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ElringKlinger records revenue growth of 27% in Q2 2011 - Operating result contracts slightly related to acquisitions
Although global car production contracted slightly in the second quarter compared to the first three months of 2011, the ElringKlinger Group managed to generate further quarter-on-quarter growth in revenue from Original Equipment sales to vehicle manufacturers. Compared to the previous year, second-quarter sales generated within the Original Equipment segment rose by 19.8%, adjusted for acquisitions, which was well in excess of the growth rate in global vehicle production. The German market, as well as Asia and South America, generated above-average growth.
First-time contribution by newly acquired Hug Group
Hug Group, a Swiss exhaust treatment specialist and manufacturer of diesel particulate filters in which ElringKlinger acquired a majority interest, was included fully in the scope of consolidation of the ElringKlinger Group for the first time effective from May 1, 2011. Hug contributed EUR 6.7 million to Group sales in the second quarter of 2011. Owing to the purchase price allocation of EUR 0.3 million and negative foreign exchange effects, its contribution to earnings before taxes was minus EUR 0.8 million.
The flat gaskets business acquired from the Freudenberg Group contributed EUR 14.0 million to sales revenue in the second quarter of 2011 and minus EUR 0.6 million to earnings before taxes. This figure includes the purchase price allocation of EUR 0.1 million as well as EUR 0.4 million in non-recurring staff costs associated with the partial relocation of gasket production in Germany to a French plant in close proximity to ElringKlinger customers. ElringKlinger is currently implementing extensive integration measures at the recently acquired businesses, with the express purpose of bringing efficiency levels in line with those achieved by the ElringKlinger Group. The Hug product portfolio in particular, which includes diesel particulate filters and exhaust abatement systems, already shows considerable cross-selling potential to be leveraged via existing distribution channels operated by the ElringKlinger Group.
Operating result recedes slightly in second quarter
The operating result improved by 14.6% in the first six months 2011, reaching EUR 66.0 (57.6) million. The Group's operating result in the second quarter 2011 declined by 2.9% compared to the buoyant second quarter of 2010, primarily as a result of the lower margins currently generated by the newly acquired entities and came in at EUR 33.3 (34.3) mn. The significantly lower gross profit margins currently achieved by the new acquisitions exerted downward pressure on the Group's gross profit margin, equivalent to approx. 1.5 percentage points. Additionally, higher material costs, substantial start-up costs attributable to the area of E-Mobility and the introduction of extra production shifts required in many areas of operation led to an increase in costs during the second quarter of 2011 in particular. In parallel, the lower proportion of revenue generated through aftermarket sales had a dampening effect. Compared with the first quarter of 2011 (27.3%), however, the Group's gross profit margin nevertheless rose to 27.9% in the second quarter. Selling expenses as well as general and administrative expenses increased at a faster rate than sales revenue in the second quarter, primarily as a result of the acquisitions. Committed to expanding the area of E-Mobility, the ElringKlinger Group increased the overall costs associated with research and development by 16.2% to EUR 12.2 (10.5) million. In the second quarter of 2011, ElringKlinger received government grants of EUR 0.6 (1.4) million for ongoing development projects within this area.
The operating margin was 13.1% (17.0%). Adjusted for dilutive effect on earnings associated with the acquisition of Freudenberg and Hug operations, the operating margin of ElringKlinger's core business was 14.6% in the second quarter of 2011.
Earnings before interest and taxes (EBIT), which includes foreign exchange gains and losses, rose by 14.1% to EUR 61.5 (53.9) million in the first half of 2011, having accounted for negative foreign exchange effects of EUR 4.5 million. Second-quarter EBIT was adversely affected by foreign exchange losses of EUR 3.7 million and thus stood at EUR 29.6 (31.6) million. On this basis, the EBIT margin for the second quarter of 2011 stood at 11.6%; adjusted for the dilutive effects of the newly consolidated acquisitions, the EBIT margin was 13.1%.
Operating cash slightly negative in the second quarter
Influenced mainly by non-recurring factors, net cash from operating activities fell to minus EUR 3.5 (29.4) million in the second quarter. Among the key contributors to the year-on-year decline in operating cash flow were inventories, receivables and other assets, which rose significantly to EUR 48.3 (18.2) million. Alongside substantial growth in sales revenue, tools billed to customers, which in contrast to the year before are now no longer capitalized, added EUR 5.7 million to inventories in the period under review. With respect to the strong order intake level and with the express purpose of exploiting the slight fall in commodity prices towards the end of the second quarter stock levels were expanded to a larger extent than in the first quarter. In addition EUR 24.4 million was attributable to the recognition of a claim against insurers for warranties that was after payments of EUR 7.5 mn set off by a corresponding increase in liabilities amounting to EUR 16.9 mn within net cash from operating activities. In total there was no earnings effect. As regards the upcoming quarters, ElringKlinger Group expects to return to operating cash flow that is well within positive territory.
Net finance costs totaled EUR 10.8 (10.1) million in the first half of 2011. Earnings before taxes rose by 16.0% in the same period to EUR 55.2 (47.6) million. The second quarter of 2011 was impacted in particular by foreign exchange losses, as a result of which net finance costs rose to 7.0 (5.6) million. As a result, earnings before taxes contracted by 8.0% to EUR 26.3 (28.6) million in the second quarter.
At 26.1% (24.9%), the income tax rate in the first half of 2011 was higher than in the same period a year ago. Against this backdrop, net income after minority interests rose by 15.5% to EUR 39.5 (34.2) million in the first half of 2011. After taxes and minority interests of EUR 0.6 (1.0) million, net income for the second quarter of 2011 totaled EUR 18.8 (20.6) million. Earnings per share for the first six months of 2011 stood at EUR 0.62 (0.59), while earnings per share for the second quarter amounted to EUR 0.30 (0.36).
Dynamic growth in order intake - Revenue forecast upgraded for 2011
The Group saw a further expansion in order intake during the period under review. In the second quarter of 2011, incoming orders again exceeded sales revenue by a significant margin, rising by 22.1% to EUR 298.1 (244.1) million. Order backlog (excluding Hug) reached EUR 412.7 (303.1) million at the end of the second quarter, up 36.2% on the figure reported for the same period a year ago.
Based on the record levels achieved in order intake, the continued stability in terms of economic performance and the rate of expansion predicted within the automotive markets, the ElringKlinger Group currently expects to generate organic revenue growth of 12 to 14% (previously 5 to 7%) in 2011. This will be complemented by a revenue contribution of around EUR 50 million from the consolidation of the metal flat gaskets business acquired from the Freudenberg Group as well as a revenue contribution of approx. EUR 30 million from the Swiss-based Hug Group. As a result, Group sales revenue for fiscal 2011 is expected to reach EUR 970 to 985 million.
The Group's operating margin will be diluted temporarily in 2011. This is due primarily to the operating margins generated by the recent acquisitions, which are as yet considerably lower than the Group average, as well as the purchase price allocation. Despite the temporary dilutive effects attributable to the acquisitions, start-up costs for the expanding E-Mobility business and higher commodity prices, Group EBIT is expected to rise by 15 to 25% (previously 15 to 25%).
The full financial report of ElringKlinger AG for the second quarter and first half of 2011 can be accessed at www.elringklinger.com
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