Results at Eberspächer GmbH & Co KG, hit a new low last year, but the worst may be over for the German exhaust and auxiliary heating systems supplier.

Eberspächer reported a loss of €12.74 million in 2003. But there are signs of improvement in the second half of this year – four years after its expensive decision to go global.

Sales of diesel particulate filters and auxiliary heaters are taking off, as is revenue in North America.

Last year’s results, though, were a major disappointment.

“It is the first time that I have had to report a loss after 30 years in the business,” says CEO Guenter Baumann.

Eberspächer is the leading supplier of exhaust systems to the German premium makes, the second largest exhausts supplier in Europe after ArvinMeritor and number four worldwide.

The loss came after a poor year in 2002 when the privately owned group reported operating profits of just €14.3 million on sales of €1.4 billion.

Sales fell 5.5% in 2003 to €1.34 billion. Gross cash flow fell 40% to €25.9 million.

Martin Peters, finance director and with Baumann one of the two representatives of the holding families on the management board, says the families have taken no dividend in recent years and do not expect to do so next year either.

Besides weak automotive demand, Baumann attributed the market weakness to:

One-off costs due to Eberspächer’s withdrawal from the French aftermarket exhaust business;

A further round of rationalisation at Eberspächer’s persistently troubled building products division;

The costs of the company’s investment in North America.

Improvement expected in 2004

But Eberspächer’s executives say they have hit bottom. The building products division has shrunk so much that it can’t be much more of a burden. The operation has shrivelled to just 4% of Eberspächer’s sales in recent years.

The replacement market for exhausts in Europe will continue to be under pressure from falling volumes as a result of higher quality original equipment parts.

But the closure of the French aftermarket business leaves Eberspächer with just €30 million of aftermarket business – a much lower share than most competitors.

And all of it is in Germany where there is demand for products made on its OE assembly lines, say Eberspächer executives.

Eberspächer’s investment levels are expected to fall in the next few years as the company completes preparations for an ambitious expansion programme. Already investment has fallen from a peak of €68 million in 2002, to €52 million in 2003, though investment was still substantially higher than write-downs of €38 million.

New programmes and products

Eberspächer expects an upturn to start as early as the second half of this year. The supplier is looking for sales growth of 8% and a return to profitability in 2004. It expects a minimum growth rate of 10% a year between 2005 and 2007.

Sales were up 3% in the first quarter of 2004 and order intakes rose 17%.

The company started delivery of new diesel particulate filters to BMW and Renault in the first half of the year, and has won its first contract with PSA Peugeot-Citroën for particulate filters.

It will supply two new Land Rover programmes, and the new Renault small car.

Eberspächer sees strong growth prospects in the newer electrically-powered additional heater businesses, and in the United States.

The company’s electric add heater joint venture Catem increased production from 1.45 million units in 2002 to two million units in 2003, and expects similar growth in 2004.

Demand is driven by poor cabin heating in efficient diesels, which produce less than half of the heat of diesels from the 1970s while customer comfort expectations have risen.

Eberspächer expects growth opportunities for its add heaters in Korea and with Denso in Japan.

In Europe it has developed new concepts such as the “Airscarf” heaters for the Mercedes-Benz SLK and individualized heating for each seat.

Investment in North America

In North America, the company reckons that it has sunk €90 million in advanced engineering work and investment in new plants, and a new headquarters and development centre in Novi near Detroit.

Under German accounting standards, these costs have to be charged to the profit and loss account in the year in which they are incurred, says Peters. But the company’s results do not yet show any payback.

The prospects for growth are good says the head of the exhausts division, Guenther Ullrich.

“The market reaction in the USA has been overwhelmingly positive,” he says.

US customers like the new development approaches that Eberspächer employs, using more virtual testing and fewer testbeds, he says.

Eberspächer started production of exhaust systems for the new Chrysler 300 series and Dodge Magnum in January. General Motors is also a customer.

Eberspächer North America will supply the new Mercedes-Benz M-class in Alabama and the new Mercedes-Benz Grand Sports Tourer from 2005.

By 2006, Ebersapaecher expects sales of $150 million in North America (excluding catalysers which are paid for by the carmakers).

But Eberspächer is wary of investing too heavily in China. It has followed core customers BMW and Audi to the market, but executives say that the outlook is uncertain, and with exhausts systems difficult to transport over long distances exports are not realistic if the boom in China is punctured.