Schaeffler Ag Ord

Dear investors, dear analysts, thank you for joining the Sheffield Group first quarter 2023 earnings call. As usual, our call will be conducted under the disclaimer. Without further ado, I will pass the floor to Mr. Klaus Roosevelt, CEO of the Sheffield Group, and to Mr. Klaus Bauer, CFO. Klaus, the floor is yours.

Renata, thank you very much. Ladies and gentlemen, welcome to our quarterly earnings call for the first quarter. You have the presentation in front of you. in a new, refreshed format, and I think with some very encouraging numbers for the year 2023. If you follow me, please, to page number four, where you have the overview with the key messages. I think you saw the results already. 10.4% growth in the first quarter, all divisions contributing, and region Europe leading with double-digit growth. an improvement in the gross profit margin of half a percentage point over the first quarter 2022, mainly driven by the exceptionally strong quarter in automotive aftermarket, and then an EBIT margin of 8.1%, certainly above the guidance range. Also here, we can say that the two automotive divisions contributed most of the improvement first quarter 2022 6.9 so 1.2 percentage points better than previous year free cash flow slightly negative if you include the restructuring cash out 105 and the German wage inflation lump sum of 35 you see that the underlying free cash flow is positive it's better than expected and we see this again as a strong sign for the cash generation power of the organization. We have decided to keep the guidance confirmed, although the first quarter is encouraging and we'll clearly see and wait what the second quarter is, how that is going to develop. One other strong development is from the balance sheet point of view, despite the acquisition of Evelix, our Leverage ratio is definitely in the range where we want to have it, and we saw Moody's upgrading the rating to investment grade again, so strong support from the balance sheet side. If you go to page number five, you see the breakdown that you're used to by division and by the different regions, and as I said, all the divisions and all the regions contributed. Then on the next page, page number six, some highlights and lowlights. I think on automotive technologies, we can say that our strategy in terms of managing the portfolio, the transformation from mature to EMOP and new chassis is definitely paying off. We saw continued strong growth in e-mobility and chassis. And that is, once again, exemplified by the order intake in Q1. Nearly a billion in e-mobility is half of what we promised for the year 2023. Aftermarket, I think, is the star in this quarter, not only with more than 25% growth, but also with a superior quality of earnings, 17 points. 7% speaks for itself. It's even above the range for our midterm targets. And it tells us that the hard work that has been done to clean up some of the logistical issues starts to pay off. There was definitely positive development from the demand side because in these times, people tend to repair cars. Our solution offering is spot on and with a solid work on the fixed cost side that then leads to margins like the one that you saw in this first quarter. Industrial is in a slightly different situation. As you know, we closed Evelix in Q1, and that led to PPAs. You will see this later on, 0.6 percentage points for the divisional results. Evelix helped to fuel the growth, 13.4% includes the inorganic portion. and that has also supported our industrial automation growth. All the other three market classes also grew. What is remarkable here, and to some extent not unexpected, is the growth in renewables. All regions are growing, so we feel good about our industrial business and we'll continue to build that forward. The EcoAdopt little acquisition that we signed and closed is one of the next examples why we will continue to invest into our industrial division. Free cash flow, I already said this, solid, better than expected underlying cash generation, and I'm confident that that continues over the rest of the year. On the negative side, what is of concern to me, that's the outperformance In automotive America, that was an outlier. You saw that in the table. The negative outperformance here has to do with declining raw material prices in the U.S. We have more price adjustment clauses in the Americas and elsewhere and also had to do with transactional FX. Klaus will explain this going forward. And for sure, I put this here in the negative. There is more room for improvement, good performance overall, but we will continue to focus on our quality of earnings and see that we execute where possible on further improvement potential. Let me go to page eight and you see the new format is a little lighter than what you had in the past. You have all the key numbers on here. Automotive technologies, 4.3% margin. The sales growth was 6% rather moderate, driven by Europe. As I said, there is a negative outperformance in the Americas that Klaus will explain in more detail. What we can say, and that's more the midterm view, we feel that our position in the U.S. from a strategic point of view is very good, in particular when it comes to the local HEF and BEF programs. One example is the quality award we got from GM, where we see significant future business on their new platforms. Increase in margins, as I said, is driven by the work that we have done in the past, all the restructuring steps, but also by price, volume, and better fixed cost absorption. You see the order intake on the next page, number nine, as I said. around a billion for e-mobility on track to