博格華納 (BWA) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the half-year results 2006 of BERU AG conference call on August 14, 2006. Throughout today's presentation, all participants will be in listen only mode. After the presentation there will be an opportunity to ask questions. [OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to Mr. Maltzan. Please go ahead sir.

Yes, good morning and good afternoon ladies and gentlemen. Thank you very much for joining our conference call today. In today's webcast conference call we will discuss four topics. First, operational highlights of half year 2006, second, development of sales, revenues and earnings, then we move over to the forecast for the fiscal year 2006 and we end with a summary.

Ladies and gentlemen, let me outline the highlights of the six months 2006. Based on unaudited preliminary figures, BERU has increased its total sales revenues for the first six months of 2006, by 10.4% to €223m, as opposed to €202m for the prior year period. And that despite a difficult market environment.

The Group was able to expand its international business. Key growth driver in the period under revenue was again our OEM sales. Successful product launches and higher equipping rates led to particularly strong growth in our Electronics and Sensor Technology division. We have taken measures to achieve sustained cost improvement in the Ignition Technology division and aligned our international production network.

During the period under review, BERU realigned its production and sales activities in the NAFTA region, with a focus on core competencies. Due to the sale of cable-production operations to General Cable in this context and the establishment of the new subsidiary BERU Mexico SA, the number of persons employed in Mexico decreased by about 80 compared with a year earlier.

The restructuring of our French facility at Chazelles sur Lyon, which is responsible for the Group's entire European production of spark plugs and ultramodern production lines, led to a reduction of 50 jobs at BERU TdA by June 30, 2006.

The high quality level of BERU's innovative products was recognized by various automotive customers in the first half of 2006. For example, the Motor Sport Industry Innovation Prize was awarded to our British subsidiary BERU F1 Systems. We also received Ford Motor Company's Gold World Excellence Award 2005, recognizing BERU as one of the world's best suppliers in terms of quality, cost efficiency and logistics. And Toyota Motor Europe awarded BERU a Certificate of Recognition in the Quality category for top performance in product quality and supplier service.

Ladies and gentlemen let's take a closer look at the development of sales revenues and earnings in this period under review.

BERU increased its total sales revenues in the first six months by 10.4% to €223m, as opposed to €202m in the prior year. Strong revenue growth from the first half of this year was assisted by seasonal effects, and the ramp-up of new products.

In regional terms, the Group's sales revenues in the key market of Europe, excluding Germany, for a moment, increased by 6.8% to €107.8m as opposed to €100.9m. In Germany, the domestic market, sales revenues rose by 8.8% to €65.8m. In the North American market, first-half sales revenues increased by 33.5% to €24.7m. In Asia, the Group achieved an 11.0% increase, taking sales revenues to €19.2m. In the other international markets, BERU generated sales revenues of €5.5m, representing an increase of 14.6%. Proportion of first-half sales revenues generated outside the home market up 70.5%, was similar to the high level of the prior-year period, where it was 70%.

In its Original Equipment sales segment, BERU increased its first-half sales revenues by 11.4% to €150m. The Group further expanded its business with leading European and U.S. automobile manufacturers, particularly for products from the Ignition Technology and Electronics and Sensor Technology divisions.

The Aftermarket segment increased its sales revenues in the first half of 2006 by 9.2% to €59.1m. This segment posts high revenues in the winter quarter due to rising demand at that time of year for parts subject to wear and tear, particularly in the field of Ignition Technology. Demand for spare parts was also boosted by the increasing average age of cars on the road.

In the General Industry segment, which comprises the business with manufacturers of oil and gas burners and our industrial electronics, sales revenues in the first half of 2006 increased by 5.3% to €13.9m.

We know that BERU has a broad customer structure. This stabilizes our revenue trend and reduces the risk for the Company of losing a customer. BERU's customer base includes nearly all of the leading manufacturers of diesel engines. Our top 10 customers includes the Volkswagen Group, DaimlerChrysler, BMW, Renault, Isuzu, Ford and Peugeot.

In the division of Diesel Cold-Start Technology, sales revenues in the first half of 2006 were at similar high levels to the prior-year period, actually rising by 0.7% to €95.7m. BERU thus strengthened its leading market position in its core division of Diesel Cold-Start Technology.

Unit sales of glow plugs increased significantly compared with the first half of 2005. Unit sales of second-generation diesel cold-start systems for light trucks in the United States and Asia grew at double-digit rates. With its innovative diesel cold-start systems, BERU is currently the only supplier of series components that fulfills the demanding on-board diagnostic regulations of the California Air Resources Board, called CARB.

