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.

Thank you. Page 28, ladies and gentlemen, is the usual patron market assumptions they are from our point of view broadly unchanged yes we saw a q1 um in terms of production volumes and also with 21.1 million cars that um showed um some gross 5.7 percent um however we have decided to stay with our assumptions that are as you know more conservative um i think for good reason 82 to 84 million is what we have behind our guidance. Let's see how the year develops. There's clearly signs that the second half of the year could be more difficult than the first half. Automotive aftermarket, global car park growth is projected with 2%. And again, we'll definitely... outperform this significantly. And also on the industrial side, this is a broad indicator industrial production that is rather slowing down 1.3% expected after 3.7 in 2022. We will definitely also without an organic growth outperform that because we are invested and operating in the right areas like renewables and also industrial automation. Against that backdrop, 29, we have decided to confirm the guidance for 2023 despite the strong and encouraging first quarter. You have this on the table here. And let's see what the second quarter brings and what that means then for the rest of the year. Let me summarize on 30 very briefly. Good Q1 performance. the artwork from the past starts to pay off. Also, in terms of cash generation, Klaus explained this, and we will continue to proactively execute on what our strategy says. The roadmap is our framework, and it has proven to be exactly right when it comes to all the projects that are necessary to make Scheffler stronger. We will give more color on the progress of execution when we invite you for the capital market update in November. In between, we have the strategy dialogue in the summer, as you know, and also a strategy meeting with the supervisory board. Very interesting things going on. So please feel already invited for that capital market update. Guidance confirmed. And again, in a complex environment where there's sunshine and clouds at the same time, whether it's inflation and also, to some extent, recession risk, we feel that a strong balance sheet is a positive. Let me finalize the presentation with a statement on the more midterm. You know our midterm targets, you know what the roadmap says, and we feel that we are on track to deliver exactly these midterm targets to you, and that would then give rise to the next five-year plan, that should drive us then into the second half of the decade. What is more near term is on 31, ladies and gentlemen. That's the calendar. The colleagues and Renata and the team will go on roadshow tomorrow in Frankfurt, then in London. We'll also do a credit conference and we'll also be available at the June 6th autoconference, J.P. Morgan. That's it for today. Thanks for listening. The floor is open to your questions.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on the touchdown telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. So anyone who has a question may press star followed by one at this time. And our first question is from the line of Christoph Lascavi from Deutsche Bank. Please go ahead.

Good morning and thank you for taking my question. The first one will be on the auto margin and how we should think about the shape of the year going forward. I'd say in general the perception is in the market that Q1 should be the weakest quarter for the suppliers, also related to the pass-throughs which seem to kick in more or less with H2. Is there any reason to think that it should be different for you as a group? And if you could comment on any pass-throughs that you've already signed so far as the first question. Thank you.

First of all, it was a little bit difficult to understand. But if I understood correctly, you said the expectation is that the margins go further up towards the end of the year.

Sorry, I hope it's now a bit clearer. Yes, the question was on the seasonality of the margin. Because in general, I would say the expectation would be that Q1 should be the weakest quarter. Now you already printed a 4.3% margin. Is there anything outside of volumes and potential volume risk in H2 that you highlighted before that we should have in mind that is a risk to margins, for example, in Q2 or the next quarter's ad?

I mean, I'm not so sure why the expectation would be it's the weakest quarter. What we clearly see differently than last year, and we also said that our pricing that we had to negotiate throughout last year and the biggest impacts then. with retroactive price adjustments only came in the second half of last year, now are sustained and already effective also in Q1. And therefore, I'm not so sure whether we see the same or should expect the same seasonality as we have seen last year. I would say from a volume standpoint, If I look at IHS, then the growth rates are difficult to judge, but from an absolute production volume standpoint, IHS still expects the fourth quarter being the highest production quarter. Therefore, also depending on the product mix, we would benefit from a positive volume. development as Klaus just said. What is our assumption for the total years volume? We are not quite following yet in our guidance this volume profile and would rather see the rest of the year being at similar volumes than Q1. But definitely if there's a volume tailwind, then we would benefit. As you have seen in the first quarter also, which was a volume uptake towards what we have seen in Q1 of last year, especially as it relates to engine and transmission. There's no question that we have available capacity, especially in that segment, and any volume uptake in that segment that would not just contribute the normal gross profit, but also the fixed cost absorption effect, and therefore have a contribution margin that's significant. So I'm not so sure whether I completely answered your question, but I at least shared what my view is.