achieve our annual target. You see two of the interesting order intakes, one for e-mobility, one for the more mature business. The one for e-mobility is truly something exciting. We are entering as one of the first foreign suppliers the Indian EV market with a two-in-one EXO where we got nominated for that project by one of the big players in India. So EV business is also becoming part of the Indian market. On the other side, second example, a new nomination received with high order intake for an electric cam phaser. That tells you that also in that situation that we have with all the EU regulation, car makers are still coming to us for mature business. This is a lucrative one, and we are proud that we can support our customer with that technical innovation. Aftermarket, I think I said it all already. Three greens, exceptionally high double-digit sales growth, clearly driven by the low comms, but also by strong demand. Then sales growth, across the board but in particular driven by Europe where we have the independent aftermarket business as you know and that has been the key driver here and then the margin again several things that come together to the positive we saw a favorable sales mix our price management was exceptionally good and also the operating leverage was keeping fixed cost under control started to drive the margin and I can once again say the hard work in the past that Jens and the precedents have done to clean up, in particular here, the logistical footprint in Europe starts to pay off. Eleven is then a little bit more business detail. We think we can claim a leading market position, in particular here in Europe, when it comes to innovative repair solutions. We have said this on and on, and that is exemplified by a variety of different customer Awards, the technical support is seen as a differentiator, and also an intelligent pricing allows us to offset or more than offset input cost. Logistical performance, we have set this on and on, and it's just here to show again, RKO is definitely on the right track. 12% industrial, double-digit sales growth. That is more or less half and half organic and inorganic. Evelix consolidated for the first quarter. and that has led, as we indicated, to a PPA effect on the margin. We have decided not to retroactively adjust the margin for 2022. So if you compare 11.3 last year quarter with this year quarter, that's not comparing apples with apples. You need to consider that there's a 60 basis points reduction due to this PPA effect in Q1 that was not there in Q1 2022. That shows margin is also on the right track. In any case, it is in line with our guidance. What we see in industrial is apart from managing the acquisitions and consolidating and integrating all of that, that there is still room for improvement. You know, we have explained that to you already for the full year. The work in terms of finally integrating the different steps from the 2020-21 program and the footprint consolidation Europe are still underway, and we see that there are some of these natural inefficiencies that we can tackle. So that should tell you we are positive on making our margin range. In terms of outlook, yes, for sure, you see this on page 13. If you look at the order book, the growth dynamic is coming down a little bit, but we are still positive in terms of growth. The environment is certainly getting a little bit more difficult here. You saw what happened with the German manufacturing indices and numbers. But in terms of Schaeffler, we are positive that we can continue to outgrow the market. Why? Because we are definitely sitting at the right spots when it comes to the different industries and when it comes to the growth potential. That is in particular renewables, but also industrial automation. So that should help us to continue to grow. And the first figures from April point definitely into that direction. 14 is a page that you know. I'm not going to say much more than what is on this page here. We continue to be disciplined on capex, 221 million capex, and the investment allocation, 179 million. The ratios are all in line. Reinvestment rate below one. And we continue with our strategic capital allocation framework that is paying off. And you also see that the regional allocation becomes more balanced. The last page from my side, before I hand over to Klaus, is on M&A. We have done now with Evelix and also with MelioMotion and the other smaller things enough in the year 2022. It's now time to make sure that all of that gets integrated in a very careful manner. And we signed EcoAdopt, a small deal, just something to mention here. What is more important from my point of view is that we will keep looking for interesting additive M&A opportunities we will continue to work on collaborations and partnerships but we will in all what we do be very careful to make sure that we fully understand risk and only invest where we get the necessary returns with that I hand over to Klaus for more details on the financials thank you very much Klaus ladies and gentlemen on page 17 we are looking at sales

