博格華納 (BWA) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Beru AG results 2005 conference call on March 30, 2005 -- 2006, sorry. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. [OPERATOR INSTRUCTIONS].

I will now hand the conference over to Mr. Marco von Maltzan. Please go ahead, sir.

Thank you. Ladies and gentlemen, welcome to the international analyst/investor teleconference and webcast of Beru AG for the annual results from the short financial year 2005.

We are particularly pleased that you join us today. This marks the first webcast conference for annual reporting.

The Beru General Assembly decided in December 2005 that the nine-month period from April 1 to December 31, 2005 will become the short financial year 2005.

At the beginning of the year 2006, our financial year is identical to the calendar year.

This morning, Beru published its annual report on the short financial year 2005. At today's conference call, I would like to present to you operative and financial highlights of the short financial year 2005, and our growth targets for fiscal year 2006.

After the presentation, I will be pleased to take your questions.

Ladies and gentlemen, Beru has successfully continued along its path of profitable growth. The short financial year 2005 was another strong and successful year for Beru.

Both in high single-digit revenue growth, we exceeded our targeted increase in sales revenues in the nine-month period, despite a difficult market environment.

International business was a key growth driver. Beru’s sales and revenues in Germany remain stable, although the debate about particulate matter led to a slight decrease in new registrations of new cars.

In Europe, we significantly increased our business with OEMs in the field of diesel cold-start technology, as well as electronic and sensor technology.

At the same time, we pushed forward with the strategic realignment of our international production network which reflects our core competencies.

Let us turn to the main figures for sales revenues broken down by region, segment, and division.

With sales revenues of €305.8m, Beru has set a new record. For the first time in the Company's history, the mark of €300m was surpassed in a nine-month period.

We significantly exceeded our target growth in sales revenues of 5% for the nine-month period, despite a difficult market environment.

This success is even more remarkable when put in an industry context. In 2005, worldwide sales of automobiles increased by only 3%. New vehicle registrations in the three major markets of Western Europe, North America, and Japan remained at the same levels as in the prior years.

We will more consistently pursue the strategy of internationalization. Sales in Europe, North America, and Asia show strong growth.

The Group’s sales revenues increased in Europe, excluding Germany, at 9.3% to €147.5m, as opposed to €134.9m.

In the domestic market of Germany, sales revenues of €87.9m were identical to the prior year levels. This is primarily due to weaker unit sales of diesel vehicles in the second quarter. As I mentioned, this was caused by debate about emissions of particulate matter and tax concessions for diesel vehicles.

However, Beru posted a 22.7% increase in sales revenue in North America with €35.8m.

We also recorded a pleasing sales increase in the region of Asia of 19.2%, with €26.3m as a result of diesel's growing popularity.

In other international markets, sales revenue rose at a lower rate of 8.1% to €8.3m, due to exchange rate movements.

The Group continues to see Europe as its most important regional sales market, and in the medium term, we expect higher contributions to revenues from North America and Asia.

Beru continued expanding its presence in the international markets. The proportion of revenues generated outside Germany increased to 71.3% during the short financial year, as opposed to 68.8% in the comparable period last year.

Sales revenues in the original equipment segment of €199.3m were a strong 11% higher than in the prior-year period. This important direct business with automobile manufacturers contributed 65.2% of total sales revenue.

Beru's diesel cold-start technology is now successfully marketed to car makers on three continents. In the field of ignition technology, we increased our share of supply with the French manufacturer Renault.

Last year we supplied our PTC auxiliary heating systems not only to the Volkswagen Group, but also to Ford and to Japanese and South Korean producers.

And the Chrysler, Porsche, and the Volkswagen Group supplied Beru's TSS tire-pressure monitoring system as an optional extra.

During the period under review, our sales revenue in the aftermarket segment increased by 2.6% to €87.5m, compared with €85.2m in the prior-year period. Due to the short financial year, there was no effect on sales from the period of January to March, when the winter weather generally leads to stronger demand for spare parts.