Maybe I can close, Christoph. Last year, just to remember everyone of the figures in automotive, 3.5 in the first quarter, then a challenging second quarter because of the lockdown situation in China, 0.5. That's an outlier. 4.8 Q3 and then Q4 3.2. I'm not sure how would you interpret that seasonality, but what we can say typically over the years, Klaus, is that the fourth quarter is normally a little bit of a weaker quarter. So, you know, we will, and that I think is the answer that I would stress, we have promised two to four. We have now printed 4.3, and we have confirmed guidance. I leave it up to you to interpret this, but I can tell you our midterm target is four to six, you know, and that's why the four is a very important cornerstone in where we want to be, you know. And whether that unfolds in three quarters or in two quarters, we will see. But what is important to take away is that we have done significant work in the last years to stabilize the margin and to make sure that we can defend this 4% to 6% on the midterm.

Very clear. My second question would be a bit just as a follow-up to the other part of the bridge. Given that it's a consolidation impact that we see, should we expect that to be positive in the coming quarters as well, not commenting on the size, but just technically speaking?

So on an EBIT level, again, it was included last year. It was just included in one position in the other expense line and not allocated throughout the P&L positions. Therefore, I mean, the bridges will look similar throughout the year with that impact. Maybe we display it a little bit differently because we already saw before the conference call that many people have been questioning what's going on. So maybe we think a little bit to make that impact operationally more transparent.

Thank you. And then lastly, if you could just quickly comment on North America with regards to customer and product exposure that you have. You stressed the underperformance was basically driven by the indexed pricing. And do you see anything which is related to the customer or product mix, or is that all trending fine? Thank you.

That is actually all trending fine. And that's what we wanted to express with the second portion of that bullet point in Klaus's part of the presentation. And so we wanted to indicate there's no structural problem. It's really an evaluation problem that's, of course, you never mention it when it's positive and then because you don't have the need to explain something. But it clearly is structurally in line. We are strong with all three Detroit companies. We are in the new mobility space, very active. Of course, new mobility space will come to volumes not this year and not next year, but Definitely for the future we are gaining, and I think we reported on that last year, we gained with two of the three, Detroit three very significant e-mobility projects in very significant platforms that might also come to fruition maybe only next year and then create sales. I mean, we have a strong footprint in the classical powertrain, and we also have set ourselves up to continue the successes with all major Tier 1 and especially the OEMs. Thank you.

The next question is from the line of Akshat Kekar from JPM. Please go ahead.

Thank you. Morning from JP Morgan. Three from my side as well, please. The first one, coming back on the underperformance in Americas, could you please quantify the technical elements that drive the slightly lesser growth in Americas this quarter, as you mentioned on raw material indexation and the FX movements? Some amount of numbers here will help us in understanding the underlying trend going forward, please. So that's the first question. The second one is on overall pricing in the quarter. So you've reported 110 million positive pricing for the group. Could you please just provide us with more detail on how is that split between automotive, industrial, and aftermarket? And finally, on the industrial division, I know the order book is normalizing, which is completely expected across geographies, across your different regions. Could you also please comment on the overall inventory situation in the industrial business and if the price levels are holding up? Thank you. Would you take the two first ones?

Okay, let me start with the last one. I think you said it completely correctly. The order book was expected to come down, and that's what I would like to point out. It's a growth dynamic. It's not turning to the negative. Inventory levels are, I would say, okay. There's, to some extent, room for optimization. We don't see a situation where we can't place the products where we want to place them. Our distribution business is clearly one of the drivers of this. There's always room to operationally improve inventory levels. And the work that has been done on price adjustment clearly supported, but I can also say it has not been overdone. So we are optimizing step by step, but I don't see any risk here that we are sitting on a bigger inventory problem because of market demand. The division is strong enough to adjust that carefully to the current situation.

I try to be as clear as possible but still want to be a little bit opaque here in answering the other two questions. Without the two effects, the evaluation effects, one Mexican US dollar driven, the other one, price development based on indexed material price clauses is significantly negative and would bring us to a not, still not an outperformance in the range of two to five percent for that quarter in that region, but clearly at the zero percent line. So that gives you some orientation about that. And again, for the price impact by the division, I would stick with our approach of last year to not lose leverage also in the public space and especially with our customers to achieve also our negotiation targets. This year you can imagine that especially in automotive technologies with material prices where they are, and energy prices in Europe not as escalated as we might have anticipated at the beginning of the year, that negotiations are ongoing. As I said, we sustained all the prices that have been negotiated, but it's still an ongoing negotiation. I mean, now we don't have to start from zero and achieve a price increase. Now we have to support our prices with other cost factors. Labor is still very much as a cost driver intact. And therefore, I would like to stay as, I would be as transparent as possible, but also stay as intransparent as possible just to not lose leverage.

