博格華納 (BWA) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's BERU AG half-year results 2007 conference call. For your information, this conference is being recorded. At this time, I would like to turn the call over to your host today, Mr. Knoedler, CFO. Please go ahead sir.

Okay. Ladies and gentlemen, welcome to the international analyst and investors telephone conference and webcast of BERU AG for the half-year results of the financial year 2007. We are very pleased that you joined us today. With me is my colleague Dr. Rainer Podeswa, Member of the Board and responsible for sales and R&D.

I would like to take this opportunity to introduce myself. My name is Marcus Knoedler, and I have been at BERU since October 2004. In January 2005, I became Vice President of the Group's Finance and Accounting; and I have been a Member of the Executive Board with responsibility for finance and IT since April this year.

BERU published its half-year results this morning. In today's corporate conference call, I would like to present to you the highlights of the first half 2007, to inform you about business developments, and to explain you our key figures. At the same time, I would like to give you an overview of the worldwide market development. And finally, I will give you an outlook for this year and for 2008. Following the presentation, as usual, we will be pleased to answer your questions.

Let me outline the highlights of the first half 2007 based on unaudited figures. Despite an extremely difficult market environment, BERU increased its total sales revenue by 0.5%. We achieved a double-digit EBIT margin of 10.9%. We continued expanding our business in the segments of Original Equipment, but the Aftermarket business was weak. Our youngest division, Electronics and Sensor Technology, was successful. Our TSS tire pressure monitoring systems generated strong growth.

The high-quality level of BERU's innovative product was recognized by various automotive customers in recent months. At Autosport International, the biggest motorsport exhibition in the United Kingdom, our British subsidiary, BERU F1 Systems, received the coveted innovation prize for its new Wire in Composite technology. This prize was awarded by the leading British magazine for motorsport technology, Racecar Engineering. The so-called WiC technology gives substantial improvements compared with conventional wiring looms with regards to durability, encapsulation, weight and aesthetics.

A prize that we are particularly pleased about is the respected Genius safety prize award by Allianz Insurance Company, which we received this April for our tire pressure monitoring system, TSS. We are very proud that with this prize BERU has once again affirmed the important and demonstratable contributions that TSS makes to the goal of safe, environmentally friendly and economical driving on our roads.

Ladies and gentlemen, know-how, technical precision, and a continued high level of quality from development to production to logistics make BERU a reliable, efficient partner. Our goal behind all of this is profitable growth and long-term value added.

BERU increased its total sales revenues in the first half of 2007 by 0.5% to EUR224.2 million despite unfavorable conditions. This development was primarily due to the strong growth of both divisions, the Electronics and Sensor Technology and the Ignition Technology.

In regional terms, the Group's sales revenues in Germany, the domestic market, increased by 20.4% to EUR79.2 million. Sales revenues in the rest of Europe decreased to EUR93.1 million. BERU posted lower sales revenue also in North America, EUR18.9 million compared with EUR24.7 million in the first half of last year. The strongest growth was achieved in Asia, where BERU posted sales revenues of EUR24.8 million compared to prior-period EUR19.2 million. Sales revenues outside Germany accounted for 64.6% of the total in the first half of 2007 compared to prior-period 70.5%.

In its Original Equipment sales segment, BERU increased its first-half sales revenues by 3% to EUR154.5 million compared with EUR150 million in 2006. The Group succeeded in expanding its business with automobile manufacturers both for ignition products and for electronic and sensor products in the first half of 2007. Sales revenues increased primarily due to higher unit sales of ignition coils and tire pressure monitoring system to leading automakers.

Sales revenues in the high-margin Aftermarket segment decreased by 4.7% to EUR56.3 million, as a result of the mild weather in the first quarter of 2007. Sales revenues in the Aftermarket stabilized in the second quarter of 2007 compared with the first quarter. Nevertheless, sales revenues in the first half of the year remained lower than expected and also lower than in the first half of 2006 when sales had been boosted by unusual cold winter weather. This decrease in sales revenues is unlikely to be offset in the remaining six months of the year 2007.

In the General Industry segment, which summarizes our business with manufacturers of oil and gas burners as well as our industrial electronics, sales revenues in the first half of 2007 decreased to EUR13.4 million from EUR13.9 million in the prior-year period. This was partially due to the current uncertainty regarding the expected tech support for regenerative heating systems in Germany, which has not yet been implemented however.

