Q1 2008 Continental AG Earnings Conference Call - Final.

OPERATOR: Good afternoon, ladies and gentlemen, and welcome to today's quarter one results conference call. For your information today's conference is being recorded. At this time I would like to turn the call over to your host today, Mr. Alan Hippe and Rolf Woller. Please go ahead.

ROLF WOLLER, HEAD OF IR, CONTINENTAL AG: It is Rolf Woller from Continental AG. Welcome to today's conference call on the occasion of our first-quarter results. I hope everybody has received their respective documents. If not, you will find it under our webpage, www.conti.de under the IR button. A webcast will be hosted simultaneously while we hold the presentation. With me is Dr. Hippe, our CFO, who will guide you through the presentation, as well as Gabriele Collatz from the IR team, and Hannes Boekhoff, he is Head of Press. After the presentation we will host a Q&A session, and with this short introduction, I would like to hand over to Dr. Alan Hippe.

ALAN HIPPE, CFO, CONTINENTAL AG: Thank you. Hello to everybody, and as you can easily hear, it will be a challenging conference call today, not because of our numbers because our numbers are quite solid, but my voice, as you can hear, it is a little bit fragile today. And I caught a cold, and whenever I get cold, normally I get an impact on my voice and here we are. So let's see how we can get through. So far it looks promising. Let's start.

When you look through the agenda highlights -- Group Financials, Divisional Financials; Financial Indebtedness; Restructuring at Powertrain -- and then at the outlook, and let's jump immediately into the highlights and that is page three.

Well, okay. Sales driven by consolidation impact coming from Siemens VDO, so an increase of 68%. EBITDA increased by 44% to EUR884 million. EBIT an increase of 4.6% to EUR456.7 million and an increase of 33% without PPA to EUR588.2 million and an 8.9% EBIT margin, and I think that's the major achievement that we can provide Q1 that we have reached that margin 8.9%. You know, our full-year guidance is going to 9.3%. We want to be better than 9.3%. We have achieved 8.9% in Q1, and you know Q1 is not our strongest quarter. So I think we're well on track, and I think that's already a very good thing.

Okay. The net income after-tax decrease of 38% not surprising. Certainly we have higher financing costs, and that shows certainly in the net income after-tax we will come to that. Earnings per share EUR1.03 without PPA of EUR1.62, and the CapEx increased by EUR192 million to EUR351.1 million. The CapEx ratio is at 5.3%. I think that is also a very encouraging signal. You know, in the year 2007, we have been at a ratio of 5.4%, even with Siemens VDO in the last month of December, we were at 5.4%. So including Siemens VDO, excluding Siemens VDO, we have been at 5.4% in 2007, in Q1 at 5.3%. So I think our guidance that we should be at around 6% in our CapEx is a very valid one and looks in my opinion even a little bit cautious.

The cash flow, operating cash flow down by roughly EUR50 million to EUR19.1 million. We will talk about the cash flow in more detail later on. So there is some necessity to explain some elements, and then the net debt, gross indebtedness dipped down by EUR790.1 million to EUR12.336 billion and net indebtedness up by EUR364.7 million to EUR11.2 billion gearing at 162.3%.

I think for those of you who are familiar with Continental, you all know that we had a seasonal effect, and that we ramp up working capital, especially in Q1 and Q2 due to our preparation for the tire business summer season, but also the beginning of the rate of production.

Okay. With that, we go to the next page; that is page four, the operating highlights Q1 2008. I think a very important point for us is that March was a very, very weak month for us, and I will show you some data later. But we had definitely the Easter effect, especially in Europe, but also in the US it showed, and that means we had in March three working days less compared to 2007, and furthermore, certainly during the Easter holiday, people also go on vacation. And that has hit our entire business intimately. But I will give you some further explanations later on.

The first April data already reconfirmed the trend of January and February. That means we have [cashed up] in April already some of the business. We have lost holidays which we have not done in March. We could catch up again in April.