Maybe I add one more sentence. The guys have done a terrific job in 2022. They have gained a lot of experience how to do this, find the right balance between a customer and our interest. What is most important to me is that the price increases from last year are sustainable. They're not one-offs. They're not gained by some sort of payment terms adjustments whatsoever, and that is critical for us. So I feel good about 2022, and yes, there is always... debates with customers in this situation, but with that basis, I'm optimistic that also for the year 2023, we'll come to a solid result there.

That's helpful. Thank you so much.

You're welcome.

The next question is from the line of Sanjay Bhagwani from Citi. Please go ahead.

Hello. Thank you very much for taking my question also. I've got three questions as well. And my first one is a bit more strategic question that's on one of the hidden and less discussed opportunity within the group. That is, if I look at the market cap of Schaeffler India, this is, I think, I mean, on the back of the envelope calculation, I see that this market cap is higher than what we have for the operating company here in Europe. And Schaeffler owns significant part of this business. So I've just been trying to understand if there is a possibility where you can monetize some of this value in any way, potential disposals or something like that. That is my first question.

Well, I mean, you know that what I can say here is that we like our Indian entity. We merged it some time ago and formed Scheffler India out of three different entities. It is very well run. It has an external board that overlooks it, and there are no plans to change the shareholder structure. For sure, the valuation environment and the way Indian investors look at that entity is different than overall. We see that gap, but I think we cannot judge the Indian capital market with the same logic as we're judging the whole thing. Again, no plans underway to change what we have there. Rather on the opposite, I would think India is a growth area for us. We are doing work there to better understand whether we can further build our operations. This is also just to make that remark an interesting aftermarket place. You saw the order that we won on e-mobility, so we are proud of what we have there. and we don't have any plans to change that shareholding.

Thank you. That's very helpful. And then coming back on North America, I think you mentioned that, so let's say if the commodity prices stay where they are, then these technical effects of, let's say, index commodity price downs and hence negative pricing, this will continue to stay for the rest of the year? In terms of the underperformance in North America, basically how should we think about this for the coming quarters based on your assumptions on the commodity prices?

So it's obviously just a technical exercise. As long as your indices are lower than prior year's quarter, then obviously that adjustment mechanism leads to a negative pricing impact I would be happy if I could forecast the steel prices, but I mean, it's conceivable that throughout most part of the year, indices will be lower than last year. So I would say, yeah, that technical impact is continuing.

And may I add maybe one word on quarterly outperformance? I mean, you have in the deck on page 40 the quarterly outperformance by region automotive technologies, and you see that there are significant swings between quarters. America's Q1 2022, 3.9, 8.4% in Q2, minus 2.7 in Q3, plus 11% in Q4. Don't get nervous about a quarter. Look at this more long term. Yes, there are technical factors as explained, but that doesn't change our view that America is a very interesting market for us. You know this from also our statement at the beginning of the year that we're looking to expand there. There's lots of positive things going on on the IRA. You all know this. In particular, when you look at the electrification potential of cars and trucks, So don't get this wrong. We are not negative on the U.S. We are very well positioned there, and that there is a situation where a quarter deviates from a long-term trend may be the case, but don't extrapolate on this. Let's see what the second quarter and the third quarter is bringing. The guidance is 2% to 5% for the group, and we confirmed this today. We are positive on what's going to happen in the Americas.

Thank you. That's very clear. And my last question is on the cost inflation. I understand you may not want to provide all the numbers here, but maybe just a rough idea of what's been the cost inflation in quarter one. And is it going to be maybe less of a pattern similar throughout the year? And then composition of inflation, maybe this quarter was largely, let's say, raw materials, and the next one would be maybe the wages and energy. So if you could provide a little bit details on that.