And then, the aftermarket business accounted for 28.6% of the Group's total sales revenues. More than half of our aftermarket sales relates to ignition technology. Beru profits from its extended product range of industrial spark plugs and the increased demand for its ignition parts.

Our third segment, general industry, sales revenues increased by 11.7% to €19m, as opposed to €17m in the last year.

This segment comprises of business with manufacturers of oil and gas [burners], and the industrial electronics business, and contributed 6.2% of the Group's total sales revenues.

Ladies and gentlemen, Beru has a broad customer structure. This stabilized our revenue trend and reduces the risk for the Company associated with the possible loss of a customer.

Beru’s customer base includes nearly all of the leading producers of diesel engines. Our top 10 customers include the Volkswagen Group, DaimlerChrysler, BMW, Renault, Isuzu, Ford, and Peugeot.

Beru consistently pursued its strategic goals last year, and continued to enhance its worldwide leading position as an automotive supplier of diesel cold-start technology.

With more than 40% of the world market for glow plugs for diesel engines, Beru is the world's number one for diesel cold-start technology.

Our core division sales revenues increased in the short financial year by 9.3% to €142.9m. The increase in revenue is generated by diesel cold-start products, benefited from the increasing popularity of diesel engines in Western Europe. Meanwhile, certain countries of Western Europe have passed the 50% mark.

Our ignition technology division, which supplies products for [gasoline] engines, generated sales revenues of €83.9m, just 1.5% lower than in the prior-year period. Declining production unit sales of gasoline engines in Western Europe, and the attempt to fight price competition, were the main reasons for the slight decrease in this division's sales revenue.

Our French subgroup, Beru Eyquem, is responsible for our entire European spark plug production at the modernized plant in Chazelles-sur-Lyon, although its sales revenues and earnings were lower than projected in the reporting period.

In view of these business developments, the management initiated comprehensive restructuring measures that should lead to a sustained improvement in profitability. We'll give you some details values of these measures later on during the discussion of earnings.

Beru expects the series launch of the new 12mm spark plug in the middle of 2006 to lead to higher unit sales in the actual fiscal year.

We also see growth opportunities from sales of ignition coils and the systematic expansion of our international aftermarket program.

The Group's electronics and sensor technology division achieved a 20% increase in sales revenue to €79m, compared to €65.9m in the prior-year period. We recorded particularly strong growth with our PTC auxiliary heating systems for vehicle interiors, which are mainly used in vehicles with diesel engines. Sales revenues increased by 62.5% to €22.7m.

As we expected, the sales revenues generated by tire-pressure monitoring systems of €16.8m were slightly lower than in the prior-year period. This was the result of lower equipping rate to cars exported to the United States, and [inaudible] postponements due to the altered scenario for the mandatory introduction of these devices in the U.S.

But we anticipate a significant sales boom this year and next, because the U.S. National Highway Traffic and Safety Administration has specified that starting on September 1, 2006, 70% of all newly-registered cars and light trucks in the United States have to be fitted with tire-pressure monitoring systems, increasing to 100% a year later.

Beru has already received a major order from a German automobile manufacturer that will equip all of its vehicles exported to the United States with our tire-pressure monitoring system as of this year.

Additional German car makers intend to fit their vehicles sold in the U.S. with Beru TSS as standard equipment, also starting this year.

Ladies and gentlemen, I would like to summarize the business development in the short financial year 2005 as follows. We are highly satisfied with our divisions' revenue trend. Beru strengthened the market position of its divisions, and improved its market position as an automotive supplier in the segment of original equipment aftermarket.

Ladies and gentlemen, I would now like to explain to you the development of earnings and the Group's financial position and asset position in some detail.

The increased pressure on sale prices and margins, accompanied by high raw material and energy prices mean that automotive suppliers like Beru need high levels of operating efficiency in the entire value chain with the continuous improvement of production costs.

Our cost of materials in the short financial year 2005 amounted to €116.1m. In relation to sales revenue, this represents a material cost ratio of 38%. A 1.8 percentage point increase compared to the prior year was mainly a result of a change in our sales mix.

