Schaeffler Ag Ord

Thank you, Renata. Ladies and gentlemen, welcome to our second quarter conference call.

You all have the presentation in front of you that we published this morning. And I would immediately jump to page number four, where you have the overview with the key messages. You saw the numbers. Q2 sales up nearly 10%, driven by volume growth in the automotive divisions and also by continued favorable pricing in all three divisions. Gross profit margin in Q2 more or less in line with Q2 2022, 21.8% also here, a function of the year-on-year improved margins in automotive technologies and aftermarket, and a little bit of a weaker margin in Q2 for industrial. Then EBIT margin, 7.1% in the quarter, 7.6% in the first half, Let me start again with industrial. Weekend industrial, 8.8%, clearly a disappointment in Q2. On the other hand, a very strong margin in automotive aftermarket. Let's point to the first half, 17% in automotive aftermarket, clearly speaks for itself. And I can say already here upfront, that the positive trend also continues into Q3. And then solid in automotive technologies, you all remember Q1, where we posted 4.3%. Now another 4.3% in Q2 clearly led us to also the change in our divisional guidance. Before I come to this, very briefly on the free cash flow, 103 million positive free cash flow in the quarter, a significant improvement compared to the last year. And if you consider that again for the half year, nearly 30 million, including significant one-off restructuring payout of around 150, tells you that the underlying free cash flow generation is absolutely intact. It is driven by the EBITDA improvement, but also by effective working capital management. So we are happy with this number. and that also then gave rise to the improved free cash flow guidance for the year. We have updated the guidance, as you saw, slightly different divisional mix, industrial margin down, aftermarket margin up, automotive tech margin up, and in total then a slight improvement in the growth EBIT margin, 6% to 8%. and also free cash flow up by 50 million while the gross rate for the full group is unchanged. Let me come to the sales numbers on page number five. As I said, all divisions, all regions contributed to the growth. We all need to be aware of the lower comms in Q2, in particular when it comes to China. There you see the significant growth rates in the line Greater China with 15% in automotive technologies and 12.8% overall. But also industrial already indicates that there is headwind and we are expecting also headwind going forward. If you want to read these numbers, we should always also be aware that there is an element of external growth in the industrial division. The 7.9%, Klaus, more or less two-thirds of that come from the consolidation of Evelix as of January 1st, 2023. Let me go to the highlights. And I think you saw page six already. Automotive technology solid margin, the 4.3% is an important number because it points to the lower end of our midterm targets. 4% to 6%, and we have always said that's what we are working towards, and that is also confirmed. Then very strong aftermarket, high quality of earnings, all the levers point into the right direction. It's not only volume, it's also pricing. It is clearly the fact that the performance in RKO has improved. It is clearly the fact that Jens drives this business in a different direction than just selling spare parts, So we're very happy about the automotive aftermarket development and then together with the strong free cash flow that rounds the three highlights up. As I said, if you look through the printed number and also include the restructuring cash outs that are running off, we think that this issue of free cash flow remains a very important parameter going forward. The two negatives or lowlights is on the one hand outperformance in automotive technologies, still no outperformance here. And that has to do with project phasing and also with the effect that certain of the ramp-ups, in particular in e-mobility, are delayed. We have always said outperformance is something that is not to be judged by a quarter. We have adjusted our outperformance downwards from 2 to 5 to 0 to 3%, and we are confident that that works. Long-term, we have always said the 2 to 5 is on average. Let's see how the year 2023 progresses. Let me also say here up front, in terms of order intake and immobility, the same logic applies. We have always said 2 to 3 billion. Last year, we overachieved the 2 to 3 significantly. This year, we are in the first half a little bit softer with only a billion order intake in e-mobility. But I can say we are very confident that we will achieve, if not overachieve, the 2 to 3 with what we're seeing for the second half of the year. An industrial margin I already commented on. The key here is, from my point of view, this is a temporary situation. We are confident that we can continue to grow in 2024. The second half is a half where we will see further headwinds. China may be one of the things to watch out for. but Stefan has initiated the right temporary tactical measures to counterbalance that situation. These measures are in particular cost-driven, but also efficiency-driven when it comes to the planned performance. So that's the highlights and lowlights. Let me quickly go through the three divisions. You see on page eight the main numbers that are already described. And I think I don't have to say much more here. Klaus is going to take this over. What I would like to say and point out is if you look at the gross profit margin, the health indicator of the business that is stable over the half year. and improved in Q2. And that is clearly also positively impacted by continued price increases. In general, we can say we are on a very good track here to push for the increases and also get this agreed with our main customers. In terms of a little bit more insight in order book and order intake, you see on page nine what I already said. 4.1 billion in the first half is lower than what we had in previous years. We are at 1 billion in e-mobility. Yes, you're all focused on e-mobility for good reason, but let me also say we are making good progress in particular in the chassis area. There are interesting developments in that area also for customers that we have not had so far. And there are in the chassis area also significant order intake potential for the quarters to come. Two examples here. You understand that we can't give you the names. The one is a new order intake for a coolant mixing valve for fuel cell applications in the heavy-duty sector. Clearly something that we are looking at. And the other one is one of these chassis things, a rear-wheel steering order intake with a significant number in China. Automotive aftermarket, as I said, everything on green, double-digit sales growth, strong demand across the regions. You see it here also in the second bullet point, 12.5% American cars. Asia Pacific 16%, Greater China from a pretty low base, even 60%. And all of that together with an EBIT margin improvement, 17%, gross margin improved, and clearly something where we are now benefiting from all the things that have been done to bring also our operating performance in line with what we wanted to see. So delivered what we promised and as I said before this trend seems to continue also into the second half. Automotive aftermarket we have given you an extra page on page 11 focusing on the region Americas and here you clearly see again the combination of logistical footprint and expansion of the product portfolio where we have initiated a specific torque converter initiative across the board, and that together also with the regional focus not only on the U.S., but also Central and South America, gives us significant further opportunity, plus 14% sales increase in the first half speaks for itself. If you then go to the next page, you see industrial. As I said, the 8.8% is a disappointment. On the positive side, we can say the division grew, largely driven by the Avelix acquisition, still some organic growth, clearly positive impacted by price. Volume gets a little softer. And on the margin side, I can basically say it's three things that have impacted here. the margin level. If you take Q2, 11.7 to 8.8%. The 2.9% margin drop, again, that should not be extrapolated for the rest of the year, is a function of negative FX and PPA impact. Don't forget, we never adjusted previous year figures. So that's, as you see on the table, half a percentage point on that basis. Then FX explains another nearly 1% drop, and then you have a mix of temporary relocation costs that we are still digesting. That's a function of the structural measures that were put in place, but also impact on the gross profit margin that comes from lower volume and a less favorable regional mix, and to some extent, a lower share of our distribution business. Nothing unusual. We have seen this in downturns before. So the real task here for the management team is to put the right tactical cost-driven countermeasures in place that's initiated. And I'm confident that we will clearly secure the lower margin ban from 9 to 11. Stefan is working on this and it's only a temporary issue as we see it. Page 13 shows you What's happened with the order book? The order book in industrial is a different order book than the one in automotive technologies. And that clearly indicates headwind in H2. Headwind comes from also the Chinese region. So we are adjusting for this. As I said before, we see this as a temporary trend. At some point in time, the straight line will turn as it has turned in 2020. And for that we are continuing to invest in new business fields and growth areas. So once again it's a temporary situation and we clearly see the growth potential that is there and we'll follow up with this. I spoke this morning at CNBC on the situation in India. India is one of the areas where we will continue to localize more, and that also goes for the new sectors like robots or medical applications. So nothing to be too concerned about. It will be a second half with headwind, but we are positive on the outlook for 2024, and we have agreed to leave our midterm target for industrial with 12% to 14% in place. Last page before I hand over to Klaus, capital allocation, nothing really dramatic here to report. We are continuing our discipline, first half 0.9% reinvestment rate, 419 million of capex. The focus areas are the same as in the past, continued prioritization of capital. the industrial division and e-mobility, and that will also continue going forward. In general, I can say the answer to this less globalized world is localization, in particular the foreign markets like China, India, and also the U.S., and we'll continue that path throughout the end of the year. With that, I hand over to you, Klaus, for the detailed look into the numbers.

