Press information

Speech of Martin Goetzeler

Press Briefing on Annual Results November 24, 2005

Martin Goetzeler

Source: OSRAM

Speech delivered by Martin Goetzeler, CEO of Osram GmbH
- The spoken word is binding -
 
Next year the Osram brand will be celebrating its centennial. The trademark was registered with the Imperial Patent Office on April 17, 1906. The incandescent bulb in our historical logo is now not only a universal symbol of light, but also of bright ideas - and of our passion for intelligent lighting. The logo dates back to 1919, by the way, the year that Osram was founded. It has been modified from time to time and in 2001 was even turned around. The "good old" light bulb form is still available today but, in addition, also for energy-saving lamps and bright halogen lighting applications.
 
Ladies and Gentlemen: I’d like to extend a warm welcome to our Annual Report Press Conference 2005!
 
For those of you who don’t know me yet, allow me to briefly introduce myself.
 
After 16 years in various positions within the Siemens Group, my path led me to Osram. I already knew the company from my work in the Siemens’ financial department. I had always been very impressed by the way Dr. Bopst managed the company. So in 1999 I was delighted to accept an offer to transfer to Osram. I worked for three and a half years in Italy and the UK, another three years in the U.S. as CFO of our subsidiary Osram Sylvania. Then in May I returned to my old hometown, Munich, Germany.

Over the past six months I’ve been "on the road" in Germany and on just about every continent meeting our staff and customers. Now I’ve also seen almost all of our 49 factories worldwide. Time and again, I was impressed to witness the fascination of our research and development, as well as our production of high-tech lamps, electronic control systems and optical-semiconductors. And I’m proud of how committed our over 38,000 staff are to finding new lighting solutions for our customers. With a view to creating better light for more quality of life.

Now let’s have a look at the facts: the business figures for 2005. To begin with the bottom line: it was a successful business year. We have further increased sales and profits, carried out key restructuring measures and invested in future products.

Despite negative currency effects of 2 percent, attributable primarily to the U.S. dollar, we boosted global sales slightly from the previous year’s level by a nominal amount of 1 percent to €4.3 billion. After adjusted currency effects OSRAM’s growth came to 3 percent, volume growth to 5 percent. We achieved good volume growth in automotive lighting - for example in the U.S. after-market - in electronic control systems, primary products and particularly in high-performance LEDs.

Our LED modules also saw good volume growth. An LED module is a component made up of several individual LEDs and used for example for colored lighting effects in architectural lighting.

Now that we’ve touched on the sales and volume trends, let’s turn to the earnings situation. Our Group profit rose from €445 in the previous year to €465 million, corresponding to a Group profit margin of 10.8 percent. The profit margin for the previous year was 10.5 percent. We achieved this improvement
- in spite of aggressive competition and - a substantial increase in the cost of energy and metals - ongoing restructuring measures - and also in spite of unremitting high levels of development input expenses and startup costs for new products, especially in the Opto Semiconductors division.

The good earnings situation is due not only to our strength in innovative products, but also, in particular, to our stringent cost management, to which we rigorously adhere. We are continuously working on improvements to productivity and processes around the globe. This past year alone we worked on about another 100 design-to-cost & customer needs projects and nearly 90 cost-cutting programs.

We again noticeably improved the efficiency of our capital utilization despite high investment costs. This is attributable, in particular, to the release of funds in current assets. The total cash balance came to €464 million on a par with Group profit for the year. This is further testimony to our company’s solid performance over the past business year.

Our global workforce grew by over 1,700 employees during the period under review, primarily as a result of the consolidation of the Russian company SVET. In Germany, our payroll declined by about 200, i.e. approximately 2 percent; the latter were, for the most part, employees in Berlin whose temporary contracts could not be renewed due to the flagging market in video projection lamps. In the Czech town of Bruntál we boosted our workforce by over 300 employees, above all due to the relocation of primary product manufacturing activities from the U.S. In Europe the number of staff remained almost constant. It fell by 2 percent in the Americas and climbed 2 percent in Asia.

