.6m in cash.

Without going too much into detail you can see that the Beru Group has a strong balance sheet. Structure on the part of shareholders equity and liabilities, shareholders equity increased to €309.6m compared to €299.4m at the end of March, 2005. This represents a ratio of 69.4% as opposed to 68.6%, i.e., an improvement of 0.8 percentage points.

Let me give you briefly an overlook of the market trends of our products pipeline which is essential for generating future business and earnings.

During the reporting period Beru profited from the sustained trend towards Diesel investing in Europe. With a decreasing number of cars sold with gasoline engines, the share of cars sold with diesel engines in Western Europe increased by another 2.4 percentage points and reached a market share of 49%, for nearly every other newly registered car in Western Europe had a diesel engine. In Germany the biggest automobile market in Europe, diesel share increased to 42.1% in the first half of this year which is 0.2 percentage points higher than in the first half of 2004.

In Great Britain, Europe's second largest market, there was an increase of 3.7 percentage points to a market share of 34.8%. The development of the UK market is quite interesting since diesel fuel is more expensive than regular gasoline however, car taxes based on CO2 emissions, these are -- these taxes are directly related to consumption and I don't have to tell you that a diesel engine consumes less -- 30% to 40% less than the comparable car with the gasoline engine.

This means if I take the 2 most important countries in Western Europe in terms of numbers of registrations, together Germany and Great Britain, these 2 markets are still advancing and approaching the European average. Even the markets in Italy and France expanded to 59.4% and 69.8% market share respectively.

What's the situation like in the U.S? J.D. Power estimates the diesel share of new registrations in the U.S. to rise to 7.6% by 2008. Annual registration of new diesel passenger cars in the U.S. has grown nearly 56% during the past 5 years. We had 470,000 diesel registrations in 2004 which represents a market share of 3.4%.

The Energy Bill which passed the U.S. Congress and Senate end of July will provide significant tax credits for new diesel engines in the timeframe '06 until 2010. Up $400 to $2,400 in tax credits on fuel economy, and up to $250 to $1,000 in tax on conservation credits, dependant on car type and weight.

We have kept on investing in new products and new technologies. Cars have been developing well. Diesel Instant Start System played a significant part in this positive development. Beru succeeded in raising its supply share with a French carmaker. Beru also profited from the decision in favor of its Diesel Instant Start Systems by the Volkswagen Group and Daimler Chrysler.

In addition there were also positive developments of sales to Korean producers and start ups for the ISS at DMAX in the United States, the joint venture between General Motors and Isuzu.

The main source of growth in Electronics and Sensors last quarter was PTC auxiliary heating systems. Sales revenues from this important product group soared by 56% to €6.7m. Equipping new models for the Volkswagen Group played a major part in this growth. I told you that sales revenues from TSF were slightly below the prior year level at €5.6m as opposed to €6.1m year-over-year. One of the main reasons for this was a lack of clarity regarding the amendment to the Tire Safety Rule recently passed into law in the United States. We'll talk about that more on the next slide.

The phase in schedule requires 20% of new passenger cars to be fitted with a tire pressure monitoring system in the first year which starts on September 1, 2005. The following year starting in September 1, 2006, already 70% of newly registered cars must be fitted with such a system. And as of September 3, 2007 PPM systems are mandatory for all new 4 wheel vehicles weighing 10,000 pounds or less.

16.5%, 17m vehicles are currently sold in the United States each year that will be subject to this new regulation. German manufacturers export some 600,000 to 650,000 automobiles per annum to North America.

On the North American continent we co-operate with Lear Corporation, a U.S. automotive supplier as you know. We set up for a 3 pronged TPMS approach. First on the North American continent we co-operate with Lear Corporation. Second, for the European market Beru has the second and is working on the third generation standalone system, and third we focus on our German OEM client base. The German OEM exports some 600,000 to 650,000 light vehicles to the U.S. per annum.

Ladies and gentlemen to conclude today's conference call let me give you a brief outlook on our plans for the full financial year.

