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1 Annual Press Conference on March 31, 2009 in Stuttgart Statements by Markus Flik, CEO of Behr GmbH & Co. KG Ladies and Gentlemen: I am happy to welcome you most warmly today to our Annual Press Conference. Let me begin by announcing my core messages: For 2008, we posted a heavy loss. Behr is in a difficult economic situation. We have introduced timely and consistent countermeasures to master the crisis, but it is a course that also demands heavy cuts. Our globalization strategy is successful. In spite of the crisis, we are cautiously expanding our activities in Mexico, India and China. Our technology position is still strong, especially on account of the contributions we are making towards reducing CO2 emissions. 2009 will be a very hard year for us, and we expect our earnings situation to deteriorate even further. Situation in the industry 2008 was an extremely turbulent year for the auto industry. During the first six months, we had to contend with the consequences of production overloads in our plants and worked intensively on expanding our capacities. Towards the end of the year, our customers’ production volumes were in free fall, plunging even more dramatically even than in the fall of 1992. 2 In the case of light vehicles (i.e. passenger cars and SUVs/pick-ups), production in North America fell in the first half of 2008 by 12 percent compared to the previous year. In the second half of 2008, the pace of the decline quickened to 21 percent. In Europe, the downturn was even more dramatic. In the first six months, production rose by 5 percent only to stagnate in the third quarter and finally plummet by 24 percent in the fourth quarter. Since the third quarter of 2008, we are also experiencing a massive global downturn in the heavy trucks industry. Due to the financial crisis, freight forwarders are unable to fund large purchases, a situation which is additionally burdened by the low demand for freight transport. In the USA, commercial vehicle production rose slightly by 14 percent in the first half of 2008, with numbers falling by 32 percent in the second half. The situation was even more volatile in Europe, where truck production in the first six months was 66 percent above the previous year’s level, only to drop in the fourth quarter by an incredible 62 percent. In the first quarter of 2009, there is no sign of any of the markets improving, on the contrary: Since, in the third and fourth quarters, vehicle stocks had, in some cases, been built up, these now have to be reduced again by further throttling production. This crisis will be deeper and longer than any other crisis since the War. Its origins are both cyclical as well as structural. 3 Sales In the past fiscal year, sales of the Behr Group amounted to 3.33 billion euros, which is 1.5 percent below the previous year’s figure. In spite of the market downturn, we succeeded in Europe in increasing sales by 2.2 percent and were thus able to win additional market share. The dramatic market slump in North America also affected Behr. Sales in this region dropped by 11.9 percent or, when adjusted for currency effects, by around 6 percent. The decline of 5.9 percent in Asia has its prime origin in India. In China, on the other hand, we were able to further expand our position. The drop in sales in the Air Conditioning Product Division of 8.1 percent to 1.28 billion euros resulted from the weak market in North America. With our engine cooling products, however, we were able to expand our position and increase sales in the declining market by 1.3 percent. In the Service division, consumer reticence caused sales to drop by 2.2 percent to 262 million euros. The global investment surge in the rail vehicles sector boosted sales in the industrial business segment by 26 to 189 million euros. Results situation The market downturn in 2008 led to a massive slump in earnings. As a result the Group’s EBIT dropped from 85 million euros to -6 million euros. Following profits of 40 million euros in the previous year, earnings before taxes in the year under review showed a loss of 70 million euros. 4 The prime contributing factors, here, are: 1. The ongoing very difficult market situation in the USA 2. The market downturn in Europe in the fourth quarter of 2008 3. Substantial burdens caused by problems at suppliers whom we had to support financially 4. Considerable additional costs incurred as a result of a labor dispute in connection with the partial closure of our plant in Barcelona. The operating cash flow fell by 13.7 percent to 145 million euros. This reduction, however, is much smaller than the fall-off in earnings. This is a result of further improvements in the level of capital tied up in working capital which we achieved in 2008. In 2008, the Behr Group invested 185 million euros, which is 9.5 percent more than in the previous year. Investments focused on expanding capacities to accommodate the high number of order call-offs from our customers in the first half of the year. Most of this capital, i.e. 137 million euros, was invested in Europe. R&D expenditure in the Group rose by 5.4 percent to 254 million euros. Again, expenditure mainly occurred in the first three quarters of 2008, while it was significantly reduced in the fourth quarter. At year-end there were 18,812 employees in the Behr Group, 3.3 percent fewer than in the previous year. Taking into account the leased staff, the reduction in personnel, which mainly took place in Germany, Spain, the USA and South Africa, amounted to 1,300 employees, or 6.3 percent. 