Thank you very much, Klaus. Let's give the numbers a little bit more flavor. We start on the first page with sales. Most of this was already presented by Klaus. Let me give maybe two additional comments here. You see first on the left side that we achieved the fourth quarter here consecutively with sales above $4 billion. And on the right lower side, you see the sales contribution and growth by region, which clearly indicates what Klaus already said, that we achieved sales growth in every region. On the next slide, we will talk about cross-profit here. I think it will get a little bit more interesting. You see on the left side in the waterfall chart versus the prior year quarter, first of all, what Klaus already indicated with $136 million, very solid price contribution to the cross-profit as well as the top line. You see then with production cost with minus $77 million, that's a lower number than the price increase clearly indicating that we are successful in transporting the inflation into also our sales prices it's it's a bigger number the sales price increase also not because we over recovered the inflation but in klaus already alluded to that there is also structural improvements in our production costs And obviously, especially in the automotive divisions, we also have a positive volume contribution in the fixed cost absorption. So in general, from a net standpoint, between price and production cost, a very positive contribution to our profitability. You see then volume and mix positive. That shouldn't be a surprise here. And not the largest number in this waterfall chart, but I think still... very valuable to discuss here is the negative mix with minus 13. That is really also indicative of what happened in our industrial division. We have a lower sales share in distribution and we have a lower sales share in wind, particularly in China, which are a good margin contributors and therefore have a little bit of a negative mix impact even visible on a group level as you see here. And then you also see the negative foreign exchange impact that Klaus also already mentioned. That's almost one percentage point that we are losing with FX and again should then also clearly clearly explain why we are on a cross-profit level at the same level as last year, but actually would be ahead if we wouldn't have the negative foreign exchange impact. So implicitly, the margin improvement is about one percentage point, unfortunately offset with the negative foreign exchange impact. Everything else on that slide, I think I will come to later in my presentation. Let's switch to the next page, overhead expenses. You see overhead expenses are almost flat compared to prior year quarter. That is actually even if you would adjust for the Avelix acquisition, which as you know, is consolidated in our group financials since the beginning of 2023. And if you would adjust the prior year for the Avelix impact on SG&A, then actually we would even show a slight reduction here. And if you look at the very bottom right side, you see that is mainly impacting automotive technologies. That's what we mentioned already in the highlights with structural improvements, automotive technologies. really sees the full scaling effect in overhead expenses with the top line and stable overhead expenses on the other side. If we then go to the next page, to the EBIT margin explanation, you see the EBIT margin improvement tool. 7.1% in Q2 and 7.6% for the half year is a very good development. What I also always want to look at on this page is not just the relative EBIT margin development, but also the absolute EBIT. And you see with an increase over prior year quarter of 89 million from 200 to 289 million, that is also on an absolute level, obviously a very good development. On the right side, you see a little bit more flavor in regard to the divisions. However, I will obviously come to that in the next three slides. Let's start with automotive. On the next slide, you see on the top left the sales development. Also, what Klaus already said, e-mobility, a little bit weaker growth this quarter. It's very difficult, especially in e-mobility, where you have big projects to really assess this number on a purely quarterly basis. There will be significant ramp-ups in the next half year and within full volume achieved in 2024. So that number will improve. What I also would like to point out, and we never talk a lot about this business division, is chassis systems. Chassis systems, as you know, is our other pillar for propulsion agnostic business. And here you see a significant growth of 44%, 221 million. And Klaus not coincidentally also showed you in his part already two of the order intakes for this year that are also chassis related, or at least the one with the rear wheel steering. So let's look at the new mobility opportunities for Schaeffler combined between e-mobility and chassis systems. As reflected in the sales growth here for chassis systems, we think that there's a huge opportunity also going forward for us. On the lower left, you see the outperformance that was also already commented on with minus 2.9 percentage points for the first half of the year. Definitely not at the level that we have seen in the past. Also here, as Klaus already said, it's difficult to assess this on a quarterly or even half-year basis. We will see And we are confident, as you see in our guidance, although adjusted down, it's still 0% to 3% outperformance. There will be a significant swing that we expect in the second half of the year with significant projects in the ramp-up phase at that time. Americas, you might remember the significant underperformance in Americas has a more structural reason. First, we are a significant producer in Mexico and then sort of the U.S. market out of Mexico transacted in U.S. dollars. And the Mexican pesos, as you are aware, has strengthened against the U.S. dollar market. over the last six to 12 months by 20%. And that drives a very significant transactional foreign exchange impact that is reflected in these numbers. And secondly, and you also remember me commenting on that, the U.S. is the one region in our automotive business where we have since a long time index-based material price clauses in our in our contracts and therefore had to accept price reductions as we also pay less for our steel. On the right side, you see the EBIT development for automotive. And here, I only want to make one comment. Obviously, you see the very significant gross profit impact on an absolute basis, plus 70 million. You might also wonder why is others so big here and is really the improvement also driven by other impacts, which would indicate maybe one-time impacts. And you might remember I explained that already in the first quarter, but we also... FULLY CONSOLIDATED PARAVAN FOR THE FIRST TIME SINCE THE FIRST QUARTER OF THIS YEAR BEFORE IT WAS AN EQUITY SHAREHOLDING AND THE EQUITY RESULT WAS REFLECTED IN OTHERS AND NOW SINCE WE FULLY CONSOLIDATED IT THE FULL P&L STRUCTURE OF Paravan is now included in the P&L structure of the group. And therefore, it comes to a reclassification effect, if you will, between others and mainly R&D expenses. Therefore, you see it's not a one-time impact. It will be ongoing. And the other impact will mainly be reflected also