Press information
Speech Dr. Bopst at annual press conference:
Osram defies difficult economic environment
Dr. Wolf-Dieter Bopst, President Osram GmbH
Annual Report Press Conference in Munich on November 26, 2002
- The spoken word is binding -
Ladies and gentlemen, I have headed Osram for nearly twelve years now and I have experienced both good and less pleasing business cycles. But fiscal year 2002 (from 10.1.2001 to 09.30.2002) was the most difficult year Osram has ever faced in that time. No one expected the global economy to suffer this much and for so long, particularly in North and South America. Nevertheless, the company made notable achievements, even against this backdrop, and once again proved its strength: adjusted for currency and structural effects, our sales dropped by only 2 percent to EUR4.4 billion, and earnings remained at a high level, totaling EUR365 million. After all, the EBIT margin is 8.4 percent, as opposed to the comparable figure of 9.0 percent for the previous year.
That was quite a feat in view of the difficult environment. Above all, we again demonstrated our rapid response capabilities by consistently introducing the necessary adaptations to costs - including those in the personnel sector - even before the crisis set in. Moreover, it is apparent that we are heading in the right direction with our strategic focus on innovation. Innovative products generate volume growth and make an above-average contribution to earnings, despite economic downswings, and this is true even in difficult times.
On the whole, we have successfully defended our strong market position worldwide. Osram is the second largest lamp manufacturer in the world after Philips. If we add opto-electronic light sources to lamps, the two companies are neck-and-neck.
Good earnings level in operative business
Earnings before interest and taxes (EBIT) totaled EUR365 million in the fiscal year just ended. The EBIT margin theoretically dropped from 10.2 to 8.4 percent, but it was 9.0 percent the year before, if extraordinary effects totaling EUR54 million are excluded. Consequently, in comparable terms, the adjusted EBIT margin for fiscal year 2002 is just 0.6 percentage points lower than in the previous year, despite the weak economy, despite the fiercer global competition, despite high development input expenses and high start-up costs for new products, especially in the opto-semiconductor segment and despite restructuring costs in the USA and Germany.
Constant cost management and benchmarking have been an integral part of our corporate culture for many years, and they ensure our operability, particularly in difficult times. Weak market development made it necessary in all regions, and particularly in the USA, to adjust the worldwide staff level by 5 percent to 35,260. In order to ensure that we remain competitive in the global market environment, we also expanded our manufacturing presence in low-wage countries. And, as in previous years, innovative products made an above-average contribution to earnings. Consistent asset management made it possible to reduce business assets by cutting stock levels and improving payment management. Good progress has been made in this area in North America, in particular. Despite the flagging economy, Osram was again able to achieve a positive cash balance, attaining a figure of EUR284 million.
Volume growth for innovative products
In fiscal year 2002, Group sales mathematically dropped 3.5 percent to EUR4.4 billion. Three of these percentage points are the result of negative currency effects primarily attributable to the US dollar. The expansion of the scope of consolidation to include companies in the Czech Republic, China, Taiwan and Australia had a positive influence of one percentage point. After adjusting for these currency and structural effects, sales were thus just 2 percent lower than in the previous year.
When the figures are adjusted for currency effects and compared to the respective quarters of the previous year, a steady improving tendency can be seen in the course of the fiscal year. This applies to all regions. For example, we recorded declining sales in the first quarter (down 7 percent on the previous year), while sales in the third quarter matched the level of the previous year and even gained 4 percent in the fourth quarter.
The 2 percent decline in sales includes a 3 percent fall in prices (2 percent in the previous year), so that there was still a volume growth of 1 percent despite the economic influences in the fiscal year just ended. This can be attributed to the positive further development of our innovative products, which achieved growth of around 10 percent worldwide.
Stability in Europe
Although all of Europe is suffering from this phase of economic weakness, Osram generated sales of some EUR1.5 billion and thus managed to maintain the previous year’s level. Our innovations contributed to this, particularly in Europe, with a disproportionately high growth rate. The primary growth drivers were line-voltage halogen lamps, compact fluorescent lamps, metal halide lamps with ceramic burner, dimmable electronic control systems and headlamps.
Expansion in Eastern Europe
The double-digit sales increase (of 14 percent) in Eastern Europe was also pleasing. We not only stepped up our sales presence there, but also continued to expand production in Nové Zámky and Bruntál. I already reported to you a year ago that Eastern Europe is an important target region for us, and it will continue to be so, particularly in the future in view of the EU’s intention to admit important East European countries.
