博格華納 (BWA) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the results financial year 2006 conference call on the 29th of March, 2007. Throughout today's 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.

Ladies and gentlemen, welcome to the international analysts/investors teleconference and webcast of BERU AG for the annual results of fiscal year 2006. We are particularly pleased that you joined us today.

We published our annual report 2006 this morning. Last year was our first 12-month financial year that was also a calendar year, following a 9-month short financial year in 2005, and it was a very successful year. In today's corporate conference call I would like to present to you the highlights of 2006, to inform you about business developments and to explain our key figures. At the same time I would like to give you an overview of worldwide diesel market developments. Finally, I will give you an outlook for this year and for 2008. Following the presentation, as usual, I will be pleased to answer your questions.

Despite an extremely difficult market environment, BERU achieved the ambitious targets it set at the beginning of 2006 for the full year, and actually exceeded some of them. Financial year 2006 was another successful year for BERU. Both sales revenues and earnings reached new record levels in the 94-year history of our Company. We continued expanding our business in the segments of Original Equipment and Aftermarket.

Our youngest division, Electronics and Sensor Technology, was extremely successful. Revenues from sales of our TSS tire pressure monitoring systems and PTC auxiliary heating systems reached new record levels. With a 7.1% increase in sales revenues to EUR439 million, BERU set a new record. For the first time in the Company's history we passed the EUR400 million mark in a 12-month financial year. We have thus surpassed the target we had set. At the beginning of the past financial year we communicated revenue guidance of between EUR425 million and EUR435 million.

When we look back for a moment at the business development over the past five years, BERU has grown at an average rate of nearly 10% per annum. In 2006 BERU continued to pursue its strategy of internationalization while improving its very strong market position in Germany. In Germany, our domestic market, we succeeded in increasing our sales revenues by EUR17.9 million to EUR137.1 million. This represents growth of 15% and means that we generated more than 31% of our sales revenues in Germany. Furthermore, in the rest of Europe BERU recorded revenue growth of 4%, to EUR207.8 million in 2006. A series startup and a growing share of supply with French automobile manufacturers helped us to achieve this growth.

We also increased our sales revenue in Asia from EUR34.8 million to EUR38.7 million, also partially due to the growing popularity of diesel vehicles in this region. BERU posted a slight decrease in sales revenues only in the US market, from EUR46 million to EUR43.3 million. However, due to the anticipated diesel growth in the United States, we look forward to renewed expansion in the coming years.

BERU's revenues in other markets increased by 21% to EUR12.1 million in 2006. The proportion of sales revenues generated outside Germany was close to 69% in 2006 as opposed to 71% in the prior year.

Sales revenues in the Original Equipment segment of EUR288.8 million were a pleasing 8% higher than in the prior year. In the 12-month period of 2005 this figure amounted to EUR267.5 million. This very important direct business with automobile manufacturers contributed 65.8% of total sales revenues. Growth drivers in the segment were the two divisions of Ignition Technology and Electronics and Sensor Technology.

BERU's Diesel Cold-Start technology division defended its leading market position. Sales revenues in the Aftermarket segment increased by 5.5% to EUR122.7 million in 2006. The Aftermarket segment contributed 27.9% of the group's total sales revenues. In this segment we succeeded in further expanding our position in international markets while maintaining our strong position in our domestic market.

The increasing average age of cars on the road, which boosts the demand for spare parts, also had a positive impact on our Aftermarket business. In the General Industry segment BERU increased its sales revenues by 5.4% to EUR27.5 million in 2006. In this segment our customers are renowned manufacturers of oil and gas burners in Germany and major export markets.

Beru has the advantage of a broad customer structure. This brings stability to our revenue trend and reduces the risks involved in losing a customer. BERU's customer base includes nearly all of the world's automobile manufacturers. Our top 10 customers include the Volkswagen Group, BMW Group, DaimlerChrysler, Renault and Isuzu, for example.

Beru continued to defend its position as the global leader for glow plugs and glow plug controller units in the core division of Diesel Cold-Start Technology. However, BERU cannot fully avoid intensifying competition and pressure on prices. For this reason, in 2006 our core division posted its first decrease in sales revenues to EUR181.2 million compared with EUR194 million in the 12-month period of 2005.

On the one hand, this was due to high pressure on prices from our customers. On the other hand, some carmakers' production cuts led to lower unit sales in the Original Equipment segment. BERU expects the competitive situation to get even tougher in 2007 and 2008, so sales revenues and earnings are unlikely to grow in those two years. As of 2009 we anticipate rising sales revenues once again as a result of the worldwide diesel trend and the launch of innovative new products.