The discontinuation of production at the interior plant, that is now decided on April 21, 2008, which means we will book a restructuring charge in Q2 for that location. The point is you'll see that we have no special effects in for Siemens VDO in the first quarter, and so this will be the first restructuring costs that we book in.

Okay, unit sales development on the divisional level. Well, interior the unit sales growth in embedded telematics, instrument clusters, digital tachographs. We have slow unit sales volume in Bluetooth and Body Control units.

Overall I can say interior runs very well, and the sales development is quite high. You'll see later on the margin in interior, which is very satisfying.

Chassis & Safety, you see up by 11% despite weak NAFTA production volume, and certainly also the weak March production we have seen in Europe. So I think quite satisfying. Boosted up by 9% here in a very weak market. I think under the circumstance we cannot emphasize any better any more. And ABS and caliber unit sales gross down by 4% and 3%, which is also not a bad achievement given the market circumstances.

You'll see Chassis & Safety also is doing very well, especially in sales, but well when you look at the margin also very satisfying.

Okay. And then Powertrain. We will have some special charges in Powertrain later on to explain the situation, but also here I can say that, in fact, in sales we're doing fine. When we look at the situation, certainly we're suffering a little bit in that, but when we look at Europe, we can really compensate. So really the Powertrain issue is not a sales issue.

Growth in PLT was up by 6%. We have strong market share gains in the Americas, which is a fine thing, and certainly when I talk about market share gains in the Americas, I talk about replacement.

In OE we have taken another dip in the NAFTA region, but that meant also that our EBIT went up. So overall in our NAFTA tire or let's say PLT Americas operation, we have in the first quarter achieved much better results than last year.

Good synergy, volumes down by 5%, (inaudible), CVT, very challenging situation. We will talk about that later on.

And then ContiTech, what can I say about ContiTech? Still going strong. Organic growth at 2.4% muted by the Easter effect, and the sales of the industrial business grew stronger than automotive sales. Still doing very, very well.

Okay, going to the next page, page five, and on page five we give you some explanation about what has happened with this March effect. And you see for PLT and for CVT, for PLT January and February, we have grown in sales by 10.5%, and in CVT we have grown by 6.6%. In ContiTech January and February we have grown by 7.3%. And then look at the quarterly sales increases for PLT 3.6, CVT negative minus 1.2% and ContiTech 2.4%. I think that really emphasizes that we really had a very, very weak March, and that we had really some outstanding impacts, which we are not going to see anymore in April, and really we could catch up some of these businesses already in April.

Okay. With that, I would like to go to the group financials. Yes, when we go to page seven, okay I think I talked about the sales already. I talked about the EBITDA, the EBITDA margin at 13.3% certainly, and that is something we have to work on. And it is not like that it is all on Siemens VDO. You will also see we have lost also some margin on the EBITDA level on the tire side. So that is definitely something we have to work on. I think what we're really proud of is the EBITDA margin with our PPA at April of 9%, which gives us really a good start into the year and makes us very confident that we can fulfill our guidance.

Okay. With that, I would like to go to the cash flow. Definitely the cash flow needs some explanation.

When you look, the cash flow from operating activities went down quarter on quarter from EUR66.6 million to EUR19.1 million. The cash flow use for investing activities from minus 186 to minus 335. The free cash flow deteriorated from a minus 119.8 Q1 2007 to a minus EUR316.7 million Q1 2008. And how can we explain that?

I think that the most simple explanation would be to say, okay, we have higher CapEx of EUR192 million. But you know well it is not Continental when we would be satisfied with such an explanation. And when you go through the cash flow statement, then you will see easily two major impacts.

One impact is the working capital. We have lost EUR172.2 million alone on working capital, and you see that inventory, in fact, is not the issue. The inventory level is not so bad. I think what we are very happy with is payables and receivables. And I think really here we can do better, and this is really something that we can really solve on a short-term basis. So I think we can expect here some improvement until the end of the year.

And the other point is when you look under other changes and other changes is, in fact, the accruals that we are ramping …