going forward in the R&D section. And that would leave me then, or lead me to industrial on the next page. Klaus already said most of it you see automotive aftermarket, sorry, automotive aftermarket first. You see that what Klaus already said, all regions grew, Europe a little bit less. That had to do with... a warehousing consolidation that is now fully in line and operative. So Europe will catch up with the other regions again in the fourth quarter. So even more growth potential here. And Greater China, Klaus already commented on, on a very low basis, significant growth that has to do also with our... online business and sales channel in China. On the EBIT bridge side, on the right side of the page, you see obviously nothing super exciting other than the result of 16.3% EBIT for Q2. And you see what Klaus already said, it's fully driven by price and volume in the cross-profit line, so a very positive and, as we think, also a sustainable result. So now, I was eager to come to industrial, obviously now I'm coming to industrial, and here you see that we indeed grew in all region on the top left side. As Klaus said, it's also heavily impacted by inorganic growth due to the consolidation of Avelix. And there's also, as you have seen, a significant price impact that we transported from our cost structure into the market. IN CONCLUSION, THERE IS VERY LITTLE ORGANIC VOLUME GROWTH IN THIS QUARTER, WHICH THEN IF YOU LOOK AT THE RIGHT SIDE, ALSO WOULD EXPLAIN THE CROSS-PROFIT CONTRIBUTION TO EBIT. AGAIN, VERY LITTLE VOLUME BASED FIXED COST ABSORPTION THAT HELPED US IN OUR PRODUCTION FACILITY AND THEN What Klaus also already mentioned, the Avelix purchase price allocation impact hurts us here a little bit with 50 basis points as well. So despite the volume growth, you see very little gross profit impact. Again, with price effects on the sales side offsetting inflationary trends on the cost side, And then the Avelix accounting impact explainable. And then as you go through the waterfall chart here, you see a significant increase in SG&A expenses. That is also due to Avelix, as we explained already last quarter. Evelix being for the first time fully consolidated since the beginning of the year obviously also impacts the entire cost structure in the P&L. And you see the negative foreign exchange impact of minus 12 million. That's about one percentage point. That is also reflective of our hedging strategy. Unfortunately, sales volumes didn't quite match the hedges. Klaus said the China volumes were a little bit different than we expected. also explainable, but not a permanent situation and definitely room and space for improvement going forward. You see the significant positive impact of others. Again, the question is, is there big one-time impacts in there? It's actually mainly driven due to our adjustments in EBIT, the EBIT adjustments in our in our P&L structure are reflected in others, and that are mainly space restructuring costs that we are trusting for that also are reflected and included in the cross-profit development and are then adjusted here in others. So not a one-time impact also. a permanent positive situation as long as we have restructuring costs. As we also indicated, the cost impact of the restructuring is now significantly facing off with H2 at 23 already and then definitely in 24. Maybe one little comment still on the left side. On the bottom, you see here reflected in the growth numbers by industrial market clusters, clearly the impact that I already mentioned on group level as a mixed impact. You see with the renewables actually stagnant or actually a little decrease here with minus 1.7%. That is, as you know, the wind business and also particularly the wind business in China. The installation rate in China based on the own expectation of China and our Chinese customers actually halved for the entire year. Instead of 120 gigawatts, the installation might only achieve around 60 gigawatts for the year. That is also the reason that we already discussed that we are a little bit careful with, Klaus called it headwinds, but a little bit careful in forecasting, especially the Chinese market and here especially the wind sector in China. On the next slide, we are coming to the net income. Net income obviously followed completely what I already said. And on the right side, you see the ROSI and Scheffler value-added ROSI. On an adjusted basis, you see with 13.2% here, clearly in our midterm target range of 12% to 15%. On the next slide, free cash flow, I mean, you heard it all, a very significant increase. Here you see it also graphically very clear, minus 219 million in the prior year and 100 plus, 103 million this quarter. Clearly, if you remember last year, driven by the significant investment in working capital, especially inventory. Here we are in a much more effective situation, as we said also in the headline, effective working capital management. That is not just true for inventories, but also receivables. And you see it actually in the waterfall chart on the right side on the top. with network and capital changes despite the volume or top-line change in sales, actually a positive contribution to free cash flow, which is definitely a good result. Is there still opportunity also for the second half of the year to even get better in that regard? There's no question there is, and we will obviously do our best upmost to exploit any opportunity in that regard. CapEx a little bit higher this quarter than it was in the prior year quarter, but clearly within the expectation that we shared with you also in connection with our guidance. Then you see others, maybe others, you see a little bit of the explanation also down in the table, but it's heavily driven by restructuring payouts still for the second quarter with 52 million included in our cash flow. And Klaus already said it, 157 million. for the first half year in restructuring payouts is three quarters of the total year anticipated amount and therefore of course pretty much front loaded and also a structural improvement pillar for the second half year free cash flow. Last comment on that page is in the a very lower corner on the right side than kind of our underlying cash flow generation power before, especially restructuring payouts. And that is now almost 180 million improved versus prior year quarter and obviously satisfactorily positive with almost 170 million. And that leads me to my last page where we show a little bit the balance sheet strength and structure. You see the leverage ratio at 1.5 times, which is as expected. And as we said, actually already at the end of last year, It's increased over last year due to the financing of the Avelix acquisition. And then, obviously, a slight increase, but only a slight increase between first quarter and second quarter due to the dividend payout of 295 million. It's only a slight increase, obviously, because we also, on the other side, contributed to equity and gave it a significant... or contributed a significant EBIT to the formula here. And last but not least, you see in the numbers below the bars our continuing strong liquidity situation that obviously is unchanged, and especially for the CFO, a pretty good basis to continue drive the performance going forward. With that, Klaus, back to you.