Our Ignition Technology division, which produces components for gasoline engines, developed very positively. Despite the continuation of falling production and sales figures for vehicles with gasoline engines in Western Europe, BERU succeeded in raising its sales revenues in this division to EUR122 million in 2006 as opposed to EUR112.7 million in the prior year. This was primarily due to increased unit sales of ignition coils, plus the startup of series supply of the new 12-millimeter spark plug also led to higher unit sales of spark plugs.

Our French subgroup, BERU Eyquem, also made a positive contribution. Its sales revenues increased by approximately 11% to EUR27.5 million compared with EUR24.8 million in the 12 months of 2005.

As in the prior year, the Electronics and Sensor Technology division achieved the strongest growth rates. Sales revenues increased from EUR103.2 million in the 12 months of 2005 to EUR135.8 million in 2006, representing growth of EUR32.6 million, or 31.6%. The division's revenues from sales of tire pressure monitoring systems rose particularly sharply. And the ongoing strong demand for PTC auxiliary heaters also boosted sales revenues in 2006. For the coming year BERU looks forward to further revenue growth in this division.

TSS, our tire pressure monitoring system, contributed EUR46.5 million to the positive revenue trend in our youngest division last year. This already represents 10.6% of the group's total sales revenue. The past financial year we succeeded in gaining additional orders for our tire pressure monitoring system. Meanwhile, BMW fits TSS as standard equipment in all of its cars exported to the United States, and many other premium manufacturers offer the system as an optional extra.

Since the autumn of 2005, the US National Highway Traffic Safety Administration has been implementing the staged introduction of tire pressure monitoring systems in all light vehicles newly registered in the United States. As of September 2007 this will be mandatory for all light vehicles, meaning for cars and light trucks. So several German manufacturers have already decided in favor of BERU's system. The staged implementation is in full swing, and BERU anticipates a significant increase in sales revenues from TSS also in the current year.

Furthermore at the level of the EU, in the context of the CO2 debate, there have been suggestions that tire pressure monitoring systems should be compulsory because they facilitate optimum tire pressure and therefore optimize fuel consumption and reduce CO2 emissions.

Cost of materials amounted to EUR175.5 million in 2006. In relation to sales revenues this resulted in a material expense ratio of 40%. The prior year it was 38%. As in the prior year, the increase in this ratio was primarily due to the shift in the production and sales mix towards electronic products.

Another factor is that further increases in raw material prices also had an impact on BERU in 2006. In order to counteract these factors we will continue expanding our purchasing volumes in so-called low-cost countries. We will also attempt to generate savings potential by combining our purchasing activities with those of our major shareholder, [Bob Warner].

In relation to sales revenues our personnel expense ratio fell from 28.4% in 2005 to 26.7% in 2006, although both periods were subject to special items. In 2006 special items totaled minus EUR0.8 million and resulted mainly from changes in legislation relating to preretirement part-time work and a change in pension provisions.

Other operating expenses for operations, administration and sales amounted to EUR66.6 million in 2006, equivalent to 15.2% of sales revenues as opposed to 17.1% in the prior year, which shows that cost improvement activity worked well.

In total, the BERU Group employed a worldwide workforce of 2,555 people at the end of 2006, which was 147 fewer than a year earlier. With a split of 58% of the workforce in Germany and 42% abroad, BERU continues to have a balanced and stable workforce structure.

Ladies and gentlemen, I would like to summarize the BERU Group's earning trends in 2006 as follows. Operating profit in 2006 amounted to EUR53.5 million. In relation to sales revenues this represents a margin of 12.2% as opposed to 10.5% in the prior year. However, earnings were affected by special items in connection with impairments, both positive and negative changes in provisions for pension obligations, changes in legislation relating to preretirement part-time work, and restructuring projects in our spark plug production. Adjusted for these special items was a negative effect of EUR1 million, which was EUR9.3 million in the prior year.

The EBIT margin was at 12.4% as opposed to 13.5% in the prior year. This margin reduction of 1.1 percentage points is partially a result of the price cuts demanded by our customers, which exceeded our internal cost-cutting efforts. On the other hand, BERU was and still is subject to ongoing increases in raw material prices.

An additional key factor is the shift in our production and sales mix that I have already mentioned, thus the products of the Electronics and Sensor Technology division have lower margins than our core division Diesel Cold-Start Technology.

Financial income totaled EUR3 million in 2006. This figure includes interest income from short-term investments of EUR2.2 million and interest expenses of EUR0.9 million. During 2006 BERU repaid nearly all of its liabilities to banks, so a further reduction in our interest expense is expected for 2007.

Earnings before taxes amounted to EUR56.5 million including all special effects. This results in a return on sales before income taxes of 12.9% as opposed to 11% last year. Adjusted for all special items, the return on sales before income taxes amounts to 13.1% as opposed to 14% in the prior year.

Tax expense amounted to EUR12.8 million last year, resulting in an effective tax rate of 22.6%. Tax expense was reduced by EUR7 million in 2006 due to changes in tax legislation in Germany relating to the capitalization of corporate income tax credits.

