博格華納 (BWA) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to BERU AG conference call. (OPERATOR INSTRUCTIONS)

I now hand over to Marcus Knoedler. Please go ahead, sir.

Ladies and gentlemen, welcome to the international analyst and investors telephone conference and webcast of BERU AG for the financial results of the year 2007. We are very pleased that you join us today. With me is my colleague, Dr. Thomas Waldhier, Member and Chairman of the Board since October 2007.

BERU published its results for the financial year 2007 this morning. In today's corporate conference call, I would like to present to you these results, to inform you about business development and to explain you our key figures. At the same time, I would like to give you an overview of the current status of the domination and profit transfer agreement with BorgWarner as well as our program to enhance efficiency. And finally, I will give you an outlook for this year. Following the presentation, as usual, we will be pleased to answer your question.

The last year was an eventful and challenging year for BERU. The personnel changes in the Executive Board have been a major event in 2007. Two executive members left the Company. Two members could be gained. Dr. Thomas Waldhier replaced Marco von Maltzan as CEO and as you probably know, I am responsible for finance and IT since April 2007. The responsibilities were reallocated with this change. There was also an important change in our shareholder structure last year. I will get to this later more details. The approved program to enhance our efficiency is to mention as well. Following the presentation, I will give you more details about that.

BorgWarner Germany GmbH has been BERU's majority shareholder since 2005 with an equity interest of 69.42%. On December 11, 2007, BorgWarner Germany GmbH announced that it had increased its stake to more than 75%. Today BorgWarner holds approximately 82% of voting rights. Furthermore, on March 17, 2008, we entered into a domination and profit transfer agreement with BorgWarner. The conclusion of such an agreement will enable both companies to simplify many processes.

BERU shareholders will have the choice between a one-time compensation and sell their shares to BorgWarner or they stay as a shareholder of BERU and receive an appropriate annual compensation payment. The one-time compensation amounts to EUR71.32, the guaranteed dividend to EUR4.73 gross and currently EUR4.23 net. These figures correspond to those determined by PricewaterhouseCoopers as reasonable compensation and payment in the valuation report jointly commissioned by BERU Aktiengesellschaft and BorgWarner Germany GmbH. The compensatory payment was based on the corporate value of BERU Aktiengesellschaft as determined by PWC of EUR618.4 million. This amount was approved by independent court-appointed auditor.

The cash payment is the equivalent of the volume-weighted average BERU share price for the three-month period up to December 11, 2007, the date on which the planned domination and profit transfer agreement was announced. The domination and profit transfer agreement is only valid if it has been given the consent of the BERU Aktiengesellschaft shareholders' meeting. A resolution to this effect is to be presented to the shareholders meeting of BERU Aktiengesellschaft scheduled for May 21, 2008. After that, the agreement has to be registered in the German Commercial Registry.

Let me now outline the results for the past financial year. In 2007, revenue rose slightly by 2.6% to EUR450.6 million compared with EUR439 million in the prior year. Revenue growth was only slight. The main reason, therefore, was the increasing demand for price reductions by the automotive manufacturers and the lower unit sales in the high margin aftermarket business.

In 2007 financial year, BERU succeeded in maintaining its share of supply in the original equipment business. In the direct business with automotive manufacturers, BERU supplies nearly all products, all producers of cars and engines worldwide. The original equipment segment accounts for nearly 70% of the Group's total revenue. The electronic and sensor division was the growth driver within BERU Group once again in 2007, especially with its tire pressure monitoring system, TSS. BERU is rapidly expanding in the field of electronics.

BERU's core sales market are Germany and the rest of Europe. More than 70% of the Group's revenue was generating in this region in 2007. BERU successfully defended its position in its domestic market, Germany, where sales revenue increased by 17.6% from EUR137.1 million to EUR161.2 million.

In the rest of Europe, revenue fell by 10%. This was primarily a result of change in distribution channels. Since 2007, BERU's products have been exported directly to customers in Asia. Previously, these markets have supplied via a European wholesaler. The unusually strong growth in Asia of 25.6% to EUR48.6 million reflects this change.

In its core division of diesel cold start technology, BERU defended its leading market position despite a decrease in sales revenue. This BERU division generated revenue of EUR166.9 million compared with EUR181.2 million in 2006. The reasons for the decrease include pressure on prices and intensive competition. However, due to the ongoing worldwide trend towards diesel engines and the introduction of innovative products such as the pressure sensor glow plug, we anticipate rising revenues in this division in the future.

BERU's ignition technology division generated sales revenue of EUR130 million compared to prior year EUR122 million, representing an increase of 6.6%. This growth was primarily due to higher unit sales of ignition coils, causing revenue from that product to rise from EUR35.7 million to EUR42.6 million.

Of the BERU Group's divisions, electronics and sensors once again achieved the strongest revenue growth of 13.2%. This division's main source of growth was the tire pressure monitoring system, TSS, which was responsible for EUR72.6 million of the Group's total revenue, or 50% more than the prior year. The positive developments in the electronics and sensors and the ignition technology divisions compensated for the decrease in revenues generated by diesel cold start technology.