Thank you. Ladies and gentlemen, let me now finish the last two or three pages quickly. You see on 27 that we slightly changed our market assumptions. You all remember we have always been cautious on the global LVP numbers. And we have now with the numbers also from IHS improved this a little bit and think we'll get to 85.6 million cars. It's a million less than the IHS numbers. What is also interesting in that table, if you look at the IHS numbers and compare H2 2023 expected with H2 last year, you see no significant production volume growth. So the growth of the market was more or less in the first half. For us, it's even more important then to deliver on our outperformance promise. I think aftermarket industrial was already set. I'm not going to comment in detail here. I think we all know this environment clearly requires a hands-on approach and very proactive performance management. 28, I think we have said this now several times, so I'm not going to say this again in detail, but you see we recalibrated the guidance. It led to an increase in the guidance on EBIT margin and free cash flow, and the composition was already explained to you. So let me summarize again on 29. You see the text here. I'm not going to read the text, but just once again the judgment. This is a decent, robust Q2. in a certainly challenging environment. We decided to recalibrate the guidance and raise it slightly up. I think that is more than prudent. It is driven by the strong performance in aftermarket, by the solid performance in auto tech with all the challenges that were described. And clearly in industrial, it will now be even more important that after industrial was always the star performer in the past that we get these self-help measures initiated and executed. Stefan is totally on it. What gives us a lot of comfort is the continued cash flow generation strength that from our point of view really counts also for action going forward. I finish with the financial calendar. We will be available tomorrow and on Friday for road shows here in Europe. We'll then go after IIA on a roadshow in the U.S. where the timing still needs to be finalized. It could also that we start on the 12th, and then the next earnings release is on the 8th of November. As I said, we look with a realistic optimism into the second half, knowing that there are headwinds and knowing that you can also use headwinds to improve your midterm delivery. With that, I hand over back to Renata for questions. Thank you.