Beru posted a net profit of EUR43 million in 2006. Earnings per share amounted to EUR4.30 as opposed to EUR1.95 in the prior year, which, I would like to remind you, was a short financial year. With these results, BERU once again underscored its strong profitability in an international industry comparison.

We employ more than 220 persons in research and development activities in Germany. In the year 2006 BERU invested EUR33.5 million in R&D, representing 7.6% of sales revenues, which is about average for the industry. The Company's high innovative skills can be seen from our numbers of patent applications. In 2006 we made 29, nearly double the number of 16 in the prior year. The expansion of our research and development center at our headquarters in Ludwigsburg continued with completion planned for spring of 2007.

Groupwide investment totaled EUR43.2 million in 2006. Investment in intangible assets amounted to EUR11.7 million. This includes the capitalization of in-house development projects in an amount of EUR10 million. Prior year the amount was EUR6.9 million.

In addition to investing in the expansion of our research and development center, investments were made in new production facilities in Ludwigsburg and Neuhaus-Schierschnitz for the strategically important ceramic glow plugs and pressure sensor glow plugs. We made substantial investment in new and expanded construction in Muggendorf and Ludwigsburg and plans for the production of ignition coils. This will allow BERU to deliver newly gained orders in the Original Equipment segment.

At our electronics plant in Bretten BERU invested in the production plant for the tire pressure monitoring system and the diesel Instant Start System, ISS. We also made substantial investment totaling EUR4.8 million in production facilities for spark plug production at our site in Chazelles sur Lyon in France. This site is responsible for all of our European spark plug production.

The group's cash flow reached a new record of EUR77.4 million in 2006. This means that our investment spending of EUR33.2 million, the repayment of bank loans of EUR10.9 million, and the dividend distribution of EUR8.3 million were all completely covered out of our cash flow. Our stock of marketable securities and cash and cash equivalents developed very positively too. In total the group's liquid funds increased from EUR83.9 million to EUR106.1 million. At the same time BERU was able to increase its net financial position by 45.5% to EUR105.9 million as opposed to EUR72.8 million in the prior year.

Gearing ratio, defined as net financial liabilities in relation to equity, also improved to 30.9% as opposed to 23.7% in the year before. The basis of the group's profitability and financial strength -- at the annual shareholders meeting of BERU AG on June 27, 2007, management will propose the distribution of a dividend of EUR1.10 per share.

The BERU Group continued to have a strong balance sheet structure in 2006. Equity before minority interest increased by EUR34.7 million, or 11.3%, from EUR307.7 million to EUR342.4 million. The equity ratio increased from 70% to 72.2%. As we already announced last year, BERU repaid nearly all of its liabilities to banks, reducing them from EUR10.9 million to EUR0.2 million. BERU is therefore virtually independent of external financing. The group's debt-to-equity ratio fell from 42.2% at December 31st, 2005 to 37.4% at the end of last year. The balance sheet total increased by 7.8% or EUR34.4 million from EUR439.6 million at December 31st, 2005 to EUR474 million at the end of last year.

Ladies and gentlemen, let's now have a look at the development of the diesel market in Europe. The trend towards diesel in Western Europe is unbroken. Last year 7.4 million passenger cars were sold with diesel engines in Western Europe, more than with gasoline engines for the first time ever. Diesel's market share increased to 50.8%. At the same time sales of cars with gasoline engines decreased by 1.9% to 7.2 million units. As you can see from the graph showing the market share of diesel cars, six countries have passed the 60% mark. This trend is promoted by attractive diesel models, higher fuel prices and consumers' resulting stronger interest in fuel efficiency.

After a decline in new registrations of cars with diesel engines was recorded in Germany in 2005, demand increased again sharply last year, so that diesel's market share reached 44.3%. In absolute terms new registrations of diesel cars increased by 7.7% to more than 1.5 million units.

What do the forecasts look like for Europe? The market research institute, Global Insight, predicts that diesel will account for 53% of new car registration in Europe in 2007. The market researchers of AID forecast a market share of around 57% by 2010. Also outside Europe the outlook is good for diesel vehicles. The diesel trend is expected to accelerate, particularly in the United States. While diesel's share of newly registered light vehicles is still under 5%, JD Power forecast a market share of 7.5% by 2010 and 15% by 2015.

Our German customers are also optimistic for a breakthrough in the US. As you probably already know from the media, DaimlerChrysler, Audi and Volkswagen formed an alliance last year to market vehicles with low emission diesel engines under the Blue Tech label in the United States.

Significantly higher unit sales of diesel vehicles can also be expected in China and especially India in the upcoming years. While diesel had a market share of about 1% in China in 2005, it is expected to approach 5% by 2010. In the emerging market of India JD Power actually predicts that more than 50% of newly registered cars will have diesel engines as soon as 2010.