And you see it's the third quarter in a row now with sales above 4 billion euros. That translates, as Klaus already said, to foreign exchange adjusted growth versus prior year of 10.4%. And Klaus already alluded to the Evelix consolidation, which was consolidated for the first time in Q1 2020. of this year, and that has about an inorganic impact on this 10.4 percent of two percentage points. All regions and divisions have been growing, and Klaus already said, particularly automotive aftermarket. I will touch on that when we talk about the divisions in more detail. On the next slide, you see the gross profit. definitely a good cross-profit margin development with sustained positive pricing across all regions. You see then on the bottom part of the right side, you see the development by division, which I will talk a little bit more when we talk about the divisions, especially Obviously the automotive technologies looks a little strange with a reduction and I will explain that and automotive aftermarket with the volume fixed cost absorption impact and also good pricing in the market, very good margin performance as Klaus already said. On the next page, we look at the overhead. The overhead cost increase was in line with sales with 10.3%. As you see, if you look at the table on the right side, you see a little bit more detail and see that it's especially driven by the two divisions that had significant volume growth, automotive, aftermarket, industrial, and that is obviously then the big impact of selling expenses that are highly variable, especially in these two divisions. EBIT margin on the next slide pretty much follows the gross profit development. And again, I will talk little bit more into the detail by division, which leads me to the next slide already diving into the automotive technologies division. Here you see on the left top slide the sales growth by business division. All business divisions grew year over year. including engine and transmissions. You might remember that wasn't necessarily the trend of last year. E-mobility significantly outgrew the other divisions, and engine and transmission actually deteriorated a little bit. So that is already something that you have to consider. It's not unexpected. I think I talked to many of you about the potential mix impact also due to affordability of cars being more important maybe this year than it was last year. If you look down on the left side, then you see the outperformance, and what's definitely catching the eye here, besides the outperformance globally of 30 basis points, clearly below our target margin or target range be between 200 and 500 basis points and what's catching the eye is obviously the negative outperformance in America's that has a few explanations first of all as always it's a not so easy to interpret this number really on a quarter-by-quarter basis. You also see the significant outperformance for the entire year 2022 with 520 basis points in that region. And therefore, you have to see the quarterly volatile signal data point maybe more in connection with a longer-term last 12 months period. But the technical impacts that we experience in the Americas right now is, first of all, as I explained in many prior calls, Americas is the region where we have predominantly material price clauses in our contracts with the automotive OEMs. That is different than in other regions and is actually also a long-term implementation, not just because of the inflation, that we have seen the last two years. And obviously you all know that material prices are relaxing significantly and that then has a now for the first time in a long time a negative pricing impact on our sales number in America because now based on these indexes sales prices are adjusted down. And the second major impact that we see, and that will most likely also continue for the rest of the year, although maybe on a slightly lower level, is we transact a big portion of our sales out of our Mexican facilities into the region we transact in U.S. dollars. And you might know that the Mexican peso significantly strengthened versus the U.S. dollar, and therefore we have transactional impact on these transactions that is also negative. If we look now at the EBIT bridge on the right side, then obviously you see, despite all what I just said, that there seems to be almost no cross-profit impact on the EBIT line. First of all, the transactional foreign exchange impact of U.S. dollar transactions out of Mexico is impacting that column here negatively. But much more important is, and you see in the other column, you have a very significant positive impact And you have to look at these two columns in connection because you might also remember last year we started to include our equity shareholdings in our EBIT, divisional EBITs. And one of the equity shareholding that was significant is Scheffler Paravan, the steering company. And this, as we also said in preparation of last year, will have a negative margin impact because it's a company that had a negative result. So now we acquired at the end of last year the remaining 10% of this company and now we are fully consolidating and not consolidating at equity. And that means that negative result now wanders from the other column because it was in other income and expenses into the full blown, fully consolidated P&L structure. and therefore now you have this positive impact in the others category and a hidden negative impact, if you will, in the gross profit area because now you're fully consolidating this company. From an EBIT standpoint, it's neutral because we included it already last year. The only additional impact is obviously that we are now including 100% and not just 90% of the EBIT impact, but that explains. So what looks a little strange in this bridge, that there's no structural impact on the EBIT and it comes all out of others, it's really explained by this reclassification of Scheffler-Paravan, and therefore the 0.8% clearly come out of the much better cross-profit and operational performance, mainly driven by volume and price. Let's go to the next slide, automotive aftermarket. Much was said already, and the numbers are doing the talking here. Double digit sales