Annual Press Conference on Fiscal 2008

Crisis in the industry results in a heavy loss at Behr

(PresseBox) ( Stuttgart, )
In the fiscal year 2008, the Behr Group, a leading specialist in automotive air conditioning and engine cooling systems, posted sales of 3.33 billion euros, which is 1.5 percent lower than the previous year's figure. In spite of the market downturn, the company was able to increase sales slightly in Europe and thus win additional market share. In North America, on the other hand, sales dropped by 11.9 percent or, when adjusted for currency effects, 6 percent. The market trend in India, in particular, caused sales in Asia to decline by 5.9 percent. In China, Behr was able to expand its position.

In 2008, the market downturn led to a significant slump in earnings at Behr. 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 showed a loss of 70 million euros. This was primarily attributable to the ongoing very difficult market situation in the USA, the market downturn in Europe in the fourth quarter of 2008, substantial burdens caused by problems at suppliers whom Behr had to support financially, and considerable additional costs incurred as a result of a labor dispute in connection with the partial closure of Behr's Barcelona plant in Spain.

In 2008, Behr 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 customers in the first half of the year. Most of this capital, i.e. 137 million euros, was invested in Europe.

R&D expenditure rose by 5.4 percent to 254 million euros. Again, expenditure mainly occurred in the first three quarters of the year.

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.

Situation in Germany

2008 proved to be a turbulent year for Behr in Germany. Following a good start in the first six months, the market downturn in the car and truck market hit Behr particularly hard in Germany in the last quarter. Since the fall of 2008, Behr Germany, too, has thus had to focus on adjusting to the market slump in Europe by shedding temporary and leased staff, reducing working time accounts, and implementing working hour and remuneration cuts in the German plants.

In spite of these rapidly implemented measures, Behr Germany was only able to achieve break-even results in 2008.

On the reporting date, December 31, 2008, employee numbers stood at 7,000, which is around 4 percent lower year-on-year.

Investments in Germany amounted in 2008 to 65 million euros, which corresponds to around 35 percent of the total investment volume. As in previous years, investment activities focused on establishing manufacturing facilities for new products

The way out of 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 difficult market situation has forced the US company to implement significant cuts. 400 jobs were shed in the USA which corresponds to 16 percent of the workforce. This was partly a result of concentrating assembly of HVAC modules in Dayton which involved the partial closure of the company's location in Fort Worth. To economize on costs, Behr America also had to relocate production of condensers and evaporators to Mexico. Furthermore, over the next two years a third of the development work currently performed by Behr America will be taken over by Behr India.

Since last fall Behr has 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. Between the end of August and the end of February, 1,600 jobs were shed in Europe using these measures.

By consistently optimizing ordering cycles and internal commodity flows, in 2008 Behr was 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 its excellent delivery reliability.

In 2009, Behr will substantially reduce investments and focus on the essentials by making optimum use of its global capacities.

At the beginning of 2008, Behr launched its Group-wide profit-enhancing initiative Project 2010. The project encompasses production, development, administration and sales, and thus all stages of the value-added chain. The initiative was exceptionally successful right from the start and has even overfulfilled the targets set for 2008.

In the industrial business sector, Behr 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.

Markus Flik, Behr Group CEO, had this to say about the situation: "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."

Structural problems of the industry

Markus Flik emphasized that the global market downturn is being 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. 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." The company is hoping to be able to commence corresponding negotiations with the works council and the German metalworkers' union, IG Metall, very shortly.

Behr is flanking these measures with enhancements to its organizational structure in order to leverage efficiency in development and administration. These actions will be implemented shortly.

Success in the growth markets

Behr is continuing to invest cautiously in the reinforcement of its activities in Mexico, India and China.

The expansion of facilities at the plant in Mexico which opened at the end of 2006 is making good headway. 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.

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 that is slated to commence production at the end of 2009.

Strong technology position

With its engine cooling technology, Behr contributes towards reducing fuel consumption and emissions. In the air conditioning sector, the focus is on enhancing comfort and boosting efficiency. Markus Flik presented some of the company's current innovations:

Indirect charge air cooling

In 2008, BMW's turbo V8 gasoline engine, featuring Behr's indirect charge air cooling system, went into series production. At given power levels the technology permits 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 which obviates the need for exhaust gas aftertreatment using urea.
Both indirect charge air coolers are a new Behr innovation.

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 technology makes special demands on the cooling system. Behr has developed the cooling technology for this application in collaboration with Daimler.

Air conditioning comfort

In 2008, Behr's comfort vent went into series production with 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 flow, spot flow, or a combination of both.
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, acoustics and cooling power were also markedly improved.
The new E-Class, too, features examples of Behr's air conditioning know-how. Comfort elements that had previously been reserved for the S-Class can now also be experienced in the E-Class. The auto magazine "Auto, Motor und Sport" gave this A/C system a very positive review.

Systems competence

In the new Porsche Panamera, Behr can demonstrate the entire spectrum of the company's 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, a 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, a joint venture with Hella and Plastic Omnium

Outlook

For 2009, it is anticipated that car production in Europe will drop by more than 20 percent and an even sharper decline of 50 percent is expected 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.

In the words of Markus Flik: "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."
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