Beru anticipates moderate growth for automobile market in the current financial year. The business environment is intensifying with regards to pricing and competitive specialists. Despite such challenges we reiterate our annual guidance, high single digit growth in sales revenues and EBIT for fiscal year '05, '06.

The Group will leverage its strong position in the Cold Start Technology and expand its business in Electronics and Sensor Technology further. Therefore, we can say that Beru is well positioned for further profitable growth.

Ladies and gentlemen. Thank you very much for attending this conference call. Please feel free now and go ahead with follow up questions you might have.

Ladies and gentlemen, at this time we will begin the question and answer session. (OPERATOR INSRUCTIONS). The first question comes from Mr. Tom Enni from Dresdner Bank. Please go ahead sir.

Good afternoon. I have a question regarding in your cash flow statement you have a change in provisions from a positive €2.2m last year to a negative €5.9m this year, I was wondering if you could explain why that is and how that affected the operating profit?

What is behind that major part is that we had a tax audit, and we have to pay approximately €10m due to this tax audit, and that is the 1 payment which has been done already in this first quarter, which amounted in total of €7.6m, so that's a major part of it. All the rest is nothing abnormal.

Okay so that was completely taxed below the operating profit line?

Yes.

Tom Enni Okay. The next question is regarding your outlook. I was hoping you could give us a little bit more of a breakdown as far as the divisions, you said you might be able to do that at the full year analyst's report, is this now possible?

No, we only give the guidance for the full year, and it's our first quarter which we just have behind us. When we expressed our guidance we were aware that the first quarter is going to be a rather strong 1, but we stick to our guidance saying that sales will go up by a single high digit number, and operating profits will develop in line.

Okay. And then on that respect if I can go on to the outlook. It seems like it is conservative after the first quarter in considering that you're saying that the TPMS is going to pick up at the end of the year, ISS seems like it's going to continue to remain strong as well as PTC, and last year you had a low basis of the after market. Is it wrong to interpret that this could be a conservative outlook statement?

No, not really. Because if you just base your assumption on 1 quarter, as I said at the beginning of the conference call, that is sometimes you have some sort of carry overs which actually have an impact you know €1m or €2m, just to give you an example, you build something which has to be produced on the beginning of the first day of the quarter, to which, perhaps you could also for technical reasons could have been done 1 day earlier, and then it would've been in the last quarter. So there are some of these aspects we have to take into account.

When we talk about these various products there are some projects which are ramping up, there are other projects going down, and 1 platform you have at the moment 50% but you know that you're only going to have 30% and then you have -- so. It's a little bit difficult, and I think you should stick to what I said, we reiterate our guidance and one should not extrapolate what actually occurred in the first quarter.

Okay. Could you then give me a little bit more guidance as to where you could see this weakness, because like I said, if I look at TPMS coming, like you said at the end of the year, ISS seems to be doing very well and PTC. I'm just failing to see where you should be going down? If you now work it out, you've done a first quarter that means that you're looking at significantly weakening in the rest of the 9 months.

Yes, if you take the guidance from a mathematical point of view you're right. But just take the example of TPMS where we – you know first quarter sales were below last year's sales, and we think that you will see the impact of TPMS really going up in the next business year.

Okay. And I have a question regarding your depreciation. Could you give us an outlook of where you expect your depreciation to be up for the full year? It's up some 33% in the first quarter?

I think it was €7.7m as opposed to €5.8m a year earlier, mainly due to the fact that we invested quite heavily over the last 2 years, and now the machinery has been installed and now depreciation period starts. And then part of the R&D expenses which are capitalized are also in this figure. So, we expect a slightly higher figure, let's say somewhere between 7.7% and 8% of sales.

Okay. And if I can ask 1 last question? Eyquem could you give us a profit margin of what you had in the first quarter?

We had a slightly positive EBIT margin, just positive. I said that as far as Eyquem is concerned, we are not satisfied with the development. It's clear it will take us 2 to 3 years before we finally have turned this company around. But we are not satisfied with the speed that process is actually going on and we will intensify that.

Okay. Thank you very much.

Thank you.

Thank you. The next question comes from Mr. Alan Lyons of Polygon. Please go ahead sir.