Now let’s turn briefly to a regional breakdown of our business development.

The Americas remain the mainstay of our sales at €1.9 billion, or 44 percent of our overall business. In the NAFTA countries (the United States, Canada and Mexico) sales inched up 1 percent to €1.7 billion. Environmentally compatible light sources are becoming more and more important there, too, and our energy-saving lamps and systems are quite successful there. For the third time running Osram Sylvania was named "ENERGY STAR Partner of the Year" by the U.S. Department of Energy.

Business also went well in South America, particularly in Brazil and Argentina.

Sales in the Asia/Pacific region climbed 3 percent to €686 million and the region’s share in worldwide business grew to 16 percent. We achieved two-digit growth in China, India and Indonesia. The generally sluggish market in video projection lamps detracted, however, from our Asia/Pacific results. These products were still booming in 2004, but since the beginning of this calendar year orders have fallen off sharply. That also goes for our main competitors.

Europe accounts for about 37 percent of our world business. Sales remained virtually constant, showing a dent of 0.3 percent. Our European business reflected the difficult economic situation in Western Europe, especially in Germany. Domestic sales came to €495 million, which was 5 percent less than the previous year. Germany’s share of global business remains about 12 percent.

Allow me to present three examples of successful projects in Germany:

• In the VW Passat and Golf Plus, we were able to implement a taillight combination achieved entirely with LEDs for mass application on roads. Up to now, LEDs have above all performed this function in the luxury vehicle segment.
• In Berlin, Germany, lamps for effects lighting by Osram show off the imposing roof of the Sony Center to advantage.
• Und thanks to our fluorescent lamps and electronic control systems - built into Siteco lamps - the Allianz Arena in Munich shines radiantly like a world champion in white, blue or red.

The negative trend in Western Europe was almost entirely offset by two-digit growth rates in Eastern Europe, where demand was strong for our innovative products.

Indeed, our innovative products were and continue to be our global sales and profit drivers. They go to make up roughly 40 percent of our business. Today we are laying the foundations for a successful future through selectively targeted investments in innovations. To that end we increased our capital spending on property, plant and equipment this past business year as well as expenditure on research and development.

Our capital spending on property, plant and equipment was 27 percent up on the previous year: it came to about €286 million. Despite all the expansion in growth markets like China and Japan, we still attach a great deal of importance to production in Germany - as a prime location for our innovative products. €160 million was invested in Germany this past fiscal year - in other words 56 percent of total spending on property, plant and equipment. Over the past five years we have invested close to €700 million in property, plant and equipment at our German facilities.

During the period under review we invested particularly large sums in the manufacture of innovative automotive lamps in Herbrechtingen, Germany. Likewise in Berlin, where we expanded our capacity in ceramic lamps, Xenon headlamps and video projection lamps, in order to get into shape for new periods of growth in this market.

Another focus of domestic capital expenditure was the expansion of the facilities and capacity at our opto-chip factory in Regensburg, Germany. The second stage of construction was by and large completed in February of this year.

We also bolstered forward-looking expenditures on research and development by 6 percent to the current level of €224 million. Group-wide R&D spending came to about 5.2 percent of sales this past fiscal year - and roughly 13 percent in Opto Semiconductors. One main point of effort was to further augment LED luminosity while concomitantly reducing the production costs. We have already made some significant headway in increasing luminosity. Let me give you two examples. Our high-performance Ostar Projection LED is well suited for use in beamers no bigger than a pack of cigarettes and in projectors for digital cameras and personal computers. The exact positioning of the chips and the compact configuration of all the components ensures an extremely homogeneous light distribution on the enlarged image. What’s more, a beamer using this high-performance LED does not need to warm up before operating and does without a fan - so it runs silent.

If you think about the use of LEDs in the automobile industry, you can’t help wondering: now that they’re in the displays, brake and taillights, when will they take over the front headlights as well? In our estimation the first approved models with LED headlights will take to the streets as early as before 2010. But we already do have conceptual studies with our high-performance Ostar LED, such as the Maserati Birdcage 75th., which was presented at the last car show in Geneva. For many years now the auto industry has been banking on lighting as an integral part of automotive design. And LEDs are opening up wholly new possibilities here in headlights, too.

