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ElringKlinger records earnings well within positive territory and strong cash flow for first half of 2009 despite challenging automobile markets
Slight upturn in revenue during second quarter
While Asia recorded a slight improvement in sales revenue over the course of the first half, the decline in US vehicle production by around 50% as well as the slump in car manufacturing by approx. 28% in Europe as a whole proved detrimental. By contrast, the second quarter of 2009 produced initial signs of a slight upturn in demand. Despite the continuing weakness of the commercial vehicle sector and the downturn in demand recorded by ElringKlinger Kunststofftechnik GmbH in the field of mechanical and plant engineering, compared with the first quarter Group sales revenue grew by EUR 8.5 million to EUR 138.2 million in Q2 2009. By contrast, sales revenue was still down 26.3% on the second quarter of 2008. Within this context, the comparative base for the second quarter of 2009 was significantly higher due to the fact that Q2 2008 had included the newly acquired SEVEX Group and the consolidated ElringKlinger Marusan Corporation, Japan, for the first time (as from April 1 and May 1, 2008, respectively), which contributed a total of EUR 21.7 million to sales. Within the Original Equipment segment, which supplies vehicle manufacturers, sales declined by 27.1% in the first half of 2009 to EUR 185.8 (254.8) million. The Aftermarket segment remained relatively stable during the same period, with first-half sales revenue contracting by 8.4% to EUR 47.5 (51.8) million - a year-on-year decline that was much less severe.
The ElringKlinger Group invested EUR 19.1 (16.5) million in the development of new products and technologies, including capital expenditure on fuel cells and battery components as well as on its diesel particulate project, which was 15.8% more than in the first half of the previous year. By contrast, investments in property, plant and equipment were scaled back year on year to EUR 41.5 (54.1) million.
Improved cost structure and positive effect from commodity price hedging
In response to the unparalleled downturn seen within the automotive markets and the severe slump in production figures, the ElringKlinger Group launched an extensive cost-reduction program towards the end of 2008, the effects of which became increasingly tangible over the course of the first half of 2009.
As a result of settlement payments to be made in connection with a hedging transaction for alloy surcharges related to high-grade steel, material expenses, i.e. ultimately the cost of sales, rose by an additional EUR 3.7 million in the second quarter of 2009. Due to the rise in the price of nickel over the course of the second quarter of 2009 and the concomitant changes to the fair value of commodity-related derivatives, provisions recognized under IFRS were partially reversed. Correspondingly, other operating income rose by EUR 9.5 million in the second quarter of 2009. In the same period, the balance between the reduction of provisions and settlement payments made had a positive effect on earnings before taxes equivalent to EUR 5.8 million. In July 2009, ElringKlinger took advantage of the continuing rise in the nickel price and sold a substantial part of its contracts to hedge purchasing prices for raw materials. At present, this is expected to produce a positive earnings effect of approx. EUR 0.7 million in the third quarter of 2009. As the settlement payments made in the first half of 2009 are no longer applicable, the effect on the Group's gross profit margin in the second half of the financial year will be favorable.
Quarter-on-quarter improvement in Q2 EBIT
EBIT remained well within positive territory despite the significant decline in unit sales and the associated excess capacities in production. In the first half of 2009, ElringKlinger achieved EBIT of EUR 22.6 (60.4) million - which includes positive foreign-currency effects of EUR 2.0 million. In the second quarter, negative foreign currency effects of EUR 1.1 million impacted adversely on EBIT. Despite this, the ElringKlinger Group recorded EBIT of EUR 15.8 (31.2) million in the second quarter, with the EBIT margin standing at 11.4 %. Within this context, the slight improvement in revenue as well as cost-streamlining measures and the contribution from the reversal of provisions for commodity-related hedging had a positive effect. In the same period, the EBIT margin adjusted for the positive effects of the reversal of provisions for commodity-related hedging was 7.2%. Compared with the first quarter (EUR 6.8 million), EBIT was EUR 9.0 million higher in Q2.
In the second quarter of 2009, higher interest costs associated with financing conducted in 2008 and restructuring of short-term financial liabilities into long-term loans were a key factor in driving the net finance result down by EUR 1.3 million to EUR -5.0 (-3.7) million. In the first half of 2009, the net finance result fell from EUR -5.1 million in the same period a year ago to EUR -5.3 million. This led to a 72.5% decline in earnings before taxes for the first six months of 2009, down to EUR 15.3 (55.6) million. In the second quarter of 2009, earnings before taxes contracted by 57.5% year on year to EUR 11.9 (28.0) million but improved markedly when compared with the first quarter of 2009.
Net income after minority interests remains solid
The tax rate rose slightly to 29.4% (28.4%) in the first half of 2009. In total, net income for the first half of 2009 stood at EUR 10.8 (39.8) million. In the second quarter of 2009 net income amounted to EUR 8.4 million, compared to EUR 20.1 million for the same period a year ago. After deducting minority interests, profit attributable to the owners of ElringKlinger AG was down 73.9% to EUR 10.0 (38.1) million in the first half of 2009. In the second quarter of 2009, the decline was less pronounced at 58.4%, taking profit attributable to the owners of ElringKlinger AG to 8.0 (19.2) million.
In the first half of 2009, basic and diluted earnings per share, calculated in accordance with IFRS, contracted from EUR 0.66 to EUR 0.17. In the second quarter of 2009, earnings per share stood at EUR 0.14 (0.33).
Slower decline in order intake
In the first half of 2009, order intake - which includes the entities of the former SEVEX Group and the proportionate consolidation of ElringKlinger Marusan Corporation, Japan - contracted by 22.8% to EUR 274.2 (355.1) million. In the second quarter of 2009, order intake was slightly more dynamic, with a decline of just 21.7% to EUR 148.8 (190.0) million, compared with the first quarter, when order intake had stood at EUR 125.4 million.
The automotive markets as a whole remain in a situation that leaves little scope for forward planning. Although the direction of future sales trends has become more discernible over the course of the second quarter of 2009, the volumes requested by customers as part of their production scheduling are subject to more pronounced fluctuations and delivery orders are often placed at much shorter notice than has usually been the case. While the European market should continue to improve at a moderate rate compared to the first half - working on the assumption that production of automobiles will decline by 15 to 20% in 2009 as a whole -, ElringKlinger cannot rule out that vehicle production in North America will fall below last year's level by a further 25 to 30% and will not recover significantly until 2010.
On the basis of market performance at the levels outlined above, together with modest economic stabilization in the second half of the year, the ElringKlinger Group no longer anticipates that revenue will contract to EUR 500 million in the annual period as a whole, a scenario that previously could not be discounted entirely by the Group given the dramatic market downturn in the first quarter of 2009. In the present climate, the ElringKlinger Group expects to generate consolidated sales of between EUR 540 and 580 million, depending on future market performance. The EBIT margin is targeted to be at 8 to 10%. However, due to the historically exceptional market circumstances, the issuance of forecasts concerning business performance remains difficult and is subject to risk. The current Group-wide program aimed at reducing costs will make a significant contribution in terms of partially offsetting the downturn in demand. ElringKlinger anticipates that it will achieve the targeted savings of EUR 10 million in 2009. Lower prices for raw materials compared to previous years are now beginning to have a positive impact on the cost situation.
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