Thank you. I mean, we were very outspoken about that in the last year. And then I was tested every quarter on what I said. And I think I wasn't too far away even at the beginning of last year. But our approach this year is to be a little bit more restrictive in that, I mean, we said it very clearly at our annual conference that the cost drivers are different. Cost drivers are not always as transparently derivable from a market spot price, especially in steel. Steel, we are very in very low quantities buying really at spot prices. It's the price that we agreed on a contractual contract with most of our suppliers. And therefore, especially in automotive technologies, we have to go to our customers with a very detailed cost breakdown where we are not arguing about indices and spot prices, but really what did we pay last year and what are we paying this year. And that might differ significantly from what the spot price would indicate. So, for example, we never bought steel at the peak spot prices last year because we were fixed in contracts and we never or we also will not pay this year for steel at the lowest end of the index development. And again, the exception, and I said that all along, is the price or the index classes in the U.S., which have been implemented since 2007 and 2008, so not a recent development. But other than that, it's really something that you cannot necessarily derive from a spot pricing. And a second component to that, and we also have been clear, energy prices will be a cost driver, especially in Europe, and labor will be a cost driver. Labor, the good thing about labor is that it's very predictable. We know now exactly how much and what the cost impact is, and it's also very transparent to our customers. It's difficult because normally it's a cost type that it's not necessarily agreeable between the parties that it's a basis of any kind of a price reduction. That's the normal assumption in a normal market environment where you have maybe 2 or 2.5 percent labor inflation. Once you hit 5 and 6 percent, obviously the discussion has to begin, and that understanding is clearly different. along the supply chain. So and coming back to energy, energy for sure does not have the current, I have to say currently, does not have the severe inflationary impact even in Europe that we anticipated. It still has a significant impact but not as severe. But at some point we are approaching the next winter also, and let's see how the geopolitical situation developed at that point and how that might then impact, again, energy prices. So I hope you're satisfied with a more qualitative answer to your question, but that's, I think, more... The strategic approach, we are very agile. We are going for the same recovery rates for different inflationary factors this year as we have been last year.

And maybe I add two sentences. I think the company has shown that it's able to manage its cost structure. So the strategic cost management is proven over years now. And you see this also when you look at FTE figures. And the company has shown last year that it's able to manage costs operationally if there are situations like last year where energy prices or material prices increase significantly. We focus on margin. The margin this quarter is at 8.1%. We already told you that our attempt is to do it on a sustainable basis, no one-offs and whatsoever. So let's see what the next quarter is going to bring. But I'm positive on the strategic cost management, and I'm very proud of what the guys have done last year and what they continue to do this year on the operational cost management.

Thank you. That is very, very helpful.

The last question is from Michael Ponzet from DZ Bank. Please go ahead.

Yes, Michael. Good morning. I have one question with regard to your energy hedges. Are you able to pass through the hedge price to your customers or are there also some index clauses in the contracts that you might have to book some losses on your books? That's a question from my side.

Yeah, and that's why we also adjusted it for EBIT. Normally, this wouldn't actually hit your books because if you know the IFRS standard, there's a so-called exemption to your fair value or fair evaluation. That's the only use exemption. And therefore, it wouldn't even be visible to anybody. But since the have settled some of the contracts last year. We now are in the fair value evaluation. And why did we settle some last year? Because obviously the desire to hedge was very high in that volatile environment. And then also the desire to reduce consumption was very high because it had a big savings impact. So these are two contradictory trends that then caused some over-hatching and the over-hatching was then settled beneficially, obviously, and therefore we now have to evaluate it at fair value. That's a little bit the technical background, but it stays technical for us. It has volatility in the net income and obviously the EBIT unadjusted or reported, but it's not how we operationally steer the company and that's also not how we would now engage with customers. As I said, we are settling close to 100% of all these forwards at the hedge price and not settle them financially. And therefore, what we would enter into very transparently with our customers is indeed the hedged price and not some artificial market price.

You think you are able to pass through the hedged prices to your customers?

Oh, yeah, okay. Yeah, I mean, that comes back to the question What costs are customers willing even to engage in negotiation? In the past, it was clearly the hidden assumption that labor and non-production material or operating supplies is the problem of the supplier or producer of parts and has to be offset with productivity. Last year has shown that clearly with gas and energy prices tripling and quadrupling and also wage inflation clearly above a normal productivity level that these need to be included in the negotiation. And I can report that we already included non-production material in our last year's negotiation. So we prepared the ground. And I'm very confident that we will get to the same recovery ratios with, as I said, different underlying cost drivers, but the result will be the same.

Okay. Maybe a follow-up. You mentioned that some of the contracts are running up to three years. Can you give us any idea which part of the contracts will run out through this year?

It's... It's about 55%. Okay, thank you.

Well then, ladies and gentlemen, if there are no further questions, then we would stop here. Thanks for listening. The colleagues are then available for further explanations if necessary. Thanks for your support and we'll see you soon again. Thank you. Bye-bye.