The trend is toward products with a higher share of electronic components and therefore higher material costs. We expect the material cost ratio to continue rising slightly in the future, in view of the anticipated increase in sales revenues generated by the electronics and sensor technology division.

We attempt to effectively counteract the trend toward significantly higher raw material costs by means of a consistent procurement policy honoring long-term relations with suppliers while making use of new international sources.

For example, we have succeeded in reducing some material costs despite rising [inaudible] prices.

We have done this through economies of scale realized by the intelligent combination of purchasing volumes, for example with BorgWarner, our majority shareholder.

Depreciation and impairment in the short financial year amounted to €25.8m. This represents a depreciation ratio of 8.4%, as opposed to 7% in the prior year.

The increase compared with the prior year is primarily due to the impairment of patents in France, in the amount of €2.5m. And the impairment of €0.5m of our investment in TecCom GmbH in Munich.

During the reporting period, there was a simultaneous decrease in personnel expenses as a proportion of sales revenues from 29.8% to 28.4%, although both periods were affected by special items.

Last year, personnel expenses were increased by €2.9m due to comprehensive restructuring projects in our spark plug production.

In our production plant in Chazelles-sur-Lyon, France, the market-related reduction with utilization of capacity led to a restructuring and rationalization program entailing the termination of 80 jobs. We expect that the measures we have taken will result in a sustained improvement in profitability in the next two to three years.

In Mexico, the sale of our ignition cable production to General Cable was the first important step in the strategic realignment towards core technologies of our global production network.

Effective December 30, 2005, Beru sold the cable production operations of the Mexican subsidiary, which generated sales revenues of €6.2m in business year 2004/05, with 150 employees to General Cable, a specialist in the production of cable harnesses.

At the same time, Beru established a new subsidiary under the name of Beru Mexico, which has taken over about 25% of the existing employees in co-operation with General Cable. This Beru subsidiary is responsible for spark plug production, and the distribution of Beru products in the region.

Due to the restructuring of our spark plug activities, we anticipate a sustained fall in the personnel expenses ratio at Group level. At present, the management assumes that this ratio will fall by up to half a percentage point already taking effect this year.

Other operating expenses for operations, administration and sales amounted to €52.2m in the short financial year, equivalent to 17.1% of sales revenues.

The Beru Group employed a total workforce of 2,702 people at the end of the year, which was 1.4% more than at March 31, 2005. We had 1,444 employees in Germany and 1,258 at our other locations.

With 53.4% of its employees in Germany and 46.6% abroad, Beru has a balanced and stable workforce structure.

Ladies and gentlemen, I would now like to summarize the development of earnings at Beru Group during the short financial year.

Operating profit for the period amounts to €32m. In relation to sales revenues, this represents an EBIT margin of 10.5%. However, this result includes the special items I described previously totaling €9.3m for the comprehensive restructuring project in spark plug production, and the impairment of assets.

Adjusted to exclude the effects of these special items, operating profit was €41.3m, equivalent to an adjusted EBIT margin of 13.5%. The adjusted margin in fiscal year 2004/05 was 13.9%.

Another factor is that unlike the presentation of the financial statements for 2004/05, other non-income taxes of €1.3m are included in earnings before taxes.

Financial income in the short financial year amounts to €1.5m. This result includes interest income from short-term investments of €2m, and interest expenses on loans of €1.5m.

Due to substantial repayment on loans, a significant reduction in the interest expense is anticipated for 2006.

Earnings before taxes amounted to €33.5m, including all special items. This results in a return on sales before taxes of 11%. Adjusted to exclude all special items, the return on sales before taxes was 14%, in the prior year it was 13.5%.

Effective tax rate shown is therefore equal to the effective income tax rate. Beru had a tax expense of €13.7m, an effective tax rate of 40.9% for the short financial year. The prior year comparison is only of limited use, due to the result of the tax field audit, which were entered in the accounts in fiscal year 2004/05.

Net profit of €19.5m, earnings per share in the nine-month period amount to €1.95.

The first [month] period of 2004/05 financial year, net profit was €23.6m, and earnings per share were €2.36.