Ladies and gentlemen, at this time we begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making any questions. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. And the first question comes from Akshat Kakia from J.P. Morgan. Please go ahead.

Good morning. Yes, Akshat from J.P. Morgan. Three questions from my side, please. The first one on auto tech and pricing versus inflation in general. Could you just talk about the gross and net impact of inflation on the P&L in the first half for auto tech and your expectations of how that evolves going into the second half, please? The second one is on the e-mobility order intake. We know order intake numbers can be lumpy on a quarter-to-quarter basis, but I just want to ask on this call if you're happy with the current offering to the OEMs, or would you like to make some bolt-on acquisitions to improve the product portfolio overall? And the third one is on the industrial business. The order book indicates quite a meaningful slowdown in the second half, but I'm also looking at your full-year revenue guidance, and it doesn't imply a big slowdown in the second half revenues, even when I adjust for ULX. How do I square that, please? Thank you.

Maybe I start with the e-mobility question. We are happy with what we have. I don't see any need to acquire something. We have always said we're building on the competences we have, and what We have in the order book is, you know, from our point of view, a success. There's a big order book to be delivered and we want to deliver our things with proper profitability and also in best in class quality. There's no reason to acquire anything at the moment. The focus must be on operational excellence and delivery. This is a long-term game and not a short-term optimization. In terms of industrial, you rightfully said, yes, there is headwind in the second half to be dealt with. We reduced also the top-line guidance by three percentage points. That is not so much Scheffler driven, but market driven to be on the safe side. That's also then clearly driving the margin expectations slightly down. But please see this as something that from our point of view will turn then in 2024. where we think the structural positioning of Scheffler in the new growth areas, think about hydrogen, think about industrial automation, will continue. Klaus alluded to this. We are at the moment a little bit more soft on wind in China, but also that is a temporary weakness and not a structural problem.