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

BERU continued to defend its position as the global leader for glow plugs and glow plug control units in the core division of Diesel Cold-Start Technology. However, BERU cannot fully avoid the intensifying competition and pressure on prices. For this reason, in the first six months our core division posted a decrease in sales revenues to EUR82.6 million compared with EUR95.7 million in the six-month period of 2006.

Firstly, this development was influenced by the weak Aftermarket business. Secondly, the intensifying price and competitive pressure also depressed sales revenues, and there was a negative impact on original equipment sales from some manufacturers' production cuts. The Company anticipates rising sales revenues again in its core division as of 2009 due to the worldwide trend towards diesel engines and the launch of innovative new products.

Orders have already been received from two automobile manufacturers to supply pressure sensor glow plugs as standard equipment, and stimulus should also be provided by ceramic glow plugs which is already being tested by many carmakers. The first full-scale order for this product will also go into production in 2009.

Despite the continuation of falling production and unit sales figures for gasoline engines in Western Europe, the Ignition Technology division developed positively in the first half of 2007. Sales revenues increased by 6.9% to EUR65.2 million, primarily due to significant increase in unit sales of ignition coils. But sales of 12 millimeter spark plugs to PSA and BMW also boosted revenues with further increases to be expected as the year progresses. In addition, BERU anticipates positive upturn from the expansion of its international aftermarket range of ignition products.

Our youngest and most dynamic division, Electronics and Sensor Technology, made a large contribution to the Group's positive revenue trends in the first half of this year. In the period under review, this division posted sales revenues of EUR76.4 million, which is an increase of 15.2%. The source of this growth was the tire pressure monitoring system, TSS, which generated over 80% more sales revenues than in the prior-year period. BERU also anticipates significant revenue growth in this area in the second half of the year.

The growth of Electronics and Sensor Technology division is leading to a shift in mix of production and sales towards electronic products, which have a much higher material content than the products of the other division.

A slight increase in sales revenues, the shift in production towards electronic products, and the further increases in raw material prices led to an increase in cost of materials from EUR85.1 million in the prior-year period to EUR93.9 million in the first half of 2007. As a proportion of sales revenues, cost of materials has increased to 41.9%.

The cost of personnel increased by 4.5% to EUR60.5 million. This increase was mainly due to higher wage costs resulting from the tariff settlement in German metalworking and electrical industries.

Despite rising energy prices, as a result of economy measures BERU succeeded in slightly reducing its other operating expenses, which also include selling and administrative expenses, to EUR33.9 million.

At June 30, 2007, the BERU Group employed a workforce of 2,596 persons. 1,495 persons or 57.6% of the total were employed in Germany and 1,101 persons or 42.4% were employed in other countries. The slight increase in employment abroad is primarily due to the startup of the new Mexican subsidiary, which was officially opened in May.

First-half operating profit, EBIT, amounted to EUR24.4 million, equivalent to a margin of 10.9% in relation to sales revenues. This margin reduction was the result of the price reductions that are increasingly required by automobile manufacturers and cannot be fully offset by internal cost cutting.

On the other hand, BERU continues to be faced with rising costs of raw materials. As a result of productivity advances, improvements in internal processes, further optimization of production structures and better purchasing conditions, BERU intends to compensate for at least a part of the pressure on sales prices and profit margins in the future and to maintain the high quality of its margin.

Pretax earnings decreased by EUR4.9 million to EUR26.8 million compared to EUR31.7 million in the first half of last year. The effective tax rate was 31%. The tax expense was reduced by a tax refund from the Irish tax authority related to its recent tax field audit. For this reason, BERU's reduction in net profit was considerably smaller than the drop in operating profit of approximately 21%. Net profit for the period amounted to EUR18 million, equivalent to a return on sales after tax of 8% compared to prior-period 9.2%.

BERU continues to make substantial investments in the future of the Group. Total investments in tangible and intangible assets amounted to EUR12 million in the first half of the year compared to prior-period EUR14.6 million. This represents 5.4% of sales revenues for the period showing that BERU once again invested at an above average rate.

The expansion of BERU's research and development center at the headquarters in Ludwigsburg was completed and the new building was opened in May 2007. This expansion is a clear demonstration of our long-term corporate policy and permanent investment in the future. Only in this way can BERU maintain its technology leadership in diesel cold-start technology and its position as a specialist for ignition technology.

At our main facility in Ludwigsburg and at our site in Neuhaus, we invested in new production equipment for the manufacture of strategically important products of the future, pressure sensor glow plugs and ceramic glow plugs. And we made substantial investments in capacity expansion for the ignition technology. We also expanded our production capacity for tire pressure monitoring system at our electronics plant in Bretten.