Ignition Technology. The sales revenues generated by the Ignition Technology division, which supplies components for gasoline engines, grew by 5.7% to €61m, largely because of the strong aftermarket business. BERU strengthened its market position as an ignition specialist and increased its unit sales of both spark plugs and ignition coils in the first half of 2006.

The Electronics and Sensor Technology division, successful product launches and higher equipping rates led to particularly strong growth of 34.5% in BERU's youngest division, Electronics and Sensor Technology, which contributed €66.3m. The main driver of this division's expansion was the serious ramp-up of tire-pressure monitoring systems for two European premium carmakers. As had been anticipated, the sales revenues generated by the Tire Safety System increased at an above-average rate of 76% to €19m in the first half of 2006.

At the same time, sales revenues from PTC auxiliary heating systems for vehicle interiors developed very positively, rising by 31.1% to €17.7m. BERU gained new orders from European and North American customers. The Company is now developing the second generation of PTC auxiliary heating systems and is expanding its range of these products.

Sales contributions by divisions were in line with our growth targets. Diesel Cold-Start Technology contributed 42.9% to total sales revenues. Ignition Technology division generated 27.4% and our youngest division Electronics and Sensor Technology posted particularly strong growth, contributing now, almost 30, to be precise 29.7% to total revenues for the period under review.

The Group improved both its operating profit and its operating margin. First half of 2006, earnings before interest and taxes amounts to €30.9m, Europe, representing an operating margin of 13.9%. In the same period of last year, EBIT amounted to €25.1m, equivalent to 12.4% of sale revenues. Group costs and management, and high utilization of capacity led to this better result.

BERU Group achieved earnings before taxes of €31.7m, surpassing the results for the prior-year period by €9.9m. The effective tax rate was 34.4%, significantly lower than in the prior-year period in which the effective tax rate rose to an exceptionally high 60.1%, due to a tax field audit and resulting additional tax payments.

Net profit, therefore rose to €20.6m. Earnings per share, for the first half 2006 amounts to €2.06 compared with €0.86 for the first half of last year. Return on sales after taxes amounts to 9.2%.

Material expenses in the first half 2006 increased by 16.3% to €85.1m. This was primarily due to the general growth in unit sales and the changed product mix, which -- with a higher proportion of electronics products. Increasing raw-material prices were the reason for the higher ratio of material expenses to sales revenues of 38.2% compared with prior-year period where we had 36.2%.

Personnel expenses of €57.9m were a slight 0.5% below the prior-year figure, partially due to the international restructuring actions. Other operating expenses, which includes selling and administrative expenses, decreased by 9.4% to €34m, although the figure for the first half of last year was increased by €0.2m as a result of special items.

As of June 30, 2006, the BERU Group employed total workforce of 2,562 persons. 57.5% or 1,474 persons were employed in Germany and 42.5% or 1,088 persons were employed in other countries.

The restructuring of our French facility at Chazelles sur Lyon, which is responsible for the Group's entire European production of spark plugs, led to a reduction of 50 jobs at BERU TdA by June 30, 2006.

During the period under review, BERU realigned its production and sales activities in the NAFTA region, with a focus on core competencies. Due to the sale of cable-production operations to General Cable in this context and the establishment of the new subsidiary BERU Mexico SA the number of persons employed in Mexico decreased by about 80 compared with a year earlier.

BERU continues to make sustained investments in the future of the Company. Investments in property, plant and equipment totaled €15.3m for the Group in the first half of year - equivalent to 6.9% of sales revenues, or 41.7% more than the prior-year period.

The Company also invested in the expansion of its German site. At our electronics plant in Bretten, we expanded the production line for tire-pressure monitoring systems and hybrid control units and put another production line into operation for TSS, our tire-pressure monitoring systems, wheel-electronic components. In order to fulfill the growing demand placed on our development engineers by car owners, BERU is currently expanding its Test Center at the Group's research and development facility in Ludwigsburg.

Capitalized development expenses amounted to €4.6m, with amortization of capitalized development expenses of €1.9m.

The Group's total investments in the first half of 2006 amounted to €20.3m as opposed to €15.7m in the prior-year period, which was 29.3% above the prior-year level. BERU was therefore once again in a position to finance all of its investment completely out of its cash earnings.

The Group cash flow, defined as net profit plus depreciation and amortization and changes in long-term provision, amounted to €38.2m in the first half of the year, which was €15.2m or 66.2% more than in the prior-year period.

We further improved our net financial position during the reporting period. Cash and cash equivalents at the end of the half year amounted to €87.1m, compared with €83.9m at the end of full financial year 2005 on December 31, 2005. Due to credit repayments, liabilities to banks decreased from €11.1m to €0.2m. Thus, the BERU Group is virtually debt free.

Ladies and gentlemen, let's take a closer look at market developments and our guidance for fiscal year 2006.