5 The way out of the crisis Ladies and Gentlemen, In 2008 Behr had to endure a heavy loss. But we have taken the necessary steps to master the crisis: Behr America succeeded in 2008 in fully eliminating the operational problems stemming from 2007 and clearly exceeded its productivity and quality targets. Nevertheless, the ongoing very difficult market situation has forced our US company to implement significant cuts. We had to shed over 400 staff in the USA which is 16 percent of the workforce. This was partly a result of concentrating assembly of HVAC modules in Dayton which involved the partial closure of our location in Fort Worth. To economize on costs we also had to relocate production of condensers and evaporators to Mexico. Furthermore, over the next two years approximately one third of the development work currently performed by Behr America will be taken over by Behr India. Since last fall we have adjusted to the market downturn in Europe by implementing timely and consistent measures. These included reducing leased and temporary staff levels, reducing working time accounts, utilizing natural employee turnover and early retirement incentives, introducing a recruitment freeze, as well as reducing working hours and remuneration in the plants. The overall effect of these measures was that between the end of August and the end of February, we reduced personnel numbers by around 1,600 in Europe. In spite of declining production, this enabled us to additionally maintain productivity in the European plants at a good level. Wolfgang Schäfer will have more to report on the situation in Germany later. By consistently optimizing our ordering cycles and internal commodity flows, we were able to significantly reduce inventories during the year as a whole by 41 million euros to 308 million euros, or 9.2 percent of sales, without compromising our excellent delivery reliability. 6 In 2009, we will substantially reduce investments and focus on the essentials by making optimum use of our global capacities. At the beginning of 2008, we launched our Group-wide profit-enhancing initiative Project 2010. This project encompasses production, development, administration and sales, and thus all stages of the value-added chain. The project was exceptionally successful right from the start and has even overfulfilled the targets set for 2008. Over 2,000 measures were implemented by our employees over the past year. We will continue to maintain this dynamic course during the current year as well. In the industrial business sector, we achieved a turnaround. After posting a loss in 2007, Behr Industry achieved positive results in the year under review. The company develops and manufactures engine cooling and air conditioning systems for rail vehicles, ships and buses, as well as for construction and agricultural machinery. New processes and structures, the expansion of production in Eastern Germany coupled with investments in enhancing staff skills have all contributed to bringing Behr Industry back to profitability and on course for further growth. There is nothing to gloss over: Behr is in a difficult economic situation. But I am very proud of the way our managers and staff are pulling their weight in these difficult times and helping to push through these challenging measures. We can count on the fighting spirit of a team committed to Behr’s success. Ladies and Gentlemen, The global market downturn is compounded by a more fundamental problem, namely a structural one. The auto industry is about to undergo a radical change. In the long run, vehicle production figures will not reach the level attained at the end of 2007/beginning of 2008. There is a clear trend towards smaller vehicles and smaller engines. A further burdening factor is the demand for lower vehicle CO2 emissions. As a result, the entire industry will have to adjust its structures accordingly. 7 This equally applies to Behr. We have to cut our structural costs in development and administration in Stuttgart by 30 million euros. This also involves shedding up to 300 jobs and negotiating further reductions in labor costs. We informed you about this on February 10. We nevertheless intend to maintain our performance capability and are thus flanking these economy measures with enhancements to our organizational structure. We will expedite processes and workflows and reduce interfaces so as to leverage efficiency in development and administration. These actions will be implemented shortly. Success in the growth markets We also have some good news to report. Our globalization strategy is proving successful. In China, for instance, we were able to increase sales by 8.8 percent and improve earnings. Our new company in Mexico was already operating profitably last year. We are therefore investing cautiously in the reinforcement of our activities in Mexico, India and China. The expansion of facilities at our plant in Mexico which opened at the end of 2006 is making good headway. We are further extending capacities for the production of heat exchangers. Behr Mexico now employs some 350 staff. Since 2000, Behr India has been performing engineering services for other Behr companies. Due to the growing demand within the Behr organization, especially from the USA and Stuttgart, Behr Engineering Services has now been transformed into an independent business unit. By the end of 2009, the current team of around 80 will be increased to some 150 staff. 