growth across all regions. And you see, especially in Europe, it's even more significant with over 30% of sales growth year-over-year. Klaus said it a little bit due to the low comps of prior year, but there's also a catch-up effect, and I think we already prepared you for that when we talked about our annual result last year. We explained that there was a relatively weak sales month in December for automotive aftermarket, especially in Europe. And now you have the catch-up effect here in the first quarter of 2023. And on top of that, as Klaus already said, we have a significant reduction of our backlog due to further optimized logistics. Both of these effects will normalize some going forward, but we still expect, as you see also with the other regions which are not impacted as much by these extraordinary impacts, we still expect significant growth in this division. You see it then in the EBIT bridge, the volume drives with fixed cost absorption, also the EBIT Besides volume, there's also, as Klaus already said, significant positive price impact in there. And you see then as the negative number, not surprisingly, a higher selling expense position since obviously you have to ship the higher volume to the customers. On the next slide, I will then talk to industrial. You see that we have growth across all regions and also market clusters. About half of the growth, a little bit less actually, is related unorganically to the first consolidation of AirVelix. And you see that then also somewhat reflected in the lower table with the extraordinary growth in industrial automation of 38.2%. A significant portion of that is inorganically based on Evelix. However, also you see now with 264 million of sales, quarterly sales, in that for us very strategic and important area we are clearly delivering on our target and objective to strengthen, as I said, that very strategically important cluster for us. If you look at the right side to the EBIT development, then in the first column you see the healthy price and volume impact that's unfortunately As Klaus already said, with the purchase price allocation amortization impact of the Avelix acquisition of around 60 basis points, not translating visibly, but definitely operationally into an improved EBIT of, if I compared Apple's troubles from 11.3 to 11.9%. But again, it's... It's somewhat not as transparent here in this bridge. That leads me then away from the divisions back to the group and consolidated financial statements. Net income stands at $129 million for the quarter. Normally, that follows closely EBIT. However, we have one volatile component that we also talked a little bit already for the full year. We have a very significant hedging portfolio for our energy demand in Germany, and we have to evaluate this at fair value. and this fair value book now has had a negative impact in the first quarter of 2023 of around $75 million. That is just bookkeeping. We are intending to completely use all hedged energy and not sell it on the markets. So we will settle all these hedging contracts, which will go out up to three years. Actually, we will settle all the maturity of that entire portfolio at the hedge price, which is still favorable to current market prices. And the minus 75 million of the bookkeeping impact of that quarter only indicates that from the last evaluation of end of last year to now the end of March, the market price reduced and came closer to our hedging rate. You see then the ROSI is sequentially improved at 12.5%. And you also are pretty much aware that we paid in April a dividend of 45 cents per preferred share, which calculated to 295 million euros in dividends paid in April. That leads me to free cash flow, and I start on the right side, minus 73 million. You see the development. There's some seasonal normal significant investment in working capital. I think we also prepared you already for that in our year-end conference call. You see also, and that was also anticipated higher than last year, CapEx ratio. We expect it to be much more equally allocated throughout the year instead of back loaded like last year. And then you see on the table below that we already paid out restructuring expenses of $105 million. That's more than half of our planned payout for the entire year. So you clearly have a front loading here as well. And you might remember when we talked about Q4 that the German bargaining agreement with the unions had a significant lump sum component, which was partly accrued already last year, but was then fully paid out in Q1 of 2023. That's another front-loaded one-time impact, if you will, of 30 million euros. So if I now look at restructuring and this lump sum impact of 135 million, then I come back to what Klaus already said. Cash generating power is intact and clearly positive here. In a quarter where we significantly invested in fixed assets and also networking capital, I said it in our last call, Networking capital will come down now. It will stay stable for Q2, almost stable, and then sequentially come down in the second half of the year. So this financing impact then will be partly reversed later this year. That brings me to my last slide. Klaus already said it. Net fine leverage ratio 1.4. Clearly, due to the Avelix acquisition, we have drawn the term loan with 500 million, and that is the consequence. We, and Klaus already said it too, but I think we... have been upgraded by Moody's and Moody's especially explicitly confirmed our excellent liquidity position. So I think that's encouraging going with this strong balance sheet into the endeavors that lay in front of us. And with that, Klaus, back to you.