Capitalized development expenses amounted to EUR4.1 million with amortization of capitalized development expenses of EUR2.2 million. The Group's total investment in the first half of 2007 therefore amounted to EUR16.1 million. BERU was once again in the position to finance all of its investments completely out of the cash earnings.

The Group cash flow, defined as net profit less depreciation and amortization and changes in long-term provisions, amounted to EUR33.7 million in the first half of the year compared with EUR38.2 million in the prior year.

Due to the distribution of dividend as well as the Group's investment, the net financial position, defined liquidity less liabilities to banks, decreased. At the end of the first half of 2007, the Group's net financial position amounted to EUR101.7 million compared with EUR105.9 million at the end of 2006.

Growth in worldwide demand for automobiles was only moderate in most regions. Unit sales of passenger cars decreased in the United States and Western Europe and Germany. In China and India, however, the dynamic growth in car sales continued unabated. In Western Europe, BERU's most important sales region, 7.9 million new cars were registered, representing a decrease of 1.2% compared with the prior-year period. Among the region's volume markets, there was a growth in United Kingdom, plus 2%; and Italy, plus 6.5%; whereas unit sales decreased in Germany, minus 9.2%; France, minus 2.6%; and Spain, minus 1.6%.

The trend towards diesel engines is continuing in the European markets. During the period of January to June 2007, total unit sales of diesel cars in Western Europe grew by 2.3% to 4.1 million vehicles. During the same period, however, sales of cars with gasoline engines fell by 4.7%. This means that diesel's share of new car registrations in Western Europe rose to 52.2%. The share of new car registrations accounted for by diesel also increased in our important domestic market. In June 2007, 46.9% of all new vehicles first registered in Germany had a diesel engine.

However, it is necessary to consider the fact that despite the increase in diesel shares of the market, the absolute number of new diesel registrations fell in the first half of 2007 compared with the prior year. The total of 739,000 new diesel cars registered between January and June was 2.4% lower than in the same period of 2006.

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 forecasts a market share of 7.5% by 2010 and 15% by 2015. Our German customers are also optimistic for a breakthrough in the U.S.

Significantly higher unit sales of diesel vehicles can also be expected in China and especially India in the coming 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.

Let us now have a look at this year, what does the current development of BERU AG look like? In an increasingly difficult market environment, accompanied by higher raw material and energy price, the pressure on our prices and margins increased during the first half, and our competitive was impacted by the strong euro. Ladies and gentlemen, the coming years will remain challenging to the entire automotive industry.

Nevertheless, BERU intends to steadily continuing along its path of profitable growth. The Executive Board maintains its forecast of growth in the Group sales revenues of a low-single digit percentage in full-year; and operating profit between EUR47 million and EUR50 million is expected in the full-year 2007 compared with EUR53.5 million in 2006. All of our efforts will be required to achieve our goal. As of 2009, new orders and the market launch of new products should then lead to a stronger growth once again.

Ladies and gentlemen, for BERU, it is true to say future-oriented action leads to sustained success. We will make all efforts to ensure that this continues to hold true. Thank you for your attention. We will now be pleased to answer your questions.

Thank you. (OPERATOR INSTRUCTIONS) We will now take our first question from Alan Lyons with Polygon. Please go ahead sir.

Good afternoon, Mr. Knoedler, can you hear me?

Yes, I do.

I am very -- to me, this is a truly awful set of results, frankly, just from where I sit. There are so many questions I could ask, but I guess the broad thing I really would like to understand better, which I don't understand is -- how can it be a time when OEMs and many other automotive suppliers are reporting strong revenue growth and accelerating margins, but BERU is stagnating and the margin is collapsing?

In particular, and I have your press release in front of me here, in particular the sales revenue at BERU's Diesel Cold-Start Technology division decreased by 14%. I think I calculated. But of course, at the same time, Mr. von Maltzan has resigned.

We can talk in some detail about the divisions and the specific projects and areas of improvement that I am sure you are looking for. But the broad thing I want to understand is why has the Company's performance hit the buffers so abruptly and what is being done to turn it around?

Alan, first of all, you have to take in consideration that we have a weak aftermarket business. And the aftermarket plus OEMs -- because you have to count both together if you speak about the whole, let me say, spare parts market -- is about 35% of the total of BERU's sales. In this area of 35% of total sales, we had a very weak first and, let me say, second quarter due to the mild winter.