Ladies and gentlemen, Beru is increasingly investing in the development of new products and technologies. Research and development expenditure amounts to €24.8m, which is 8.1% of total sales revenues. This was actually slightly higher than the ratio of R&D spending to sales in the prior year.

With investments of €24.8m in property, plant, and equipment, Beru brought its production facilities up to state-of-the-art during the period under review. 83% of our total expenses -- expenditure of €20.6m was at German locations.

Beru also invested €4.7m in its plant in Chazelles-sur-Lyon, France, for the modernization of equipment for the production of spark plug [in Europe]. The main focus there was on improving the quality of processes, while purchasing new, more viable machinery.

Beru was able to finance all of its investments from cash flow in the short financial year. Furthermore, Beru was in a position to reduce its financial liabilities by €11.7m.

Beru’s cash flow, defined as net profit plus depreciation and impairment, and changes in long-term provisions, amounted to €45.9m in the nine-month period, which was €5.2m, or 10.2% below the figure for the prior 12-month period.

However, Beru succeeded in raising its free cash flow from operating activities, defined as net profit plus depreciation and impairments and change in long-term provisions, minus investments, at €6m, or 43.8%, to €19.7m from €13.7m in the prior year.

The cash and financial position of the Beru Group was still at a high level. Cash position decreased compared to the prior balance sheet date, by €16.7m. This was due to tax payments for previous years of €10.1m, relating to a tax field audit carried out for the period of fiscal year 1997/98 to fiscal year 2001/02, as well as investments in tangible and intangible assets totaling €26.3m.

The Group's net financial position decreased from €78.1m to €72.8m, as a result of investments, tax payments related to the tax field audit, and the dividend distributions.

The gearing ratio, defined as net financial liabilities in relation to equity, was 23.7%, as opposed to 26.3%.

On the basis of the Group's profitability and financial strength, the management will propose to the annual shareholders' meeting of Beru AG, on June 21, 2006, a dividend of €0.83 a share be distributed. Once again, this represents a high distribution ratio of 42.6%.

Ladies and gentlemen, the sound balance sheet structure of the Beru Group continued in the short financial year. [inaudible] the development of assets and liabilities.

Equity before minority interests increased by €10.9m, from €296.8m to €307.7m. At the same time, the equity ratio before minority interest rose from 68% to 70%. Beru’s debt equity ratio continued decreasing from 46.3% to 42.2%. Due to repayment on loans, Beru is meanwhile nearly free of debt. Liabilities to bank fell to €11.1m. The balance sheet total increased by €3m from €436.6m at March 31, 2005, to €439.6m on the balance sheet page.

Ladies and gentlemen, at this point we should also have a look forward to the future. I would like to present to you our assessment of the automotive industry and the developments expected in the main areas of business.

The trend toward diesel investment in Europe will continue. Since 1996 diesel’s shares of new car registrations within Europe has more than doubled. In 1996 it was 22.6% and in 2005 it reached 49.5%. Nearly 7.2m diesel vehicles were sold in the whole of 2005, 2.4% more than in the prior year.

Market analysts expect that this year, for the first time, more cars will be sold in Europe with diesel engines than with gasoline engines. According to projections by industry experts, diesel’s share of total new registrations could rise to 56.8% by the year 2010, equivalent to 8.5m vehicles.

I should now like a closer look at the market for diesel vehicles in Western Europe. Meanwhile, seven countries in Western Europe have passed the 50% mark. In addition to the domestic market of Germany, the important volume markets include France, Italy, Spain, Great Britain and also Benelux and Portugal. Last year the strongest growth rate was recorded in Great Britain, with an increase of 4.3 percentage points to 36.8%. France and Italy maintained their high levels, with 69% and 58% respectively. Positive growth was recorded in Spain, where diesel’s share of new registration increased by 2.4% which comes to 67.8%.

In view of the high oil prices, factors for success in the United States are lower fuel consumption and tax incentives such as the energy legislation which came into effect in January this year. Diesel is making progress in the United States. In 2004 diesel accounted for 3% of total sales of 16.7m by vehicle.

