Interview with the Executive Board

Mr. Dräger, you reduced your earnings target by 15 percent. At least in the first half of the year, you had an economic tailwind. What were the reasons for that? And what have you done in order to “weatherproof” the Company for the impending recession and the coming fiscal year?

DRÄGER: As our business is not as sensitive to economic conditions as other companies, the tailwind did not have any notable impact on us. Conversely, we also face less headwind in difficult periods. There were various aspects which triggered the profit warning in December: the lag in product development, the strong US dollar and higher bad debt allowances. This is frustrating, but we responded by increasing our research and development activities. In the long term, the earnings prospects should of course improve – and we want to achieve sustainable, profitable growth. In the new functional areas we have much more critical mass to manoeuvre than in the small, vertical units. There is a good reason why the interaction and cooperation of colleagues is focused on much more than before. All in all, even more opportunities are open to Dräger.

A recession can also provide an opportunity to actively consolidate the market and take over less successful competitors in order to achieve more growth together. You are currently considering acquiring the 25 percent share Siemens AG holds in your medical subsidiary.

DRÄGER: Acquiring the 25 percent share is a very attractive opportunity for us, because we believe that our medical division still harbours an immense amount of untapped potential. With the acquisition, we will decrease complexity and become an integrated technology group, making full use of economies of scope. This is a far more attractive prospect than taking over another market player: we know the company we are buying extremely well, there is no integration risk and we are convinced that we would be able to considerably boost net sales and income in the medium term.

Mr. Lescow, could Dräger actually realise major takeovers in the current refinancing environment? How secure is longterm financing? The share price performance was again disappointing in 2008 and a capital increase as a refinancing instrument for takeovers is certainly not an option at these prices. What criteria do you believe are necessary for a takeover and how do you see Dräger’s financing compared with that of the competition?

LESCOW: We are always willing to participate in M&A activities – assuming that we can expand our product portfolio regionally or in terms of technology by doing so. We will always be in a position to make smaller acquisitions, even after acquiring the 25 percent share. Our longterm financing is secure and stable – which is good news in these times. It comprises note loans or bilateral agreements with reputable German banks and does not include any ordinary termination rights, so there is no potential risk from follow-up financing. I believe this is a definite competitive advantage! I also believe that a ratio of 2.5 for net debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) is most acceptable in the medium term. Currently this ratio is 1.5, but a higher ratio of 3.5 to 4.0 for a reasonable period of time would also be feasible. It generally also makes good sense to be guided by the dynamic level of debt, which shows the period of time in which the debt could, in theory, be repaid using the cash flow. Our goal should be not to exceed four years medium term.

As a listed family-run company, how will you make yourself attractive again, particularly for major institutional investors? A lower dividend is not really appealing.

LESCOW: That’s true. But what matters to the shareholders is that we invest the capital they entrust us with in a way that generates value. The lower dividend will make this possible even if our earnings are lower. No argument is more convincing for an investor than sustainable earnings growth. We hope to achieve this primarily through the measures introduced in the medical division – an optimised process landscape and increased profitability. In the safety division we have already proved that we can do this. A policy of providing clear information still remains important.

Mr. Dräger, you made fundamental changes to the Group’s value chain between 2000 and 2007. These changes played a key role in making the Company particularly attractive to investors in the past. A comparable theme seems to be missing in your capital market communication. Can earnings be increased again through similar restructuring?

DRÄGER: We have focused on our core competencies and outsourced some areas of production and support, which has seen some some 1,200 employees from our headquarters here in Lübeck transferred to suppliers. This significantly reduced the added value of our own production: in the medical division, it fell to 7 percent and in the safety division to 9 percent. I am convinced that productivity can be increased further if we all work even better together under the motto: if Dräger knew what Dräger knows… I know what knowledge and skills are available in the individual areas, but unfortunately, this knowledge is not fully accessible around the world.

That sounds like limited potential. What other opportunities do you see instead? The restructuring of the medical division’s US business has not yet resulted in any measurable success.

DRÄGER: We are taking advantage of numerous opportunities, and improving idea management across the entire Group makes a considerable contribution. Of course we are also working on creating momentum again for the medical division’s US business. In certain terms, we had more than a 50 percent share of the market there several years ago. It will just take some more time until we have regained our old strength again. There are also a number of other challenges which hold similar significant potential. Look at Japan, for example, the second largest single market for medical technology.

In Japan, it appears that international providers still have a difficult time competing with the Japanese producers. Which attractive niches could Dräger still tap into in addition to its current business?

DRÄGER: Outside of the current business and customer structure, there is very little likelihood of success according to Ansoff’s product/market matrix. We would be more likely to focus on the current customer requirements, applications and technologies. Our thermal imaging camera for firefighters is a good example of this: this product was particularly interesting for this special group of customers. But unfortunately, we did not have the technology at our Company so we developed and produced it with suppliers from the US in a strategic partnership.

Is Dräger indivisible, or are there areas that you can imagine selling?

DRÄGER: The Company is not for sale as a whole and it would not make sense to split it into two parts. However, as in other companies, occasionally there are areas which do not fit together as well anymore and have significantly better opportunities for development elsewhere. In such steps we focus more on the market and less on the current structure of our legal entities. These entities all function according to defined processes and industry standards, which of course simplifies a carve-out. A generation ago already, my father sold the autogenous welding and the pneumatic regulating technology operations.

Dr. Thibaut, is it actually realistic to start joint development projects i.e., for both the medical and the safety divisions? What does the breathalyser from the safety division have in common with the ventilator from the medical division?