And that is the reason why we haven't -- have low glow plug sales, for example. It is not only the OEM, it is also the aftermarket as I explained. And as I pointed out in my presentation as well it is the price pressure of the OEMs.

Well, I understand that. But every automotive supply company is having to deal with OEM price pressure, right? And nearly all -- well, not nearly all, but many of the other companies I follow are managing to negotiate that in such a way as to not suffer this kind of margin pressure. In fact quite the opposite. They are enjoying an expansion in their margins at this current point in time.

So, I am just -- and especially because in addition to that, for me, BERU, i.e. focused on Diesel and also with the Electronics and Sensor Technology division, which should be a fast-growing division, to me should be beating the overall market in terms of its growth rate. So I am really shocked to see this kind of performance.

And another question I was going to ask you is, why is it that you can say you think growth will resume in 2009 and not necessarily be able to say that about 2008? What is going on in the background that leads you to that conclusion?

First of all, how do we come to an increase in 2009 is, as we stated, in 2008 we will have the consolidation as we stated every time before. And in 2009, we will have new products, as I mentioned, for pressure sensor glow plugs, ceramic glow plug, and high-temperature [safe] sensors in the area of EUR20 million.

Marcus, let me jump in here. It is Rainer Podeswa speaking. We have published various orders for high temperature sensors, pressure sensor glow plugs and ceramic glow plugs as well during the last month. But I guess it is understood that even if our pressure sensor glow plugs will start even this year, we speak about few thousand pieces, so no significant sales at all.

The new product will go into significant volume production by 2009. And what we have in our budget for new projects and new products in 2009 is pretty exactly EUR20 million only in new products, going up to more than EUR100 million by the year 2012.

Yes.

Okay. Another question I was going to ask you is the presumption that for the year you'll manage to achieve low single-digit revenue growth, is that predicated on the presumption that you'll experience a more normal aftermarket in the fourth quarter, is that the idea?

No, I do know. That is not the idea. What we will see in the second half, which is simply a fact, is a tremendous increase in our TSS sales because by the 1st of September 100% of all new passenger cars in the United States have to be equipped with the tire safety system.

So this double-digit growth, which we have reported will continue, especially in the high-profitable, independent aftermarket, as well as in the original equipment spare parts because our customers are as well hit by those weather conditions.

We still have a reasonably high stock. And our dealers and our original equipment customer will not purchase significant huge new volumes for the independent aftermarket until they have reduced the stock they have built up due to the warm weather condition. And it is simply a fact, if it is not cold you will not detect that you have a problem with your glow plugs in the diesel engines.

Okay. That makes it -- you can say with some confidence then that that forecast for second half will be delivered because you have reasonable visibility of the demand for the TPMS system.

Yes. As Rainer said, there is some launch of product, for example, in the TSS, one further platform will be [arriving] in the second half of the year.

Fine. Another question I had was, I heard what you said about the JD Power estimates, the penetration of diesel in the U.S. market. What are you experiencing in terms of actual orders that lead to any kind of near-term conclusions about potential growth in the U.S. diesel market?

Maybe I can pretty clearly say that right now we see that the diesel engine market in the U.S. is pretty stagnant and it is not growing.

Why? Because with the Big 3 you will find diesel engines in SUVs, and if you know the situation in the U.S. with new passenger cars, their registrations which are down, you know that Ford is particularly down, you know that Chrysler is not longer offering the Jeep with a diesel engine due to emission regulations.

What we see is that we will have an increase in diesel engine sales in the U.S. in the years 2011/2012. These are new projects which we are developing right now and which clearly will lead to higher diesel sales.

In addition, you know that, for example, Mercedes and Volkswagen are going to introduce their blue technology diesel engine in the U.S., which as well most probably will increase the sales of diesel engines.

But let's summarize this. Right now, the diesel engine share in the U.S. market is pretty below 5% and it will most probably double within the next five years to only 10%. That is what we see right now.

Okay. And the last question because I am sure you have got other people that want to ask, but the last one [here says] can you -- is there anything you can say to make us feel more confident or better about the time frame with which you hope to replace Mr. von Maltzan?

This is a question that we both cannot be answering. This is, let me say, an exercise of the Supervisory Board. And as we can say here, their search is ongoing.

Okay. Thanks for your time.

You are welcome.

(OPERATOR INSTRUCTIONS) Mr. Knoedler, we don't have any questions at this time.

If there is no question anymore, we thank you for participating and thank you for your time.

That will conclude today's conference call. Ladies and gentlemen, thank you for your participation. You may now disconnect.