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5. KSPG AG (Formerly Kolbenschmidt Pierburg AG) Business Report FY ended Dec. 2014

KSPG AG (Formerly Kolbenschmidt Pierburg AG) Business Report FY ended Dec. 2014

Factors
1) Mechatronics
-Sales of the Mechatronics division grew by 12.9% to EUR 1,322 million in 2014. High demand from automotive manufacturers around the world for solutions for the reduction of CO2 and emissions allowed this growth, which was well above the 3% growth recorded in global light vehicle production.

-In applications for exhaust gas recirculation for passenger cars, the most significant growth was achieved with exhaust gas flaps. Sales of commercial vehicles products were also successful, particularly in the case of exhaust gas recirculation valves and exhaust gas flaps.

-The growth in sales of solenoid valves was mainly due to divert-air valves and pneumatic converters. The intake manifold product group was in the process of being phased out as planned.

-The Company divide products in its pumps business into the areas of commodity and technology. Demand for technology products continues to grow in line with the need for further reductions in CO2. In particular, growing sales of products such as variable oil pumps, electrical water circulation pumps and electrical water pumps led to a significant rise in sales compared with the previous year.

2) Hardparts
-The Hardparts division increased its sales by 5.1% year-on-year in 2014, to EUR 934 million. In business with pistons, sales of both small-bore and largebore pistons rose year-on-year in the year under review.

-The start-up of new products in Mexico and the Czech Republic overcompensated for a decline due to market forces in Brazil in business with pistons.
With large-bore pistons, increased demand in North America and the start-up of the new production company in China had a positive impact.

-Higher sales of the maintenance-free or low-maintenance non-motor plain bearings (Permaglide) were generated in Europe and North America, with sales up once again on the previous year.

Outlook in 2015
-On the basis of growth estimate of 2.7% in global automotive production in 2015, the Company expects sales growth in fiscal year 2015 to a level between EUR 2.5 billion and EUR 2.6 billion.

New Plant in Germany

-Pierburg GmbH announced that it moved into its new Lower Rhine plant located on the harbor pier in downtown Neuss as early as the spring of 2014. Altogether EUR 50 million has been invested in the new facility. Since then and step by step production plant and equipment have been moved from the two previous sites in Neuss and Nettetal to be set up at the Lower Rhine plant. To begin with, this concerned the manufacture of solenoid valves and the assembly of exhaust-gas recirculation coolers. At the new plant, a workforce of 520 is employed and hence all of the employees at the previous Neuss and 100 from Nettetal are now working there. With the relocation of the Nettetal foundry starting from November, the 180 employees right now still working at Nettetal, will also be switching to Neuss by mid 2015. (From a press release on November 13, 2014)

Joint Venture in China

-The Company announced that, following the signing of the agreement in July 2014 with HUAYU Automotive Systems Co., Ltd. (HASCO), the relevant cartel authorities have meanwhile given their go-ahead for KS Aluminium-Technologie GmbH's joint venture. The two parties now each hold 50 percent of the shares in KS Aluminium-Technologie GmbH, Neckarsulm, and Werkzeugbau Walldurn GmbH, Walldurn, which belongs to it, as well as in the 50-percent stake in the joint venture KS ATAG TRIMET Guss GmbH, Harzgerode. KSPG plans to integrate its entire automotive aluminum alloy casting business in Germany into KS Aluminium-Technologie GmbH. When the integration is completed, KS Aluminium-Technologie will mainly produce aluminum cylinder blocks. KS Aluminium-Technologie has three plants in Germany and supplies its products to automakers such as Volkswagen, Porsche, Volvo, Daimler, BMW and Peugeot. (From a press release on December 12, 2014 and July 22, 2014)