Thank you. Can you hear me?

Yes. Sure.

Okay. 2 questions I've got then. 1 is on the figures. I was confused in the last full year figures by the €17m provision and the €5m exceptional, and then I see in today's figures as well, there is like a write back or a release of a provision. I understand the 10% sales growth and the margins staying the same principle, but should we be thinking that the base is the recurring EBIT from last year, i.e., with the exceptionals and the provision written back? And if we shouldn't be thinking that doesn't it imply that there's a huge fall in the margin and why is that the case? That's my first question.

And then the second question I had was, great to see the incentives in the Energy Bill.

It's a little bit difficult to understand, could you repeat that, sorry?

The second question?

Yes.

The second question was, we were obviously delighted, as I'm sure you were, to see the size and scale of the incentives for lean burn vehicles in the Energy Bill. The disappointing bit seems to be, I think it only applies to engines which pass the Tier 2 emission standard, which if I understand it correctly, there will not be a significant number of those for at least 1 to 2 years from now. So I was a little disappointed with that, but I was curious of any broader commentary that you might make about the impact of the Energy Bill and how good you thought it was?

Okay. Hopefully I've got all your questions right. Are you calling from a mobile phone, is that possible?

I'm not actually. I have just got a bad telecom provider.

Let's go over the second question and as far as the Energy Bill is concerned, it actually passed a couple of days ago, and you are right that it refers to clean diesel engines and it's also related to certain emission rules. But I think now that it's a clear situation, and we cannot evaluate at the moment the entire impact of that because that has now been broken down by the various states how they're going to apply it.

But I think the positive thing is you just compared what happened to the hybrid cars, which were actually subsidized also by the Government, they had a very positive development and now I think you know the entire industry in the diesel field was hoping that this Energy Bill will pass, but I think you will see, you are right, you will see this impact, not today and not tomorrow, but in let's say 1 to 2 years. In 2006 for instance at the end of 2006, the sulfur content of diesel has to be reduced by 96%, and many in our industry are already getting prepared for that and are already offering it. I think that could gain momentum. I think at the moment I wouldn't become enthusiastic about it, but I think there's 1 step after the other, and that was the important 1 which actually passed.

As far as the second question is concerned, I think you were relating to the provisions. Once again at the end of the business year, we had to increase provisions because of this tax audit. And we reduced provisions because we paid €7.4m to -- €7.6m now to the fiscal authorities, which is only 1 part of the total because we do not have the final statement from the fiscal authorities yet, but according to the German law we just wanted to make sure because there's going to be high interest charges if we do not pay it early or early enough. So that was actually the reason. And if I understood your question correctly, was that relating to --?

Let me say it again because I rambled a bit. Here's what I was really trying to understand. Last year's EBIT number, the reported EBIT number, was €50m and that was --.

€50.5m

Sorry, €50.5m and that was including the €5m exceptional for the export number and the €17m provision, so what I'm trying to understand is.

No, hold up. You know we have an adjusted EBIT of €55.5m and that is adjusted for the €5m that's all. And in our guidance, if you refer to that, is that we take the adjusted EBIT we think we can grow that according to the growth we estimate for sales. So the basis is €55.5m not €50.5m.

So the base is €55m?

Yes.

right. Okay. So the provision. I don't want to get bogged down in this, but just while I have you, the provision would that be taken below the line, is that what you're saying?

Yes.

So when I look at last year's accounts €50.5m less a little bit of interest, less the tax that you're saying the provision is somewhere below the €50m?

Yes, the provision for the tax audit was €10.1m, of which I think interest charges were €2.8m and the rest is just tax.

So the taxes of €7.1m appears in the tax on income and earnings line?

Yes.

I see. But the other €7m appears above the line?

No. Which other €7m?

There were €17m of provisions written back in the cash flow statement.

No, it’s €7m are taxed, and €3m are interest, and these are just the €10m. The other provisions are our normal regular provisions we know in line with the business.

Okay.

€7m tax approximately and €3m interest charge, so everything below the EBIT line.

I see. Above the EBIT line there was €5m or €7m?