In its original equipment segment, BERU achieved growth in sales revenue of 5.9% to EUR305.8 million. The increase was primarily due to higher sales of ignition technology, components and the tire pressure monitoring system, TSS. Growth was particularly strong in the field of tire pressure monitoring systems where revenue rose by EUR26.1 million to EUR72.6 million. This was mainly a result of rising sales to BMW, who installs our systems in its vehicles destined for export in the United States. Numerous other manufacturers such as Audi, Bentley, Bugatti, Daimler, Ferrari, Maserati, SsangYong, VW, offers TSS as optional equipment.

BERU has the advantage of a broad customer structure. This brings stability to our revenue trends and reduces the risk involved in losing a customer. BERU's customer base includes nearly all of the world's automotive manufacturers. Our top ten customers in the year 2007 include BMW, Volkswagen, Daimler, Renault and Isuzu. So far the development of sales revenue.

The total cost of materials in the year 2007 amounted to EUR186.8 million. As a proportion of sales revenues, the cost of materials amounted to 41.4%. As in the prior year, the increase in this ratio was primarily due to the shift of product mix towards electronic products, which have significantly higher material consumption than the products of the diesel cold start technology and the ignition technology division.

Despite slight increases in the world market prices, BERU was able to maintain its purchasing prices at a nearly stable level in 2007. BERU attempts to counteract price increases by finding new international sources of supply, especially in low-cost countries and by developing secondary supply sources.

In 2007, personnel expenses amounted to EUR124.3 million, equivalent to 27.6% of revenue. The increase in personnel expenses was caused by higher wages following a tariff settlement on 4.1% pay rise for our employees in Germany as of June 1, 2007. The Group-wide restructuring project with a provision of EUR3.1 million and the management restructuring provision of [EUR0.9] million also led to higher personnel expenses. Other operating expenses compromising general administrative selling expenses amounted to EUR75 million, equivalent to 16.6% of revenue.

The Group's total investment in property, plant and equipment and intangible assets amounted to EUR40.2 million, which was slightly lower than the prior year, EUR43.2 million. In total, BERU invested EUR34.3 million in research and development in 2007, equivalent to 7.6% of Group's revenue, as in the prior year.

The capitalization rate, defined as the ratio of newly capitalized development [worked to] total R&D spending was 29.4%. At the main site in Ludwigsburg, BERU completed the extension of its research and development center and opened the building in spring of 2007. Investment also continued in Ludwigsburg and Neuhaus in new equipment for the production of BERU's important products for the future, ceramic glow plugs and pressure sensor glow plug.

In both Muggendorf and Ludwigsburg, substantial amounts were invested in new production lines for ignition coils. At the Group's electronic plant in Bretten and the plant in Muggendorf, investments were carried out for additional production lines (inaudible) BERU's tire safety system, TSS. Substantial sums were also invested at the plant in Bretten for additional production lines for the diesel instant start system, ISS.

Investment in modernized production facilities continued at our plant, at Chazelles sur Lyon, France, where our European production of spark plugs is concentrated. It amounted to EUR2.7 million in 2007. Furthermore, BERU invested EUR0.8 million in Tralee, Ireland. Part of it was for the production line for sensor production.

The Group's cash flow, defined as net profit for the period plus depreciation, amortization and impairments and changes in non-current provisions amounted to EUR61.6 million in 2007. Therefore, investments with an effect on cash of EUR30 million and a dividend distribution of EUR11 million were fully covered out of the cash flow.

The Group's securities, cash and cash equivalents decreased by 17% from EUR106.1 million to EUR88 million, primarily due to granting a loan to BorgWarner. In 2007, BERU granted BorgWarner Europe a loan of EUR35 million above normal market conditions. When the net financial position is considered, liquid funds less liabilities to banks, there is a decrease of 17% to EUR87.9 million. Adjusted for the loan to BorgWarner, both positions would have been higher than in the prior year.

As a result of reducing liabilities to banks to just EUR0.1 million in 2006, BERU is close to be debt free. The decrease in other current assets is primarily due to lower advanced payments on fixed assets.

As a continuation of the past dividend policies at the annual shareholders meeting of BERU AG to be held on May 21, 2008, the Executive Board and the Supervisory Board intend to propose the distribution of a dividend of EUR1.10 per share. This represents a total dividend payout of EUR11 million.

BERU once again had a very sound balance sheet structure at December 31, 2007. Equity attributable to shareholders of the parent company increased by EUR17.6 million or 5.1% from EUR342.4 million to EUR360 million. The equity ratio increased from 72% to 73%. Return on equity was 8.4% in 2007 compared with 13.3% in prior year.

I summarize the business development of BERU as follows. Profit on ordinary activities, EBIT, amounted to EUR39.1 million in 2007, equivalent to an EBIT margin of 8.7% compared to prior year 12.2%. As mentioned above, special items in 2007 in overall negative added up to approximately EUR4 million, resulting from restructuring. The decrease in the profit margin was caused, on the one hand, by the price reductions increasingly demanded by the automobile manufacturers which exceed our internal cost cutting efforts. On the other hand, BERU is affected by the high level of raw material and energy prices.