We have started transferring part of our filament and fine wire production from Germany and the USA to our Czech location in Bruntál. This mostly relates to primary products with a high wage component. The project is scheduled to be completed in fiscal year 2004. As has been known for some time now, we will then close the plant in Berlin-Wedding - our smaller site in Berlin after Spandau. The Schwabmünchen plant in Germany will continue to be responsible for the production of wire rod and phosphors.
The Osram plant in Nové Zámky, Slovakia, which specializes in signal and auxiliary lamps for the Automotive Lighting division, is taking over production tasks from German, French, Italian and American locations and will additionally be getting more involved in mechanical engineering (component production and design). The plant in Herbrechtingen, Germany, will concentrate more strongly on headlamps in the future.
Intensified competitive pressure in Germany
We still generate 11 percent of our worldwide business in Germany, the largest European lighting market. We did well in our domestic market, too, recording only a slight drop in sales of 2 percent to EUR489 million. The decline in sales was above all due to greater pressure from Asian competitors, as well as to the general economic situation.
As you can easily recognize, Germany is a relatively small market in terms of our global business today, but it continues to play a key role as a production location, particularly in relation to the manufacture of innovative products for the world market. In Germany, we have the technical knowledge and the research and development capacities we need to design products that are the first of their kind in the world, get them ready for the market and transfer them to production.
This is also why a major portion of our expenditures on plant and equipment - EUR133 million - was invested in Germany in the fiscal year just ended. That is equivalent to 44 percent of our worldwide investments in plant and equipment, which totaled EUR302 million. The largest single investment made in this context (amounting to EUR35 million) was in the new chip factory in Regensburg, which will start production next spring. We have thus laid the groundwork for further expansion of LED business, an area with promising prospects for the future. In addition, Osram focused on expanding the capacity of the following locations: Herbrechtingen for halogen headlamps, Eichstätt for high-voltage halogen lamps and Berlin-Spandau for discharge lamps.
On account of streamlining activities and transfers of production to low-wage locations, the workforce at our German production locations was reduced further - mainly through the expiration of limited-term contracts. Some 480 employees were affected, including 45 from ERG. As announced over a year ago, Elektro Röhren Gesellschaft (ERG) in Göttingen ceased business operations on September 30, 2002. Its core business was the production of niche articles for a small group of customers, so that it was no longer a match for the Asian competition. Conversely, we hired thirty employees at our new plant in Regensburg-Burgweinting, and we expect to create up to 100 more jobs at this location in the current fiscal year. We had 9,153 employees in Germany at the end of September 2002.
Our seven German plants are characterized by highly automated and extremely efficient production, as well as flexible working time models. Only in this way can we continue to produce competitively in Germany. However, we must constantly reexamine our manufacturing costs, and we will need a higher level of flexibility in adapting to customer demands than has hitherto been necessary. Only if we have this flexibility, will Germany continue to be a production center for our innovative, high-tech products in the future. However, we will primarily invest in low-wage countries when expanding the production of standard products. This will undoubtedly lead to a further reduction of our production staff in Germany in the medium term. The degree to which we can offset this reduction by creating new jobs in innovative product sectors depends on several factors, not least the future development of the economy.
Difficult conditions, especially in America
We generate a good 47 percent of our worldwide business in the NAFTA countries, the USA, Canada and Mexico, where the sales of EUR2.1 billion were 6 percent down on the previous year’s value. Expressed in dollars, the decline was just 4 percent. We thus made an improvement compared to last year, when the decline amounted to as much as 8 percent. However, the much-awaited economic turnabout did not materialize in the period under review, and no clear tendency is in sight for the coming months.
Sales suffered from the poor situation in the semiconductor and capital goods industries, which we traditionally supply with primary products. In the lamp market, however, we succeeded in strengthening our position as No. 2 in the USA. Although conditions remained difficult, our General Lighting division was able to achieve a sales increase in dollars. Business with innovative high-pressure discharge lamps developed positively. Automotive lighting profited from a successful product strategy and slightly higher vehicle production in the USA.
Our Osram Sylvania subsidiary continues to play a pioneering role in e-business. No fewer than 13,000 customers had already registered for the extranet by August 2002 (previous year: 6,000). We offer them around-the-clock access to our catalog with customer-specific prices, information on product availability, ordering options and a function for checking the status of an order. In the fiscal year just ended, Osram Sylvania generated more than half its sales via electronic media, and this figure has passed the one-third mark on the global scale. Our Internet activities focus on business-to-business transactions and the goals include cost reduction, internal process optimization and even better customer orientation.