Excuse me?

Above the EBIT line, there was a provision of -- was that €5m or €7m taken?

I don't know whether we talk about the same thing. We have -- EBIT was €50.5m, and in order to adjust it to the 1 off, you come to €55.5m EBIT.

Okay.

And then you have -- below the EBIT line, you have €7m we paid in tax, and approximately €3m we had additional interest charge.

I see. Alright. I'll finish here, but what I don't understand is in the cash flow statement there are €17m provisions written back, so if you're saying there's €10m below the EBIT line does that mean there are €7m above the EBIT line?

Which cash flow statement are you referring to, the first quarter 1 or?

No, last year's full year statement. All I'm trying to get to is I understand the guidance for this year is 10% I heard the question earlier. I know some people think it's more but fine, 10%, but I'm trying to work out the base, because I hear you when you say that the €5m exceptional has to be added back, that's the €55.5m, but I would've thought unless you are anticipating some big provisions this year, that also any above the line provisions from last year should also be added back for the comparison.

No, because that's below the line.

Okay. Thank you for your help.

Okay.

[OPERATOR INSTRUCTIONS. We have a follow up question from Mr. Tom Enni. Please go ahead.

Hi. This is actually regarding the upcoming AGM. I was wondering regarding the share buyback, would you be interested in doing that as a tender offer, or would you be buying back those shares in the market?

No. First of all, just in order to get that right, the administration put that on the Agenda because, according to the German law, it's a standard issue or standard item on German General Assemblies, so that is totally in line with what we did since I think 4 to 5 years now. And there are no precise plans of buying back shares or anything else. So that is just in order that the Company needs such a decision in order to dispose of all degrees of freedom -- it could be on the path it works for, or the idea of what is pending to offer shares to the employees, but once again, we do not have a buy back program in mind at the moment. We just want like to make sure that we have all the degrees of freedom to operate in future.

That's great. Thank you.

Thank you. The next question comes from [John] Nathan of the Bank of America. Please go ahead.

Hi can you hear me? I was wondering how come margins are flat despite the revenue growth. Shouldn't it improve it by capacity utilization?

I somewhere referred to the fact that we are living in a very competitive and price sensitive environment and I don't have to tell you. On the other hand, part of this growth we have in the diesel cold start technology area comes from the ISS system, and the ISS system is the mechanical how to speak a glow plug that goes with an electronic control device. And the margins on the electronic control device are not as high as they are on the glow plugs.

So we have a delusion so to speak, and once again there is 1 quarter where we have margins which are close to our Company goal which is 50% in some quarters they are below. I think we keep the objective up to 50% but we know that it's very, very ambitious to get there in this actual environment. And don't forget since we had a reduction in our turnover on the GFS side that the profitability of that product has slightly decreased, so we were positive and now the profitability has slightly increased to a lower production volume.

Alright. Thanks. Just another question. Can you quantify the impact of material cost increases, or did you have any?

Can you -- excuse me I didn't get it?

Can you quantify the impact of material costs increaes? You said [Inaudible] component.

We were lucky that we had long term contracts and we didn't suffer in the period actually where steel prices went up considerably. And also the special steel we need we are not so much exposed to these price increases that we've seen in the past.

Now the price is going down. On the other hand, you are having long term contracts you take advantage when the prices go up, but you're not so well off when the prices go down, so we stay around the same. On the other hand, also we have quite some important programs running in order to improve our material cost side. We are more and more internationalizing our purchasing activities, and we also take advantage of BorgWarner who's our new major shareholder, we can use synergies. If they buy 10 tons of steel and we buy 1 ton, then you get better terms if you buy 11 tons that I think is quite obvious.

Okay. Thank you.

Thank you.

Mr. Maltzan we have no further questions at this time. Please continue.

Ladies and gentlemen, thank you very much for calling into today's conference call. I hope none of you had to interrupt your vacation and I wish you all a nice day. Thank you very much. Goodbye.

Gentlemen, this concludes the First Quarter Results 2005/06 Beru AG Conference Call. Thank you for participating. You may disconnect.