I mean, I can only emphasize the China comment that Klaus just made. The impact, as I said, of the reduction in installation forecast in that sector in China by 50% is significant. But I think we all agree that that doesn't impact the longer term installation need. that is there also in China. So I think it's clearly a temporary situation that is also reflected in our order book in a significant way. Let me come to your first question that was about pass-through of inflation, especially in the automotive sector. We are automotive division. We are clearly at... at least at the same recovery level as we have been last year, actually even catching up a little bit of maybe a remaining gap from last year. And from a timing standpoint, I said it clearly in our last call that maybe other than with other peers and market We have not started all the negotiations new at the 1st of January and kind of reset to zero and started then anew. We continued most of the accomplishments of last year into this year. We negotiated from the beginning. One of the negotiation targets from the beginning was to have sustainable price increases and not just temporary ones. So that there is still, of course, because there's also a different composition of the inflationary cost side. So, for example, wages instead of raw material. Therefore, there is still negotiation elements in that. And therefore, there's a slight... slight increase of recovery over the year, but it's by far not as significant and extreme as it was last year. You remember last year, the main recovery push in the P&L was reflected in Q3, and I really want to manage expectation that that will not be the case this year. It's a much more a smoother phase-in of the prices this year than it was last year, and especially because last year's negotiation results were mostly sustainable.

And the next question comes from Horst Schneider from Bank of America. Please go ahead.

Yes, good morning, and thanks for taking most of my questions. I have got three related to automotive again. The first one is I see that your production guidance basically is still pretty cautious as you highlighted versus S&P. On the other hand, I see that your outperformance guidance seems to assume that your outperformance picks up significantly in H2. My feeling at the moment would be that maybe production is stronger and your outperformance again weaker. The impact on your business would be then zero. So that's fine, but maybe you can explain what makes you so optimistic about outperformance in H2. What's going to be the drivers? Question number two is a follow-up to Ashak's question. You have explained the thought on pricing, but can you maybe explain a little bit what are the bridge elements for H2? So some more... details, basically, what is driving that volumes? Is it a cost advantage? Is it pricing? Or is it all of these drivers? And the last question, sorry for that little bit longer, when we look at that, what book Warner did, basically, in July, they completed the senior spin off the auto aftermarket business, I just want to know if maybe you would also consider such a step? Or what are the reasons why you would not consider that ever?

Thank you. Okay, let me take the last one and the first one. We are not considering a breakup of our automotive business. That would be counterintuitive to the logic that we have put in place. That doesn't mean that we are not distinctively managing the different parts. And you know our model with the mature business on the one hand and the new business on the other hand. New is not only e-mobility, as Klaus said, it's also chassis. That's the model we have put in place. You know that we are super disciplined in terms of capital allocation. You also know that this is a midterm challenge that at the end of the day depends on maintaining good relationships with long-term customers. So our setup is as it is, and we believe that this is the right answer to that challenge. development in the, in particular, the propulsion business. Others do it differently. Let's see what that means for them. But we feel good about the structure that we have put in place. In terms of auto tech production guidance, yes, let's see what's happening for sure. Our outperformance was reduced. It's also back-ended, as you said. Why do we believe that that is possible? We have nearly two hands full of ramp-ups this year. They are delayed in certain areas, delayed because of reasons that are not in our hands. And if they come, as we know from our customers, that outperformance number is possible together with the structural points that Klaus made. So yes, there is an element of back-ended here. but the operational information that we have point clearly to an 0-3% outperformance being possible for the full year. And the pricing one I give to Klaus. Klaus, maybe I was mistaken. Were you asking about the Finia spin-off or were you asking about the aftermarket spin-off? Aftermarket. Oh, the aftermarket. On the aftermarket, we don't intend to spin that often. Again, you see, Horst, in this quarter in particular, the benefits of diversification. And yes, you can always say you want to have the diversification at your end, but we think that with all what we have, just think about structures, regional structures. There are synergies there. Jens can run his business as a separate division. The way to a legal separation and a carve-out is still cumbersome in terms of all the costs that come with this. we would at the time not go for a legal full cover of the aftermarket business.

Claude, can I maybe follow up with one small question? When you made the statement about outperformance and you say it's back-end loaded, you make the statement on industrials that you are pretty confident that the business is going to recover again next year. Can you make this statement also for auto tech that this weakness and outperformance is just temporary for the known reason that it's going to recover next year with model ramp-ups?

It's a function of ramp-ups. The businesses are in totally different situations. So one is suffering from headwind, in particular in certain sectors, that's the industrial part. I don't believe that these headwinds will continue forever. I think when these recessionary trends that we see at the moment across the world will mitigate it, then the base market grows, in particular in the sectors where we are strong, wind, industrial automation, all of what you know. So I think it's a temporary weakness that Stefan needs to tackle with countermeasures. On the industrial side, it's one thing. On the auto tech side, it's more a question of how do the long-term trend of e-mobility will continue in the next years. And here it is, from my point of view, a question of operational excellence and delivery on the ramparts that we have in our books. Yes, you can always say, why don't you have even more orders? And my answer to this is we want to deliver the orders that we have. We are proud of what we have today. And from a customer point of view, it's most important that you get this properly done.