A year ago, I already reported to you about our response to the unfavorable economic conditions in the USA, our largest single market. In the fiscal year just ended, we continued to vigorously implement our short-term adaptation measures, greatly cut back production and reduced staff at Osram Sylvania by 8 percent to 11,350. We are in the process of restructuring our Precision Materials and Components division: the further consolidation of glass manufacturing is an important aspect in this context and - as mentioned - we are transferring part of filament and fine wire production to the Czech Republic and power lead production to Mexico. In the Mexican city of Monterrey, we recently acquired factory grounds where we intend to set up this production. We also want to invest in the expansion of electronic control systems there. We expect these products - which are responsible for controlling discharge lamps - to generate double-digit sales growth in the NAFTA region in the medium term.
Mexico’s role in production in the NAFTA region will certainly become increasingly important over the next few years. With a view to improving returns, we will have to continue to critically observe our production sites in the USA. Changes in the exchange rate and wage levels mean that, like Germany, the USA is now a high-wage country. At the time of Osram Sylvania’s acquisition in 1993 the dollar was still equivalent to EUR0.83. In contrast, the mixed rate in the fiscal year just ended came to EUR1.08 to the dollar. This alone results in a shift in competitive strength of 30 percent.
Turbulence in South America
South American sales dropped by 41 percent to EUR104 million. The political and economic turbulence in Argentina resulted in a major decline. The Brazilian lamp market, too, has not yet recovered from the energy crisis. Stable conditions were only encountered in Chile, where business developed favorably.
Inconsistent development in the Asia-Pacific region
Development in the Asia-Pacific region was mixed. Sales rose slightly to EUR512 million. Adjusted for currency effects and newly consolidated companies in China and Taiwan, this is equivalent to an increase of 2 percent. We achieved favorable growth rates in Korea and China. In Japan, only sales of automotive lamps displayed pleasing growth, but we felt the effects of the enduring recession in standard products business. The difficult economic situation prevailing in Indonesia and India had a negative impact on our business there.
In the medium term, we will be expanding our sales involvement in the region, as well as our production presence in China, Indonesia, India and Malaysia, where we expect good growth opportunities in the medium term. We also consider China to be a key automotive market for the future; current studies already put the country in fourth place worldwide by 2006. Consequently, we will primarily be targeting the further expansion of automotive lamp production in China.
Osram - a high-tech company in the lighting industry
Let us now turn to our main topic for the future: innovation. We know that we can only safeguard and expand our leading world market position with a consistent strategy of innovation. Some 40 percent of our sales are today generated by products that are less than five years old. Innovations generate the necessary growth and produce above-average earnings, despite the high start-up costs. In the fiscal year just ended, we applied for some 220 new patents worldwide, 5 percent more than in the previous year. At EUR219 million, our expenditures on research and development again made up roughly 5 percent of sales.
At present, we generate almost 30 percent of our sales with electronic control systems, electronically operated lamps and opto-semiconductors. We intend to increase this electronics share to about 50 percent in the medium term. Conversely, conventional incandescent lamps accounted for only 11 percent of sales in the fiscal year just ended, and this figure will continue to drop. Osram has thus further developed from a classical manufacturer of incandescent lamps into a high-tech company in the lighting industry - across all divisions. This development is illustrated particularly clearly by the Automotive Lighting and Opto-Semiconductors divisions.
Automotive Lighting shifts into high gear
Despite the difficult situation in some areas of the automotive market, Automotive Lighting boosted sales by 5 percent and was thus our best performer in fiscal year 2002. With roughly EUR740 million in division sales and a 17 percent share of total sales, this division is our second strongest business segment after General Lighting. And we are confident of its favorable future development.
As the No. 1 in automotive lamps, we have an outstanding position on the market. We manufacture some 4 million automotive lamps a day around the world. Our plants operated at full capacity in the fiscal year just ended and we invested in expanding this capacity. The question is, what role does innovation play in this commercial success? I would like to explain this on the basis of five points: Our current success with innovative headlamps (halogen and discharge lamps) is based on high initial investments made over the last 10 years. During this period, expenditures on plant and equipment, plus personnel costs for the development of the lamps and machines, totaled over EUR200 million.
Our high innovation rate - we put a new generation of lamps on the market every two to three years - keeps us ahead of the competition. For example, only few companies today have a mastery of the sophisticated clean-room manufacturing technology needed to make xenon headlamps of the top quality required for original automotive equipment. Incidentally, in the fiscal year just ended we were able to step up our sales of xenon headlamps by an impressive 36 percent. A key development topic at present is pollutant-free discharge lamps that contain no mercury - another area in which we are one of the leaders.
Our strength comes from many years of close cooperation with headlamp and automobile manufacturers. For automotive lighting is no longer a purely technical issue, but rather a feature used to differentiate car makes. Innovation becomes all the more important when light becomes an element of design.