In Opto Semiconductors, organic light-emitting diodes (OLEDs), continue to be a point of main R&D effort. We have developed new displays in additional colors. These formats and colors are tailored to applications in mobile terminal devices such as MP3-players. We’re also intensifying our research and development in the field of OLED lighting.

Last fiscal year we came up with product innovations not only in Opto Semiconductors, but also in traditional light sources. Like our mercury-free Xenon headlamps, the new Alupar for stage lighting is conspicuous for its environmental compatibility. It’s not only 10 percent brighter and 60 percent lighter than ordinary halogen lamps, but also constructed in a modular design - which is advantageous for recycling.

Another exciting new Osram development is the Puritec UV light system, which sterilizes drinking water economically and without resorting to chemicals. The device emits ultra-violet rays of a wavelength that kills off bacteria and viruses. With Puritec campers and globetrotters can obtain dependably germ-free drinking water in next to no time. Water tanks and the kinds of cisterns used in many arid regions can be sterilized with ease.

Puritec goes to show that light sources nowadays have long since broadened their functional repertoire beyond the confines of lighting and backlighting to include wholly different spheres of application. Osram is also in on the act, for instance, when it comes to air purification, livestock breeding and the cleaning of semiconductor wafers. Or parking your car. Osram is involved in one way or another in just about every area of life.

As we’re on the subject of innovations, I’d like to turn briefly to our Ministar. "Made in Eichstätt, Bavaria" and debuted at the last Light+Building Trade Fair. We’re extremely proud of it.

For one thing, we take pride in the achievement of our researchers, who’ve managed to integrate the reflector into the lamp. For another thing, it’s garnered three different awards: including a prize at the leading Polish lighting fair and an innovation award at the Lightfair International 2005, the biggest lighting show in the U.S. We are delighted that our customer, B-K Lighting, also received a prize for a lighting innovation using our Ministar.

Last year, to keep us setting trends in the future, our Corporate Innovation Management developed a structured process for early assessment of multidivisional and multifunctional ideas. The goal is to turn these ideas into new products and business - fast. These may involve innovations in products, applications or processes. The idea is to consistently look beyond the narrow confines of the lighting industry. For this is where the real pathbreaking trends lie dormant. A case in point is LEDs: this innovation didn’t come out of the traditional lighting business, it came from the semiconductor industry!

Now to our expectations for 2006. We hope to cash in on innovations and achieve good volume growth while maintaining a high level of earnings.

Our "pyramid of success" will form the basis for future developments. Under my leadership, innovation, globalization and cost leadership will remain the cornerstones of our long-term strategy. Other critical factors of success will be

• The utmost quality,
• excellent staff
• and customer focus.

In May we addressed an issue of great concern to me: our company’s obligations to the environment and society. Apart from acting on the principles of social responsibility, our focus is on sustainability. In other words, giving even greater strategic importance to the consistent development of environmentally sound products and the responsible use of resources. I’ve already mentioned eco-friendly innovations like the mercury-free Xenarc headlamp. Furthermore, we consistently apply high environmental and safety standards worldwide.

But our factors of success also bore fruit all those years because time and again we swiftly adapted to the market environment as part of our long-term strategy. In fiscal 2006 and 2007, our focus will be on the growth markets in Asia and Eastern Europe as well as on our LED systems.

First, to Asia, where Osram has been present for several decades. We now have companies and sales offices in 11 countries and nine factories. Since the year 2000 we have increased the Asia/Pacific proportion of total sales from 9 percent to currently 16 percent.

According to our estimates, by the year 2015 Asia will account for more than 50 percent of the world lighting market. A number of leading lamp manufacturers, in other words our customers, have already set up production facilities in Asia. Over the new few years we intend to get closer to customers there and build up a stronger local presence with a new supraregional Asia Organization, which is set to take off at the beginning of 2006.