As in the prior years, the product mix continued to shift in favor of the products of the electronics and sensors division, which has lower margins than the products of our core division, diesel cold start technology.

Net interest income and income from investments totaled EUR5.2 million in 2007. This figure includes interest income from short-term deposits of [EUR4.1 million] and interest expense of EUR0.9 million. Income from equity investments, which primarily compromises income from write-ups on investment accounted for using the equity method amounted to EUR2 million.

Profit before income taxes includes a special item amounted to EUR44.3 million. This represents a return on sales before income taxes of 9.8%. Net profit amounted to EUR30.9 million. Net profit in 2006 amounted to EUR43.7 million, but was boosted by a one-time special tax gain of EUR7 million. Earnings per share of 2007 amounted to EUR2.98 compared to prior year EUR4.3. In total, BERU invested EUR34.3 million in research and development in 2007, equivalent to 7.6% of Group's revenue as in the prior year.

As of December 31, 2007, BERU employed 2,560 people.

Ladies and gentlemen, the past financial year didn't run according to plan for BERU. We had to release two profit warnings. As you can see on this slide, our EBIT margin developed negatively over the last years. Despite rising sales, we made less profit. With an EBIT margin of 8.7% BERU is still very good compared within our industry. Nevertheless, we have to act now to stop this development. We assume in 2007 we reached a low point in the negative development of margins and we will achieve a turnaround in 2008.

Starting in the year 2009, new orders and the market launch of new products should lead to stronger revenue growth and a slight improvement in earnings once again. But we also have to work on improving and minimizing our cost. That's why decided our efficiency program in December 2007. These measures include the streamlining of the organizational structure and the optimization of worldwide production capacities in order to make internal processes faster and more efficient and to place more priority on close contact with customers.

The first step was the reduction in size of the Executive Board from four to three members. As a result of internal rationalization, the worldwide headcount is to be reduced by 160 employees before the end of 2008. So far the work force has been reduced by 82 persons. The first positive results of the efficiency improving program are already apparent. In the medium term, annual savings of approximately EUR5 million are to be achieved.

But also the worldwide trend to diesel vehicles will push BERU. Diesel sales are likely to continue catching up with sales of gasoline vehicles in the coming years. Lower fuel consumption and new low emission engines are likely to attract more customers to diesel than in the past all over the world. In Germany, more than 50% of new vehicles are expected to be registered with diesel engines than gasoline for the first time ever in 2008.

In the United States, where sales of light vehicles with diesel engines have always been very low, there is now more potential for the new generation of low emissions in powerful diesel engines. A steady rise in new registrations of diesel vehicles is to be expected in the next two years due to Americans' increasing environmental awareness and ongoing fuel prices increase.

J.D. Power, a renowned market research company, forecasted that the percentage of newly registered light vehicles with diesel engines in the United States will be into double digits by the year 2015. India and South Korea are the most important countries for the success of diesel vehicles in Asia. But according to forecast unit sales, they will continue rising in China and Japan, with significant acceleration in 2009.

The BERU Group expects organic growth to slow down in the year 2008. We anticipate revenue growth of a low single digit percentage this year, as in 2007. In terms of operating profit, we expect 2008 to realize an EBIT between EUR40 million and EUR45 million. Starting in the year 2009, new orders and the market launch of new products should lead to stronger revenue growth and a slight improvement in earnings once again.

The efficiency improving program decided upon in December 2007 will also show its full effects in 2009 and will make a positive contribution to profitability. In the medium term, we expect to achieve savings of EUR5 million per annum, partially compensating for the pressure on prices from the automobile manufacturer. The efficiency improving program includes streamlining our organizational structure and optimization of our worldwide production capacities to make internal process faster and more efficient and placing more priority on close customer relations.

Intense competition will continue to be a feature of the market environment in the next two years. With the help of the efficiency improving program, BERU aims to partially compensate for the pressure on prices and margins and to position itself successfully in the marketplace. We therefore intend to increasingly source components and materials in low cost countries in order to reduce our material costs. In the medium to long-term, BERU aims to expand its activities in the BRIC countries -- Brazil, Russia, India and China -- and thus to participate more in the dynamic upswing taking place there.

In the area of research and development, BERU plans to invest more efficiently in the years 2008 and 2009. The main area of investment will be in diesel cold start technology, especially for the products diesel instant start system, ISS, pressure sensor glow plug, PSG, and ceramic glow plugs. A large part of the investment in the area of sensors will be for the industrialization of the high temperature sensor, HTS.

To secure profitability growth both in the future, BERU will, this year, increasingly investigate options for possible acquisitions in the area of the automotive supply. The required funds are available. Revenue growth is not BERU's sole corporate goal, however. It is even more important for the Group to attain a strategic and operational positioning, enabling it to grow profitable over the long-term. Ladies and gentlemen, thank you for your attention. Dr. Thomas Waldhier and I will now be pleased to answer your questions.

(OPERATION INSTRUCTIONS) We have no questions so far.

Okay. Thank you.

Shall we close the call?

We close the session? Okay. Bye-bye.