8 In future Behr will be producing HVAC components and engine cooling systems for the China National Heavy Duty Truck Corporation (CNHTC), one of the biggest heavy truck manufacturers in China. The long-term cooperation agreement between CNHTC and Behr also envisages the construction of a new plant in the vicinity of Jinan. CNHTC will be responsible for building the infrastructure and the plant. Behr, on the other hand, will invest around 4 million euros in the production facilities and will be in charge of training the workforce of around 120 employees. The plant is slated to start production at the end of 2009. The sales target for 2010 is to achieve 30 million euros. Further potential for growth lies in the Euro 4 exhaust emissions standard expected to be implemented in China in 2012. Strong technology position Our engine cooling technology contributes towards reducing fuel consumption and emissions. Our focus in the air conditioning sector is on enhancing comfort and boosting efficiency. We have a particularly strong market position in the premium segment, and in the large modules and systems sector. Here are some examples of our current innovations: Indirect charge air cooling In 2008, BMW’s turbo V8 gasoline engine, featuring our indirect charge air cooling system, went into series production. As opposed to the air-cooled charge air cooler, the indirect charge air cooler can be mounted on the engine and is cooled by a separate low-temperature coolant circuit. Not only does this save package space, the short ducting between charge air and cooler also reduces pressure drop, thus boosting the resulting charge air pressure. At given power levels this enables reductions in fuel consumption and CO2 emissions. In its new Euro 5 engines, MAN is now employing a two-stage turbocharging system with two-stage indirect charge air cooling. This obviates the need for exhaust gas aftertreatment using urea. 9 Both indirect charge air coolers are a new Behr innovation. They offer high power densities and are designed to meet the extremely high temperature and pressure requirements of this application. These innovative charge air coolers are manufactured at our plant in Mühlacker, Germany. Battery cooling This summer Mercedes-Benz will be the first manufacturer to launch the production of a hybrid vehicle that uses a lithium-ion battery–the S400 Blue Hybrid. This battery is superior to the nickel metal hydride batteries currently still in use. However, to ensure optimum performance and service life, the lithium-ion battery has to be operated within a narrow temperature range of around 10 - 40°C. As such, special cooling requirements have to be met. In collaboration with Daimler, Behr has developed the cooling technology for the lithium-ion battery. It is cooled by the vehicle’s air conditioning circuit and, similar to a rear HVAC module, is directly integrated into the refrigerant circuit. Cooling is achieved using a cooling plate made of aluminum which contains channels in which the refrigerant evaporates. The plate is in thermal contact with the cells of the lithium-ion battery. Air conditioning comfort Our comfort vent went into series production in the new 7 Series BMW. For the first time ever, passengers can individually select not only the direction but also the type of airflow that best suits their needs: Diffused ventilation: The airflow is fanned out. The air conditioning system runs absolutely draft-free. Spot flow: The airflow is bundled and can be focused on a specific point. Maximum airflow: The air is partly spread out and partly bundled. 10 The superior level of individual comfort provided by Behr’s four-zone automatic climate control system in the new 7 Series BMW sets new standards. A premium consideration jointly shared by Behr and BMW was ensuring optimum air quality. Furthermore, we have markedly improved the system’s acoustics and cooling power. Systems competence In the new Porsche Panamera we can demonstrate the entire spectrum of our thermal management systems competence, for this vehicle features the following Behr development services and products: Refrigerant and heating circuit including production of the lines HVAC module: The world’s first four-zone air conditioning system with temperature and air mass control housed in a single unit Cabin air ducting including production of the air guiding elements for the air distribution function A/C control system and control head from BHTC, our joint venture with Hella Integration of the entire cockpit module in close collaboration with Dräxlmaier who performs the assembly work Cooling module for engine and powertrain Integration and assembly of the frontend module by HBPO, our joint venture with Hella and Plastic Omnium This project illustrates the creativeness and innovative drive of our company and employees. Through intensive collaboration with Porsche, we were able to consistently implement our systems concept. 11 The new E-Class, too, features examples of Behr’s air conditioning know-how. In close cooperation with Daimler, we succeeded in incorporating in the E- Class key climate comfort elements that passengers had previously only been able to experience in the S-Class: Different modes or styles: normal, diffused and spot flow Individually adjustable temperature for the rear compartment Clear and simple operation; the control head is made by BHTC. According to the auto magazine “Auto Motor und Sport”, “The new air conditioning system is probably the best you can currently get in the upper mid-size range”. Outlook Ladies and Gentlemen, For 2009 we anticipate a drop of more than 20 percent in car production in Europe and an even sharper decline, 50 percent, in the heavy trucks market. In the USA, the market is currently deteriorating at a much faster rate than anticipated at the end of 2008. Current forecasts predict less than 10 million light vehicles as compared with 12.9 million in 2008 and 15 million in 2007. Against this background, we anticipate for the Behr Group a reduction in sales in 2009 of 15 to 20 percent. Without the numerous production startups we are implementing, this drop would be even sharper. So, in spite of the progress we are making with our cost saving measures, we expect to post an even higher loss in 2009. We are rigorously pursuing our course of implementing the aforementioned countermeasures, but some of these will not take effect until 2010. Thank you.
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