THIBAUT: Well, at first glance, those types of devices naturally appear very different in terms of size and area of application as well as the life cycle or the requirements for licensing. Both devices, however, have gas sensors, control electronics and software, power supplies, user interfaces and much more which could be housed under the same technology and application umbrella. If we look more in depth, there are certainly features and components which are found in both divisions. In the future, we will use economies of scale here and focus our know-how further in order to generate additional contributions to added value with our existing employees and budgets. Just think about the issue of technology platforms: today we use a very wide range of software development and design tools as well as strategic suppliers who would work more efficiently if working methods were converged more.

Now you want to actually function across divisions, but apparently have already had difficulties with the introduction of the product components of “Infinity ACS”, which was supposed to be “the first standardised platform with particularly high-performance individual components for patient monitoring, therapy functions and information management.”

THIBAUT: “Infinity ACS” was and still is indeed a very complex project which poses significant challenges for our entire organisation. It will bear fruit when new devices and combinations are created based on the developed module, also in terms of speed and efficiency. Lasting one year, the development of a new acute ventilator for infants based on the “Infinity ACS” platform will then take less time than a new development. We have also already demonstrated the coupling of devices, such as the integration of monitoring and ventilation, on the basis of this system architecture. By re-using components, we can drive future developments more quickly. This is clear in the product roadmap recently prepared by the medical division. This way, the medical “Cockpit C500” introduced with “Evita Infinity V500” will also be found in other devices. We are also putting this modular principle to use in the safety division: a platform has also been created for respiratory protection systems such as the “Dräger PSS 7000”, which can be expanded continuously and adjusted to meet customer requirements.

Dräger has again invested some 7 percent in research and development. Does this not limit profitability?

THIBAUT: Exactly the opposite is true: profitability increases when new products are launched. That is why we are continuously investing in product development. Profit margins for new products are usually significantly higher than those that have been on the market for a long time and are often under constant price pressure. In the past few years, we actually had to struggle with a lower percentage of new products, based on the entire portfolio and total sales. We are trying to offset this development by better synchronising market launches and making targeted investments in new devices and accessories as well as less extensive model upgrading of aging products.

Dr. Fehrecke, what contributions can production make to higher profitability in light of this?

FEHRECKE: Production, logistics and quality are the bottleneck when it comes to processing orders quickly, flexibly and by the desired delivery date. Of course the quality of Technology for Life will be maintained. The goal is zero errors, irrespective of whether the issue is product quality, life cycle, cost, delivery or service. The closer we get to this goal, the bigger the resulting competitive advantage.

As a manager from the automotive industry, you are used to creating efficient production structures with low margins of error and cost-effective platform strategies. Does medical technology still have a long way to go?

FEHRECKE: At Dräger, we have introduced the Kaizen method of continual and rapid improvement together with the employees. And this has been very successful, increasing productivity at some sites by 25 percent. We are aiming for between 3 percent and 5 percent for the Company. We are now introducing this method, which we call PRIME, around the world in the administrative and ITbased units.

Dr. Pruss, what were the most important milestones for you in the safety division and which products and customer segments actually still promise to stimulate growth in 2009?

PRUSS: We look back at a very successful fiscal year. We reached our strategic goal of net sales growth of 10 percent, which would have been higher had it not been for the dampening effects of exchange rates. Furthermore, we maintained our strong market position in Europe and even significantly expanded in the Asia/Pacific region. Profitability improved overall in China in particular. In addition, orders from Indonesia (stationary gas detection products), Taiwan (semi-conductor industry) and China (mining) also contributed to this trend. The first saturation diving equipment for a diving support vessel of a Norwegian customer was launched in April 2008. In the US, we successfully launched a new self-contained breathing apparatus on the market after we obtained approval from the National Fire Protection Association (NFPA) in May 2008 and won some significant major orders from fire services (US state of Arizona). In 2009, we want to set further standards with our range of products for fire services. High hopes are also placed on alcohol and drug measur- ing instruments and the new drug screening device introduced in May, the “Dräger DrugTest 5000.”

Do you think that the competitive environment will remain the same or do you think that the emerging countries such as India or China will soon produce strong new competitors?

PRUSS: We have found that other global players are investing in exactly those markets that are attractive for us. Of course, this spurs us on, even though these companies are significantly larger than us. We will focus on those areas where we can become the global market leader. Chinese and Indian providers currently pose less of a threat than joint ventures comprised of US, Taiwanese and Chinese companies whose success we monitor very carefully.

Mr. Dräger, are the market entry barriers in medical technology high enough and will you be able to maintain your competitive headstart in the IT-intensive areas? After all, you are up against significantly larger groups with “deep pockets.”

DRÄGER: The market entry barriers for medical devices tend to be lower and the competition from China or other emerging markets will come to a head. We are also expanding our system solution competence further. This is particularly challenging for IT-intensive areas, for everyone involved. This market is also not yet fully formed. Evidently, large, all-encompassing solutions are so complex that nobody is currently in a position to manage them. The trend is moving toward special solutions, which also offers us several interesting opportunities.

You said that you will avoid getting drawn into thinking in quarters and that instead the Company wants to focus on long-term development trends. What will Dräger look like in 20 to 25 years?

DRÄGER: We will continue to deliver Technology for Life and will have customers in more countries than today. We will translate their requirements into innovative solutions – by working better behind the scenes and by working together in close networks. We want to be the first choice for all customers in all markets.