Okay. Thank you. Maybe I add one comment to that from a CFO perspective. I mean, with e-mobility projects, as you know, it They trend to be much bigger projects. And then you are also much more dependent on the success of the platforms that you're in or how successful are platforms that you're not in. BYD is the top example. In the drivetrain, nobody is in because BYD produces it themselves. But It depends whether you are in that. So I think the CFO, as the CFO, I have to be much more concerned, not are we growing more than the market in these areas or better than the market, but are our projects that we are in profitable or not? And that's, I think, where we're very diligent in selecting and really going after the projects in e-mobility. We want to safeguard a minimum threshold for gross profit and then adjust our overhead cost structure over time in our transformation. to the value addition and vertical integration that you have in this area that's different than an engine and transmission. And therefore, I think it is very much important that you have sound tools in place to be able to choose profitable projects and then win profitable projects and maybe not anymore the volume impact that you clearly have seeked also in engine and transmission. But engine and transmission, you have hundreds and hundreds of projects that are smaller. And based on statistical measures, obviously, if you are less successful in one and more successful in the other, you have the chance to have that equalized. I think that is different with e-mobility. And again, maybe the outperformance to the market is not the main driver anymore going forward. But now to your other question, and I think it went a little bit beyond just the price impact. It's more the entire gross profitability levels in automotive technology. You kind of answered it yourself, or is it all three of them? I think it's all three of them, but with maybe different dynamics. I think volume will, and we also said we will grow moderately this year, so I think as much as our visibility is for this year in automotive, volumes will stick and will stay where they are. We might be from an from an LED global production volume, a little bit conservative, but we have relatively good visibility, obviously, what our orders on hand are, at least for the next three months. And so I think volume will be a positive contributor for the entire year, but at the same level as you have seen in the first half. Price, I think I already said, there will be a slight increase a positive impact on top incrementally for the second half of the year, but not that much. Lastly, you obviously have then production performance driven and overhead performance driven. I think we have proven in the first half of the year that we are serious about structural improvements. You know about our restructuring program that we announced in November of last year that is heavily impacting structural improvements of automotive. And so that will continue. However, it will be a more continuous phase in and mainly the next year, not this year. But there's definitely further improvement potential that we are going after. And from a production performance standpoint, as you can imagine, with such a big production footprint that we have, there's always pockets of improvement. And These we will go after as well. However, also not revolutionary, but evolutionary. Thanks for these heated answers.

And the next question comes from Sanjay Bhagwani from Citi. Please go ahead.

Hello. Thank you very much for taking my question also, and as always, a very comprehensive presentation. So I've got three questions as well. My first one, sorry to come back on the outperformance on the automotive. So maybe looking at the China, that seems to be H1 organic growth, 5 percentage point underperformance. So can we expect this to come back in H2, or this could probably come back more like, let's say, in 24? And the same for the Americas. How much of this 10 percentage point underperformance is, let's say, driven by currencies and the indexation? And when can we expect this to reverse? That's my first question, and I'll just follow up with the next one, if that is okay.

Yeah, so I start maybe with Americas. And as you heard me explaining it, this is structural. And as long as these structural impacts are not completely phased in, and then you have next year, obviously, a different basis, I think we will see, for example, the Mexican peso-US dollar transactional impact continuing. We will also see the... the index price impact structurally continuing. Obviously, it's all subject to change, both the FX impact as well as the mid-tier price impact. But as long as that trend is not turning around, I think you then only see the outperformance normalizing when you are in the next year and then comparing to that basis that we have right now. In China, I think we explained that also in the past. Obviously, and it's going back a little bit to what I said before, if you are in platforms that are gaining market share, then you are automatically also outperforming. And there we have a... weakness in platforms that we are in in China, especially Volkswagen, but we are also in domestics that are very successful, but we also have clearly the Volkswagen impact in China from an outperformance standpoint. you have the big impact that I think every supplier has. That's the BYD impact. As long as BYD is gaining 4% to 5% market share, I mean, it's 4% to 5% market share every year, it's difficult for a drive train supplier to outperform the market there because BYD has a very high vertical integration. So I think At some point also BYD gets to the limit of growth. I think we internally think there's still quite some growth ahead of them, but at some point it will slow down and then you also will see a normalization of that market share shift to BYD effect, if you will. And on top of that, and we explained that also in the past, we clearly are gaining a market share in new projects. And as they phase in, and that's with pretty much all significant domestic players in China, and as they phase in, that will also normalize them again. But it's not a matter of months or quarters. I mean, it's a matter of base effect and then looking into next year.