In the future our Ballasts & Luminaires Division, which has regional centers in Europe and NAFTA, will also operate one in Asia, where the head of division will be located. Our Display Systems business unit will also be managed from Asia in future. With our management on location, we want to be able to react even faster to the extremely short project cycles of our customers, the successful display manufacturers in Asia. These manufacturers are almost exclusively located in Asia.

In addition to Asia, Eastern Europe and Russia are key growth markets. We are still the only global lighting group with its own production facilities in Russia. We consolidated the SVET company at the outset of this past fiscal year. Our top priorities at SVET are product quality, modernizing production and environmental considerations.

During the past five-year period we have more than doubled sales in Eastern Europe. In 2006 we will have new sales offices in Kazakhstan and in the three Baltic countries.

I’m often asked what effect our bolstered presence in Asia and Eastern Europe will have on European and in particular German locations. This can best be answered with a few facts: exports from our German plants in both regions are now 80 percent higher than they were five years ago - a significant contribution in view of the economic slump in Western Europe.

Having touched on the growth markets in Asia and Eastern Europe, let’s turn to a vital future market for us in technological terms, namely LED systems. LED systems are made up of several components that are needed for a complete customized lighting solution, including
- LEDs or LED modules
- optical devices (lenses, diffusers etc.)
- electronic control systems
- and control components (for dimming, changing colors etc.).

Possible applications for LED systems include their integration in car headlamps or use as backlighting for LCD screens.

LED systems offer our customers clear advantages. For Osram is the lighting specialist capable of offering customers an optimized one-stop solution comprising traditional lighting, electronic control systems and LEDs. What is more, we can bank on well-established customer relations.

So our newly formed LED Systems division will be launched in just a few days, on December 1. Our objective here is to consolidate and expand this business sector. The idea is to successfully extend the system business we are already engaged in with traditional light sources to include LEDs. Our Opto Semiconductors division will continue to be responsible for the development, production and marketing of individual LEDs.

Now I’d like to make a few announcements regarding some changes in our management board. On January 1, 2006, Johannes Närger will take Dr. Thomas Seeberg’s place as CFO, and on April 1, 2006, Claus Regitz will succeed Dr. Jörg Schaefer as our Chief Technical Officer. Dr. Seeberg is going into retirement as planned at the end of December, Dr. Schaefer at the end of March.

Johannes Närger comes to us from Siemens, but he is by no means an unfamiliar face at Osram: he held executive positions in Munich, Germany and in the U.S. as early as from 1995 to 2001. Claus Regitz can look back on 20 years of experience in the technical domain at Osram. He is currently the Chief Operating Officer at Opto Semiconductors in Regensburg, Germany.

Dr. Seeberg’s responsibilities as Executive Vice President Human Resources will be assumed as of January 1 by Dr. Kurt Gerl, who has served in the management board as our Chief Sales Officer since May 2005. As former head of the General Lighting division, Dr. Gerl has many years’ experience in the company and excellent customer contacts.

Dr. Seeberg transferred from Siemens to Osram as CFO in 1998. Dr. Schaefer has been with us since 1982, as CTO since 1991. Though one of you will serve another month in office and the other four more months, I’d like to take this opportunity to thank both of you for your invaluable contributions to Osram’s success over the years. For you - together with my predecessor Dr. Bopst - have built Osram up into a global corporation and a high-tech company in the lighting industry. Many thanks!

The Osram brand will be celebrating its centennial next year. For our customers in some 150 countries worldwide, the Osram trademark is inseparably associated with guaranteed high quality. And with our constant drive

• to make all our products even better,
• even more durable,
• and even more environmentally compatible for our customers
• and to set new trends with our innovations. As we did last year.

To recapitulate, we have

• launched key product innovations like the Ostar line and Puritec,
• boosted sales and profits,
• increased investment in property, plant and equipment as well as in R&D spending,

and

• laid two decisive foundations for future growth with our concept for an Asia Organization and our new LED Systems division.

With these positive results we are embarking confidently on a new fiscal year - and another century in business. Osram is a successful high-tech company in the lighting industry. For the future, customer focus and innovations will continue to be our wellspring of growth.