Full Year 2006 Conergy AG Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

CHRISTOPH MARX, IR, CONERGY AG: I'll start the analyst conference, to which I welcome you very much. With me here is, on my left side, Heiko Piossek, CFO of Conergy, and, beside him, is Nikolaus Krane, COO on the management board. We have now a presentation, which will probably take about 30 minutes, which will be followed by a Q&A session, to which I'll welcome you as well.

And now, please, Heiko.

HEIKO PIOSSEK, CFO, CONERGY AG: Thank you, Christoph, for the introduction. Ladies and gentlemen, it gives me great pleasure to present the performance of Conergy in 2006 to you and the outlook for the current year. As you will see, we have prepared a number of slides which I will guide you through. Of course, we will be very happy to answer your questions following the presentation.

2006 was an amazing year for the Conergy Group. We grew again at a very past pace in terms of sales, internationalization and technologies, as well as employees. The revenues of the Group increased by 42% to EUR752 million. And our net income reached EUR30 million. The board of directors and the supervisory board proposed to pay a dividend in line with previous years, a dividend of EUR0.10 per share. With continuously rising sales in non-PV business and in sales outside Germany, Conergy is well on its way to successfully implementing our 50/50/08 strategy. In 2006, we put much effort in preparing grounds for further growth, both in terms of organizational developments and exploring and entering into new technologies and markets. All in all, we are really looking forward to an extraordinarily successful year for 2007. We are confident that we will be able to boost our sales to EUR1.25 billion and to at least double our annual net profits.

Let me turn to last year's performance in some more detail. As you can see, the Group's sales have grown impressively again. As in previous years, we have again outperformed the market in terms of sales. Our compound annual growth rate in recent years was 58%. All our businesses made a considerable contribution to the significantly higher growth rate. As you know, the average price level for PV modules has been declining since mid of 2006 due to an oversupply in the market. This led to increased competition, particularly in the B2B sector. To keep our strong growth path, we shifted capacity from our wholesale unit, AET, to the more profitable businesses and large projects that we have bundled in Epuron. Some of you might recall this former brand named voltwerk. Epuron is clearly currently the shooting star within the group, as it was Conergy and AG last year, and will be SunTechnics in the coming years. This shows also that our business model with the customer-oriented brands is a very flexible model for all terms of the cyclic market.

We are pleased to report that sales in markets outside Germany have grown disproportionately by 268% to EUR278 million. They already account for 37% of total sales. This development was particularly driven by our strong position in the major growth markets. Our non-PV business has also grown faster than photovoltaics and has contributed EUR197 million, equaling 26% of total sales, a higher ratio than we had initially planned. Particularly wind power and bioenergy have contributed to this development.

Moving on to the gross margin, you can see that we have delivered a significant improvement again. Compared to 2005, we can report an increase of roughly 20%, up to 19.4%. This is a result of a growing international business, a stronger business with bioenergy and solar thermal systems, and additional value resulting from the increase in in-house production.

Our operating income of EUR23 million has offset extraordinary costs of EUR20.9 million, arising from internationalization efforts. That is startup costs in new markets and from new technologies, including the production side in Frankfurt Oder. The operating income was mainly derived from the sale of land and wind power and the wind power joint venture in Turkey that we have to account under this line according to international accounting standards. The other items refer mainly to income gained from foreign currencies.

As we said before, we have invested significant time and resources in 2006 to position ourselves for future growth. We have thus significantly increased our headcount to 1,573 in total, especially in those markets where we expect the strongest growth. These are, first of all, Spain; the new markets with new regulations, Italy, France and Greece and other Europe; North America; and Asia Pacific.

Conergy's strong growth across the whole value chain was endorsed by investments in all our businesses. However, investments in the solar module production account for nearly half of the total capital spending of EUR139 million. Intangible assets mainly comprise goodwill for companies that have been acquired recently.

The increase in working capital reflects two main factors. First, towards the end of 2006, we sold partially on payment terms to keep our stock levels low in the phase of change to decreasing price levels in the market.

Secondly, the significant increase in large projects under construction. We currently have 43 large projects under construction, have also led to a buildup of receivables and partially inventories. Looking back, Conergy has shown a working capital level of less than 10% of total sales over years.

Due to the high growth in large scale projects on one side and the change of the market in the second half of 2006, we saw an increase of receivables. This was a special situation. Since January, customer payment terms are back to normal, and we have also completed our financing works on large scale projects for PV business. So this situation will in 2007 definitely come back to the normal level.

If we exclude the two special factors mentioned above, our working capital levels in 2006 do indeed meet the long term average. For the end of 2007, we do expect the working capital to account for EUR222 million, including the module production in Frankfurt Oder, which will be in line with our communicated target of less than 20% of sales.

Conergy plans a positive cash flow-- a positive cash flow until [2005] and expects positive free cash flow from operations for 2007 without Frankfurt Oder. We are taking the following steps to reduce the working capital. As we still experience a surplus in supply, we have been able to extend the supplier payment terms and conditions to an average of 60 days. That is to say supplier payment terms are now more in line with our customer terms. And large projects will be financed directly by a special purpose entity, so directly through the project. For example, we have concluded the financing arrangements in end of last year for the PV project in Spain. And we are currently working to turn this also for wind projects on a cash neutral basis.

That said, our net income has increased to EUR30.2 million. This has been influenced by delayed deliveries accounting for sales of EUR53 million end of last year-- we reported this as soon as we knew it-- including expenses into new technologies and startup costs into new markets. We expect that the investments in new markets and the expansion of the product range in solar thermal, wind energy and bioenergy will result in a profit contribution in 2007.

As I have pointed out before, we saw a positive long term development of the gross margin. Conergy's EBIT margin will take up that track soon, though with a little delay. Epuron has come up for the biggest contribution to the EBIT. SunTechnics' margin has been influenced both by expenses on internationalization and the fact that large projects are compensated after the completion of the installation. Thus, we expect a margin increase in 2007. Conergy's own contribution to the margin stems from B2B business and is at the same time restrained by technology costs and costs to keep our shared services.

Let me now hand over to Niko Krane, who will say a few words on our corporate strategy, give you an update and also an outlook for 2007. Thank you.

NIKOLAUS KRANE, COO, CONERGY AG: Yes. I think we have one lady, so lady and gentlemen, I'm happy to give you a short insight into our structure, strategy and what is happening in 2007. I'm here-- I'm replacing Hans-Martin Ruter, who is on travels in Asia. At the end, I will give you a nice reason why this makes sense to travel to Asia, since this is one of the most interesting markets for our business.

Most of you will already know our [cube] strategy that we have been pursuing since the very beginning. I'm with the Company since eight years, and this strategy has never changed, more or less. So, the overall guideline is all the same. Of course, there's a lot of adaption underneath it.

It is key to our thinking in the development of our organization to meet our customers' need at any time as best as we can. What is the cube strategy all about? It comprises three dimensions - specialized brands for our different customer groups, internationalization and technology enlargement, as you have seen over the course of the last years.

Our organization is focused on three client groups. SunTechnics is the global market leader in B2C and, therefore, turnkey business with customers who pay for a complete system. Epuron is considered the world market leader in structured financing, where we finance large scale projects and derive from that financial products for our customers. Conergy carries out our B2B services. These brands have provided technological support through our global technology teams that are constantly on the move to develop the most demanded renewable energy technologies. The decision to make or buy new technologies is made by these teams, which look for unique selling propositions and a return on investment in a given period of time.

As you can see from the following three slides, we have successfully entered a broad range of markets outside of Germany with huge …