In 2005, this share had already risen to 3.5% of new registrations and is expected to reach 10% by 2010. Compared to vehicles with hyper-drive systems, which are heavily subsidized in the United States, Beru had a market share of only 1.2% and experts expect this to rise to just 4.6% in the same period, that is, until 2010. This offers German automotive manufacturers and automotive suppliers good opportunities to market their diesel technology.

Finally, ladies and gentlemen, how will Beru’s business develop in the year 2006? We anticipate a relatively moderate revival of worldwide demand for automotives this year. This industry is the subject of increasing pressure on sale prices and margins, accompanied by higher raw materials and energy prices. Due to the continuing rise in the demand for these diesel vehicles and the proliferation of electronic components, the Executive Board at this stage [inaudible].

Assuming that no further negative effects arise from general economic development and that the automotive industry develops in line with market projections, the Executive Board anticipate net profit in 2006 of [technical difficulty] of €425 to €435m. During the same period, the Executive Board aims to increase operating profit to more than €50m, thus continuing the strong earnings trend of recent years. We assume that Beru will continue its positive growth path in 2006.

Thank you very much for your attention. I will now be pleased to answer your questions.

Thank you sir. [OPERATOR INSTRUCTIONS]. The first question comes from Mr. Paul Smith. Please state your name, followed by your company name.

Hi there Marco. Hi, it’s Paul Smith at Credit Suisse.

A very good afternoon.

Can you hear me?

Yes, I can hear you.

Great. The first question is to do with the cash flow statement. There is a rather large outflow, compared with last year anyway, in total receivables. Is that just different seasonality or can we expect that to unwind?

Could you repeat that, excuse me, because the line was pretty [difficult]?

Okay. In terms of the cash flow statement, €12m outflow in the period, compared with €4m outflow last year. Do you expect that to unwind over the next probably three to six months?

These are seasonal effects.

Okay. My other question relates to the Borg Warner integration process. Can you shed some light on how that’s going? Obviously, the results themselves have been very strong [inaudible]?

First of all I wouldn’t talk about an integration program, because Borg Warner is our majority shareholder to my knowledge holding 69.4%. As far as co-operation activities are concerned, as to say how, for example, exploit synergies, we are on a good path. I think that we could realize savings in a six-digit number in the actual fiscal year, due to economies of scale and synergies in purchasing as to say, for instance, in the insurance claims or also in purchasing materials and components.

So that is as far as purchasing goes. As far as R&D projects are concerned, we are in the process of defining areas where it could make sense to co-operate, but always on an “at arm’s length” principle.

Okay, that’s very clear. My other final question is in relation to mergers and acquisitions. On the ad hoc statement the other day you referred to, essentially, using your significant cash flow to buy companies. Can you give us some sort of indication of the types of companies you might be interested in what scale of potential opportunities you have?

Well, our philosophy remains to be active in market niches which are, let’s say, go up to €500m in annual sales volume and these niches we would like to become one of the top players. Because these niches have a size which is interesting for a company like us and perhaps the niche is too small for the huge companies. So our intention always was to make acquisitions and that has not changed, although we do not have anything very concrete right now in the pipeline. But we would definitely, when we look for acquisitions, stay in our industry and consider companies which fit to our philosophy.

Okay, so you could see yourself potentially buying something [as you say] up to €500m of value or --

No. I said that the sales potential of a market niche which might be interesting for us is €500m. But a company we were looking at, you know, I would rather it could be in the area somewhere about €50 to €100m in sales.

Okay, thank you. And a great set of results - well done.

Thank you.

The next question comes from Mr. [Alan Young]. Please state your name, followed by your company.

[Inaudible]. Marco can you hear me okay?

Yes I can hear you.

This line is terrible. Okay. What I wanted to ask was, on slide 26, where you reiterate the projection that was in the statement this morning, can you just try and help us understand how that compares to previous year, ie. what underlying growth rate that implies for 2006? Because, in particular, the difficulty I’m having is, a, it was a partial year so the comparison is made difficult and, b, there were several provisions in and out of the P&L pretty much every quarter last year and also, probably, in the first quarter this year.