We offer our customers system competence, because we sell not only lamps, but also the corresponding electronic control systems. For example, our xenon headlamps with integrated starter take up very little space - an important aspect for designers.
In addition, the Automotive Lighting division will be handling the sale of light-emitting diodes in the future. We expect attractive growth rates in this sector. In the long term, LEDs can be used for all lighting purposes in a motor vehicle - even in the headlamps. LEDs are already being used for the complete tail lighting of some cars. The tiny, luminous chips have the advantage that they can emit colored light, are very small and weigh next to nothing. Moreover, light-emitting diodes have a longer service life than the car. However, that does not mean that classical lamps will disappear from the market: depending on the requirements imposed by carmakers on the technical properties or design options, there will always be solutions based on incandescent lamps, discharge lamps and light-emitting diodes. There are currently about 200 light sources in a motor vehicle and the number is increasing all the time. Future technology - Semiconductor light Another division with great potential for the future is OSRAM Opto Semiconductors, which generated EUR309 million or roughly 7 percent of our total sales. Due to a sharp downturn on the market - in the first quarter, LED sales dropped by 33 percent from the figure for the same quarter of the previous year - sales in this segment were 7 percent below the level of the previous year within the period under review. However, the number of incoming orders had already improved significantly in the fourth quarter, which indicates positive market growth in the coming months. WSTS statistics for semiconductors predict that the average annual market growth for opto-semiconductors will be back up to about 14 percent as early as 2003. In any case, we aim to grow faster than the market in order to become the No. 1 in this business segment in the medium term.
Opto-semiconductors are of great strategic importance to us, because they are the business segment in which we expect the strongest medium-term growth, and because light-emitting diodes are conquering an increasing number of applications. The chips are a particular success in areas requiring miniaturization, a long service life and colored light. We expect the share of this business segment in our total sales to more than double in the medium term - i.e. in a period of up to 5 years.
The special role the opto-semiconductor business plays in the future of our company is also reflected by the expenditures we have made on plant and equipment, which amounted to EUR67 million in the fiscal year just ended. This money was spent on the chip factory in Regensburg I mentioned previously, and on our plant in Malaysia, where we have built a new production facility for organic light-emitting diode displays (OLED). The chemical term "organic" refers to the hydrocarbons that form the basis of the polymers used. The start of production was delayed because the technology is entirely new and highly sophisticated. In fact, not one of our competitors has been capable of delivering large unit volumes to date. We expect the first sales of OLEDs to be transacted within the current fiscal year.
The advantage of the luminescent plastic layers is that they allow the design of brilliant, extremely flat and bright displays with a broad viewing angle. Visual information can be communicated in a much more appealing manner. Unlike a liquid crystal display (LCD), no backlighting is required, meaning that OLED displays are more energy-efficient and can be of significantly flatter design. That is a big advantage in mobile phones and cars.
OLED technology can safely be referred to as a revolution. It marks the development of a new basic technology for a large market. For example, once a flexible plastic substrate becomes available instead of glass as the carrier material, a flat screen could easily be built into the backrest of a car seat without endangering the passengers. In the long term, I can also imagine applications in the general lighting sector, such as illuminated wallpaper - but that is still just a vision of the future.
The rapid growth rates to be expected for OLEDs in this market are more than just a vision. Market studies refer to a market volume of 2 to 3 billion dollars in five years. We expect OLED business to account for a quarter of the sales of Osram Opto-Semiconductors in the medium term.
Outlook Having taken a look into the future of light, let’s move on to the outlook for the current fiscal year.
Adjusted for currency effects, quarterly sales in the last three months of fiscal year 2002 climbed above the same quarter of the previous year for the first time, and we had a good September. We consider this to be a first sign of improvement, although the period is still much too short to infer that the tide is turning.
Consequently, although our plans for 2003 provide for slight sales growth in all divisions, they are based on the premise that there will be no fundamental improvement in the global economic conditions. Whatever happens, we will be tracking the economic environment very closely over the next few months and we will react quickly with additional cost adjustments if necessary. We have plans to further increase productivity at our plants and, as mentioned, we will implement the restructuring of our worldwide production locations consistently. On this basis, we stand by the commitment we made in the "Operation 2003" program.
This report contains statements about the future that are based on assumptions and estimates made by the Osram management. Although we assume that the expectations proceeding from these predictions are realistic, we cannot guarantee that they will ultimately prove to be correct. The assumptions may be associated with risks and uncertainties, which can cause the actual results to deviate substantially from the predictions. The factors that can cause such deviations include: changes in the economic and business environment, exchange and interest rate fluctuations, introduction of competitive products, lack of acceptance of new products or services, and changes in the business strategy. Osram has no plans to update the predictions, nor does it assume any obligation to do so.
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