In the further course of this year, BERU anticipates a relatively moderate revival of global demand for automobiles. Growth stimulus is expected from Asia and Eastern Europe, while unit sales of passenger cars are likely to remain flat in the volume markets of the United States and Western Europe. BERU's important domestic market, Germany, might profit from purchases being brought forward this year due to the planned increase in value-added tax as of January 1, 2007.

We expect the sustained trend towards diesel with the proportion of new cars registered with diesel engines in Western Europe increased from 22.6% in 1996 to 49.5% in 2005, thus more than doubling within 10 years. Diesel's success has continued this year, in the period of January through May 2006, diesel's share of new registrations -- car registrations in Western Europe reached 50.4%, surpassing the 50% mark for the first time. Experts anticipate a diesel share in total new registrations of 56.8%, or 8.5m vehicles, by the year 2010 in Western Europe.

As I said before, in car registration, new car registration in Western Europe reached for the first time more than 50%. To be precise, 50.4% penetration. In the European volume markets, which usually have a high proportion of diesel vehicles, there are varying growth trends for new diesel registrations. In the first six months of this year, Germany posted growth of 1.5 percentage points to 43.6%. Great Britain recorded an increase of 2.5 percentage points to 37.3%. There was an increase of 2.6 percentage points to 69.4% in Spain. In the same period, diesel's share of new registrations stagnated in France, however, at a very high level, at 69.9%, and decreased slightly in Italy to 58.2% from 59.1% in the prior year.

Growth in diesel's market share was particularly high in Scandinavia, Belgium and Luxembourg. That had the highest proportion of new registrations of cars with diesel engines in Western Europe, rising to 73.7% in the first six months of this year.

Diesel is also on the advance in the United States, where diesel accounts for just under 3% of the 16.7m light vehicles sold in the U.S. in 2004. The proportion rose to 3.5% last year and is expected to reach 10% within five years. In comparison, hybrid vehicles, which are heavily subsidized in the U.S. and now account for 1.2% of unit sales, are only expected to reach 4.6% in five years' time.

Key facts, in addition to the sharp increase in price of oil is a lower level of fuel for diesel's success in consumption as a diesel engine uses up to 30% less fuel than a gasoline engine, depending on the type of vehicle.

The Energy Act that came into force in January 2006 provides tax incentives for diesel engines. In view of stricter emissions legislation in the United States, BERU anticipates rising demand for diesel in the coming years.

The market environment continues to be characterized by intensifying pressure on sales prices and profit margins accompanied by high raw material and energy prices, and resulting consumer uncertainty.

In the further course of this year BERU anticipates a relatively moderate revival of global demand for automobiles. The Executive Board is confident that BERU will perform well in the thoroughly difficult market, as a result of the current order situation and product start-ups. We also expect further efficiency improvements in our international production network. Therefore, the Executive Board affirms the Group's forecast for the full year. Assuming that the world economy and the automotive industry develop in line with market projections, we are confident that the Group will achieve or even slightly exceed the upper end of forecast ranges. We target sales revenues corridor of €425 to €435m for fiscal year 2006. Accordingly, BERU expects to achieve earnings before earnings and taxes of at least €52m, and thus a return above the average for the industry once again.

Ladies and gentlemen, in closing, let me summarize the key points of this presentation.

We are pleased with the business development in the first half year 2006. BERU showed, again, a strong performance, despite a rather challenging market environment. Sales revenues grew at 10.4% to €223m. Earnings before interest and taxes improved by 23.2% to €30.9m in the first six months. The ramp-up of new products, high equipping rates and the alignment of our international production network, leads to respective performance increases.

Our strong net financial position of €86.9m, provides a solid basis for further internal but also for external growth. Positive business development in the first half 2006, make us confident of achieving targeted revenue and earnings growth for full year 2006, despite difficult market conditions.

Ladies and gentlemen BERU will continue along its path of profitable growth. Let's now turn to question and answer session.

Thank you Sir. Ladies and gentlemen at this time we will be taking the question and answer session. [OPERATOR INSTRUCTIONS]. The first question comes from Mr. Alan Lyons. Please state your name, company name followed by your questions.

Yes, good afternoon. It's Alan Lyons here from Polygon. Can you hear me Marco?

Yes, I can hear you very well.

Okay, good, okay. I have two questions. One is could you talk about the trends you expect to see in the second half, for the cyclicality of the business in the second half versus the first half? Because just some simple mat’s, the number -- the projection that we now have after the excellent second quarter is starting to look quite conservative. So, I'd appreciate any help you could give us on that.

And the second is, do you have any thoughts on the structure of the Company's balance sheet? To what purpose that cash -- what use that cash might be put, what else you might do with it? How much cash do you think the Company should carry? Any thoughts you could give us on the balance sheet would be much appreciated.