Finally, what about BERU's business development this year and in 2008? Ladies and gentlemen, the coming years will remain very challenging for the entire automotive industry. The industry continues to be in a situation of increasing pressure on prices and margins, combined with high prices for raw materials and energy. Nonetheless, BERU intends to continue along its path of profitable growth. We will continue to make substantial investment in the development of new products. The focus will be on Diesel Cold-Start Technology and our youngest division of Electronics and Sensor Technology.

However, this year and in 2008 our sales revenues and earnings will enter a phase of consolidation, although at a high level. Starting in 2009 new orders and the ramp up of new products should lead to strong growth once again. Ladies and gentlemen, for BERU it is true to say future-oriented actions lead to sustained success. We will undertake all efforts to ensure that this continues to hold true.

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

(OPERATOR INSTRUCTIONS). Alan Lyons.

Alan Lyons here from Polygon. I have -- well, it's one question, but I have two or three, if I may. Could you update us on your thoughts about what is going on in the US diesel market, in particular, whether you think like 2007 will be a year when you see a significant uptick in penetration of the US diesel market?

The second question was with respect to balance sheet. Could you update us on your thoughts with respect to the cash that is accumulating on the balance sheet and what you intend to do with that?

The third question I have is about the guidance that you give, because it's a little vague. You talk about a period of consolidation until 2009. I'd like to know are you talking about single-digit revenue growth but then the period of consolidation? Should we take that to mean that margins will fall, are margins still the same, or what does that mean, a period of consolidation?

To answer your first question on diesel trends in the US, I think listening to our customers, European manufacturers, which have the idea to enter the US market, I think we will see a breakthrough most likely in the year 2008 than in 2007. We also know that the American manufacturers are all working on diesel engines for this market. So we think there is a trend which is going to the right direction. However, the trend will develop smoothly and might speed up by 2008 onwards.

As far as the second question is concerned, what is our intention as far as our cash position is concerned, we will propose to the general assembly a continuous dividend of EUR1.10 per share. Our intention is to be ready if we have an acquisition, what we're actually pursuing at the moment. We do not have anything ready in the pipeline in the short-term, but we have the clear understanding and the focus on looking for interesting opportunities. As a general situation there are some companies who are facing different situations. We also could be asked to act quickly, if we have to. So our intention is to not distribute this money at the moment, but to be able to make an acquisition if one is coming up in the next couple of months.

As far as our guidance is concerned, I mentioned to you in my presentation that we have in 2007 and 2008 a continuous mix impact. We have most likely a higher increase in sales in terms of tire pressure monitoring systems as opposed to the Diesel Cold-Start Technology business, which normally generates higher margins than our youngest division. So from this point of view we expect OEM sales in the diesel cold-start business to be rather flat. That is due to high pressure we have on prices.

But from 2009 onwards then we have the effect, which I mentioned to you that sales would pick up in the United States, in North America, so to speak, and other areas of the world. You know the programs we have in our pipeline will stand for an increase in sales by 2009 onwards, starting at the end of 2008 but definitely pick up in 2009.

So as far as the guidance is concerned, we expect sales to increase in the course of the year in the lower one single-digit or lower single-digit number. As far as our operational profit is concerned, we're trying to maintain it at today's level.

You choose the words that you're comfortable with your guidance; I understand that. But if you don't elaborate further, I think I would have to take that to mean -- I think the market would have to take that to mean a phase of consolidation means, certainly, declining margins in 2007.

Yes. Well, let's put it this way. I showed you the turnover charge, sales revenues charge over the last five years. We had growth rates of approximately 10% per annum. As I said before, we expect in 2007, 2008 to have lower increases in sales. I also mentioned to you that we continue to have high pressure on margins. The one impact just to mention to you are we're competing against Japanese manufacturers, who now for over five years have the advantage of a weakening yen against the euro, which is from a competitive point of view is a difficult situation. Nevertheless, we undertake everything to maintain our margins at today's level, but that will be a challenge.

One more, if you will, which is, when you talk about price pressure in the core business, could you try and give us an idea what kind of magnitude that is?

Also, so far into this year, if price pressure has been maintained at that kind of rates or got better or got worse?

Price pressure? Okay, we are facing price pressure for many years. I think that's not a secret. It has increased quite substantially over the last couple of years. And that depends on the customer, so I cannot give you an average number on price decreases. But the trend will continue, and I think you can read every day in the press, this was something we have to try to compensate with the productivity gains and increased cost efficiency programs.

(OPERATOR INSTRUCTIONS). Thank you, sir. We appear to have no further audio questions.

Thank you very much. Thank you everyone again for listening to our conference call. I wish you a good evening or good morning or good day, wherever you are in the world. Thank you very much for listening and goodbye.