Contracts

-Pierburg GmbH, a member of the KSPG Group, has been awarded contracts worth a total EUR 250 million (lifetime) for a newly developed compact exhaust-gas recirculation valve. Ordered by major European and North American automakers, the valve will be installed in engines designed to comply with the Euro 6 emission norm. Since recently the valve has been a standard feature from a German premium carmaker. The other valves ordered will be installed in 2014 and 2015 when certain new engines go into production at the European and US plants of further manufacturers. Meanwhile, Pierburg's annual production volume of EGR valves and modules is as high as six million units. The valves are made not only at the German plants but also in the Czech Republic, Spain, USA, India, and China. (From a press release on February 26, 2014)

-The Company announced that as many as seven of Ward's 10 Best Engines use components from KSPG. A table of engines containing the Company's components is listed below. (From a press release on January 16, 2014)

Award

-The Company announced that the Pierburg pump plant in Hartha, Saxony, Germany, recently received Ford's Q1 quality award. (From a press release on November 20, 2014)

Strategy Program

-The "Rheinmetall 2015" strategy program has been implemented since 2013, which focuses on internationalization, product innovations and cost efficiency. The plan is to generate more than a third of Rheinmetall Automotive's sales outside Europe from 2015, with particular emphasis placed on the Chinese and Indian markets.

Internationalization

• Strengthening the presence in Chinese and Indian growth markets
• Expansion of the Mechatronics division's business activities outside Europe

Product Innovations

• Realization of growth potential of Mechatronics products, especially in the case of turbo-charged gasoline engines

Cost Efficiency

• Strengthening the competitiveness of Hardparts division through improved cost structures
• Optimization of national and international site structures

R&D Employees

New Products

-Heating/cooling module for electric vehicle: A heating/cooling module enables energy-efficient heating/air-conditioning of the crew compartment by utilizing a significant proportion of heat losses. When this system is used for example in all-electric or semi-electric vehicles, this can extend the vehicle range in electric mode. Rheinmetall Automotive's own range extender vehicle has been further optimized.

-Plasma Transferred Wire Arc coating process: Following the successful testing of early coated prototypes in engines with a major customer in the automotive sector, the Plasma Transferred Wire Arc coating process is scheduled to enter series production in 2015.

-Flex valve system: which is used above all in diesel engines, has as a matter of priority undergone production optimization so that it is ready to enter series production.

-All-electric coolant pumps: In the product segment for all-electric coolant pumps have been upgraded in line with the future 48 V on-board power supply, which will allow them to be used in alternative vehicle drive concepts such as hybridized vehicles.

-Tandem pump modules: In addition to controllable mechanical oil pumps, tandem pump modules are also equipped with mechanical vacuum pumps. The Mechatronics division is currently preparing the production launch of this technology as part of a major customer project.

-Steel pistons for diesel engines: which is developed by Hardparts division for passenger cars entered series production at a renowned German automotive manufacturer in 2014. The main benefit of lower friction loss as a result of a modified piston design depending on the application is an up to 4 % reduction in fuel consumption.

-LITEKS pistons: which are currently around 14% lighter than the conventional series piston design. This weight reduction was achieved thanks to the new highperformance alloy KS 309.

-New bearings: Hardparts division offers two new solutions, the KS S203D galvanic bearing and the KS S203W sputtered bearing. The basis for both bearings is a newly developed steel-bronze composite material.

Mechatronics Division
-The Mechatronics division invested EUR 89 million in the year under review, after EUR 93 million in the previous year. This includes capital expenditure of EUR 18 million for completing the Lower Rhine production center (previous year: EUR 32 million). The construction is now finished.

Hardparts Division
-In fiscal 2014, the Hardparts division returned to a normal level of capital expenditure. It invested EUR 64 million in intangible assets and property, plant and equipment after only EUR 46 million in the previous year.

-The focus of the increase was in the Pistons area with the expansion of steel pistons in Germany and Mexico and the selective modernization and expansion of the production facilities in France, the Czech Republic and Japan.

-In Castings, specification in die casting, investments were made in modernizing the production facilities and adjusting them to new products (including structural parts).

-The Bearings area concluded the sinter line project in Mexico and extended continuous casting capacity in the Papenburg plant. In addition, there were a large range of smaller modernization and rationalization measures typical for this area.