Okay. Well, your first question, I think it's a very valid one. You cannot just take by simple mathematics just multiply half year results by two, because, you know, we had a very strong first quarter and that is due to our -- particularly to our Aftermarket sales business, which is -- we had a very strong winter and since [the rates] went up pretty high in these three months of the year, so that was an exceptionally good year, first quarter we had.

Though the third quarter is normally -- it's rather -- well it's not such a good one. So, that is actually the reason why we stick to our guidance we actually delivered already, a couple of months ago. And also, you note for the first time that we report the -- we had the shift in the fiscal year. We had a short financial year, which ended December 31, 2005. And now is the first time that we report the first six months, our year period from January to June. So, that is a little bit difficult to compare.

But again, we have -- we are living in a rather seasonal environment, and so, please do not multiply the half-year results by two.

As far as your second question is concerned, you were right when you pointed out our high amount of cash we have. On the other hand, what I have communicated and what we are looking for is, we think about external growth. We do not have something concrete in the pipeline at the moment. But our focus clearly is, that we would like to increase our business or to grow our business externally. That is what we most likely what we will need the liquid funds for.

Okay. And actually one other thing, while I have the floor, which is I read with interest your remarks about the two European OEMs, you didn't name them, but two European OEMs, ramping-up the tire-pressure monitoring business. Are you starting to see that happen in the States? Because my understanding is, that that requirement is imminent, [inaudible] I think the model here is for this year or for next year, I forget which one.

September 1, is mandatory for 70% of the new registrations. And then it goes by actually September 1, 2007 it's 90% and then one year later it goes up to 100%.

So, are you seeing -- starting to see pull-through in tire-pressure monitoring in the U.S. now, or is it too early to talk about that?

That starts. You know, we are supplying our systems to European manufacturers, who then export their [inaudible], their cars to the United States. And while, you noticed the sharp increase we had, I think we generated sales if I am not mistaken, by €19m in tire-pressure monitoring system, it's mainly due to that fact and it that will increase over the next couple of months.

Okay, thank you.

You're welcome.

Your next question comes from Mr. Frank Biller. Please state your name, company name followed by your questions.

Yes, hello good afternoon. This is Frank Biller calling from [Baden-Wurttembergische] Bank. Just three quick questions. The one thing is, maybe you can say something about your adjusted EBIT margin in the first half year in 2005? I think it was in the range of 14% as well as in the first half of this year.

The next thing is about this hybrid control unit. Maybe you can point out a bit, what sales figures you got in the first half and how it goes on in the future?

And the next thing is about your free cash flow. I'm a little bit confused about this calculation. Free cash flow of €22.5m, I cannot work it out from the cash flow statement. Maybe you can help me a bit with this?

Okay. [Inaudible], as far as the free cash flow is concerned -- okay you'll get it in a moment. [Inaudible] the hybrid control units, we do not break that down, that -- we have not split that up between control units and glow plugs. But we introduced these ESS systems, I think now, three years ago and we were the first in the market and -- but I always told you that we will not have the same high margins on control units than we have on the glow plugs. On the other hand, it was to -- when we started this product it was also to protect our high margins on the glow plug business.

Okay, the second question was the free cash flow. You take the net income, and then it was €20.6m, you add the depreciation of €17.4m, and you add changes and long-term accruals of €0.2m and you subtract CapEx of €15.7m, that leads you to €22.5m.

Okay, thanks and the adjusted EBIT margin in the first half?

Hold on. The amount was €25.3m. So, it was just a special item was €0.2m. I have not -- I think my colleague's just calculating it.

Because in the statement you said there's a high one-off exceptional in the first half last year. So, it must be a bit more than this €0.2m, isn't it?

No, it's just this one.

Okay, thank you.

It was -- but it was 12.5% was the adjusted EBIT margin 2005.

Thank you. So very high margin in the second quarter, if you work it out from these half-year figures, compared to what you got in the first quarter this year?

Okay, we published the first quarter results but only in EBIT margin and we did not publish net income figures. You know that since we have an internal standard we are not obliged to do it, but nevertheless we do it. And so, again, we had a strong first quarter and we managed particularly also, to improve productivity and we reduced administration costs. And so, actually, we had in generally speaking we had a pretty good first half year.

Good, thank you.

[OPERATOR INSTRUCTIONS].

Okay, I think there are no further questions. So, at any case, you know, where you can join us for further questions. You either call Gala Conrad or Stephanie Schaefer, and so if you have further questions do not hesitate to get in touch with us. I wish you a nice day or a nice afternoon. Thank you very much for calling us. Bye bye.

Ladies and gentlemen this concludes today's presentation and thank you for participating. You may now disconnect.