Rising costs cap Leoni margin hopes

FRANKFURT (Reuters) - German automotive wire and cable supplier Leoni (LEOGn.DE: Quote, Profile, Research, Stock Buzz) sees little chance to reach double-digit profit margins as the commodity parts maker struggles to stem rising labor and raw material costs.

"In our market we don't see the chance to achieve 10 percent. We can't distinguish (ourselves) by technology, we can just distinguish by price and delivery performance," CEO Klaus Probst said at the Reuters Autos Summit in Frankfurt.

He expects sales of about 2.3 billion euros ($3.4 billion) and earnings before interest and tax (EBIT) of some 130 million this year, corresponding to a margin of almost 5.7 percent.

For 2008, its profitability is set to significantly deteriorate as Leoni's purchase of Valeo's (VLOF.PA: Quote, Profile, Research, Stock Buzz) Connective Systems means sales should grow to 3 billion and operating profit to 140 million.

Leoni has aimed for years to achieve an EBIT corresponding to a return on sales of 7 percent and a return on capital employed of 18 percent, but customer demands to reduce prices by 3-4 percent on average per year amid a spike in the copper price has made things difficult.

Other German parts suppliers like Continental (CONG.DE: Quote, Profile, Research, Stock Buzz) have been able to use their technological know-how in the field of advanced powertrain and braking systems to translate into much higher margins.

To cut costs, Leoni is looking to eliminate smaller plants with some 500 people and shift production to larger ones with 3,000 employees and more.

At the same time, the company wants quickly to move out of low cost sites such as Hungary to avoid labor costs and currency issues and head towards even lower cost countries like Ukraine and Romania.

Here wages could be below 1 euro per hour, he said.

Since most customers manufacturing in Western Europe wanted delivery within 10 days and even in some cases as little as three, logistically the company cannot move farther east to supply these carmakers.

Although the mid-cap has a market value of just over 1 billion euros and a freefloat of 100 percent, Probst saw little threat from predators looking to launch a bid.

"We don't see any external approach that somebody would like to acquire Leoni at this point in time," he said.

"There were some talks with us, but those financial investors normally are just interested in acquiring a company if they can convince top management that this would be a positive step for the company...(but) we don't see any advantage for the Leoni group to be owned by a financial investor," he explained.

Probst pointed to the fact that they have always been able to secure financing to grow the company from 300 million euros in sales in 1996 to a forecast 3 billion in 2008 either through the cash flow or a rights issue.

Regarding acquisitions, he said the group would normally not be prepared to spend more than 5-6 times EBIT for an asset and did not want to stretch its gearing ratio beyond 110-120 percent.

(For summit blog: summitnotebook.reuters.com/)

(Editing by David Cowell)