So what I really want to know is, what is the underlying sales growth rate that you’re implying here, the €425 to €435m? And, likewise, what is the underlying EBIT growth rate you’re talking about?

And part of the same question is, the €50m versus €425 to €435m, that looks like a projected margin of 11.6%, but I thought that [the pre] provision margin, before exceptionals, was running at 13.5 to 14%. So the 11.6% looks low unless I’m misunderstanding something.

Okay. Well, first of all I think talking about growth rates is a little bit difficult because of the short financial year [in that time] and since the short financial year excluded the three-month period from January to March, we think that it’s difficult to give you a percentage rate in terms of growth. That’s the reason why we said we expect sales in 2006 somewhere in the range of €425 to €435m.

And as far as our EBIT margin is concerned, I think if you just take €50m, you are right that you hit only 11.6% EBIT margin. However, what we said that we expect an EBIT margin which is higher than €50m. So please understand that we are just at end of March and, at the moment, I cannot give you a clearer outlook on that, only that we said that we expect to have an EBIT margin which is similar to the good results we had in prior years.

Okay. And on that point, obviously, the problem with that is there are provisions and exceptional things in the numbers last year both for the nine-month period and for the first calendar quarter. What do you think was the underlying EBIT margin in 2005 calendar?

Well, you know, as I said before that I cannot give that figure to you because these figures were not audited and I understand that you guys have problems to make this comparison, since we have to -- we can do it rather simply on a sales basis when we compare nine-month period to the nine-months sales figures of the prior year. However, when it comes to the margins and the results that becomes due to seasonal impacts in different quarters it’s really difficult and these figures have not been audited. So, I cannot really say any more about that.

So, what would you -- I don’t want to take up too much time asking these questions, but if I could just have one more. Would you say, then, [the reason why] the EBIT margin this year should be less than last year?

Well, again, I think, well -- I think you should take my word as I said. We expect it to be higher than €50m and that we would be close to the good results we had in the past, and due to the fact that we had higher margins in the past. So I think at the moment, please understand that I cannot give you more information on that.

Fine, okay. But then, the other I want to ask about is, on this slide in here, slide 24, with the projections for the U.S. diesel market in ’06 which has got, obviously, a pretty pleasing trend exhibiting there. That looks like the growth rate for new registrations for U.S. diesel is something like 23% in ’06. That should imply, should it not, that Beru’s overall growth rate should be accelerating in [the States].

Yes, that’s clear. As far as our growth -- our sales targets in the United States are concerned, we expect higher sales indeed in 2006, not only to diesel sales but also to glow plug sales but also to [inaudible] sales etc. So from this point of view, we will have definitely a higher sales expectation for 2006.

On the other hand I think, if you look at the absolute amount of cars with diesel engines, I think they are going to be a major impact in 2007 and 2008, because when you talk to European or, in particular, German manufacturers they have announced that already that they are really planning and preparing to enter the U.S. market with diesel engines at a pretty massive rate. So that will definitely also be sales for our business.

Okay. But you see that more as a 2007 issue than a 2006 issue?

Yes definitely.

I see, okay. Then the last thing I wanted to ask is, on tire pressure monitoring that was a little bit of a disappointment in ’05. We have the mandated 70%, I think it’s 70% this year of new cars that have to have it. Are you anticipating that, as a practical matter, most of the manufacturers will effectively treat the 2006 model year as a year when they basically have to introduce it? Or would it -- is it likely that a lot of the benefit will be deferred into 2007?

I think you will see most of that, most likely -- well it starts in 2006 but the major impact will definitely be in 2007.

Okay, alright. That’s all my questions. Thanks Marco.

You are very welcome.

[OPERATOR INSTRUCTIONS]. Excuse me sir, there appear to be no further questions. Are there any further points you wish to raise?

No, if there are no further questions I thank you very much for listening and I wish you all a good day. Thank you very much. Goodbye.

Ladies and gentlemen, this includes the Beru AG results 2005 conference call. Thank you for participating. You may now disconnect.