And maybe I can add to the next year. If you just look at IHS figures, you see that at the moment, the latest forecast is 86.7. We are slightly weaker. And for next year, the number at the moment is around 88, 1.4% growth. You see that China grows next year. uh stronger than america's and europe is at least projected at the moment more or less flattish now if i look at the forecast for this year and just take china china for the full year 23 is 1.2 percent after 7.4 in the first half that clearly means and it's logically because the first half 22 was impacted by the covet crisis It's a function of how we develop there against market, but there won't be 7.4% market growth in China. It could even be that this is, you know, reduced market growth compared to previous year where you had a big swing back. And that all needs to be factored in, similar situation in the US. So let's see where we get to. Our calculations at the moment point to, as we said, 0.3% outperformance for this year. And midterm, we have no reason to change the overall logic of 2% to 5%.

Thank you very much. Actually, you already answered two of my questions. Thank you for that. So just one last from my side is when we talk about the upside optionality, and sorry to ask this question again because – What we saw is one of your U.S. industrial peers, they actually monetized some of their stake in their Indian subsidy. And then when we again look at Schaeffler, for example, if I look at market cap of Schaeffler India, that's, I think, ahead of what market cap of the European parent company is. And you own a significant chunk of that. So do you see, is there a possibility of if you could monetize some of the steps, that is basically you still maintain the majority ownership, but can monetize some of the valuations that the Indian market is appreciating the OPCO Act?

Thanks for the hint. The question was asked last time already. It was asked frequently. We have no plans to change the setup. We are proud of what we have in India. It's an investment area. Parts of our strategy dialogue this year, some weeks ago, was focused on India, was focused on the US, on China, on more localization. So I cannot comment on this, on what you just alluded to. What I can say, the company is in a good situation when it comes to free cash flow. There's no need to monetize anything. We are not traders in participations in India. We want to make sure that our operational business runs. And, again, so there's A, no plan, and B, no need to do anything like that.

Thank you. That's very helpful.

And the next question comes from Markus Schmidt from Odoo BHF. Please go ahead.

Thanks for taking the question. It's just one on the March 24 bond maturity. I guess you will come to market in H2 to address this, or, and this is the question, could you opt for other financing options, for instance, promissory notes, because the cash interest impact would be about 20 million, I think, for the time being, if you would stay in the bond market. So is there any preference on your side which route you want to take and at what point in time?

Yeah, of course, we are clearly focusing on the refinancing of that bond since quite some time. I can tell you that we actually closed a term loan yesterday, and that's a financing part of it. but we are also thinking about a capital markets transaction in the second half of the year. And more to come, and more to come soon.

And could you disclose, just to follow up, could you disclose what the amount was, what you concluded yesterday, and at what interest rate?

Interest rate, not amount, 125 million.

125, okay, yeah. Great, thank you very much.

And the next question comes from Tom Swift from Morgan Stanley. Please go ahead.

Hi, guys. Good morning. The question on the bond has already been answered coming back. But I guess on top of that, in terms of, you know, talking about countermeasures, especially for the industrial businesses, does that imply, you know, potentially more cash restructuring to come? That's the first question, please. And then the second question is, can you just talk about the difference in cash flow profiles between the auto tech and the industrial business, please, and specifically the working capital profiles? Thank you.

Let me do the first one. As I said, the countermeasures for industrial at this point in time are tactical or operational ones. So there's no restructuring cost linked to this. It's not a restructuring program. It's the normal performance management type of things, saving costs, being diligent with production variances and these kinds of things. And on the cash flow profile, Klaus, you want to say something there?

I mean, cash flow profile is indeed different, especially inventories, because in industrial and automotive aftermarket, you have significant finished goods inventory that from a reaction time to market trends is much slower than in automotive technologies as an OEM supplier. And therefore, automotive aftermarket with a very good demand situation is... I would say at the lower end of inventory that we would see, and industrial on the other side, based on the slowdown on the demand, now has a little inventory above our target range that now reduces over months. But as I said, you cannot react within days or weeks in industrial, especially in the distribution to a weaker demand. market signal and therefore you have always a little bit delay whenever there's a swing in the demand up or down. You then have the opposite effect in your inventory for some time until you adjust back to the level that reflects the demand level. So in other words, yes, it's different. Automotive technology is pretty much correlated also with the profitability and sales top line. Industrial and automotive already always a little delay to what you see in the top line. Thank you.

Thank you.

And the next question comes from Gemma from JP Morgan. Please go ahead.

Hi, good morning. My questions have originally already been answered. Thank you.

Super. Then I think that's it from our side. There's no more questions. Ladies and gentlemen, thanks for your interest. Again, roadshow starts tomorrow. Hopefully you all have some summer holidays planned. without all the rain that we have here in Germany. We are again closing now here and look forward to seeing all of you soon. If not at the roadshow, then at the IIA, where we will exhibit our latest technologies. So please feel invited. We look forward to staying in touch. Thanks a lot and enjoy your holidays if you have any. Bye-bye.