Schaeffler Ag Ord

Dear investors, dear analysts, good morning. Today, for the third quarter release of the Schaeffler Group, Mr. Klaus Rosenfeld, CEO of Schaeffler Group, Mr. Klaus Bauer, CFO, and us from the IAR team are here to take you through the results. This conversation will be conducted under the disclaimers you find on the deck. And without further ado, let's start the call. Klaus, the floor is yours.

Thank you, Renata. Ladies and gentlemen, welcome to our Q3 earnings call. You have in front of you our presentation that was published this morning, and I would like to go immediately to page five, where you have the key messages for Q3. I think you will agree these are strong Q3 results that are driven by the success of our automotive divisions. Q3 sales against high comms rather flat for the whole group. Good growth in Europe and Asia Pacific, but clearly headwinds in China. If you think about the first nine months, then you see that there is growth in line with our overall guidance. You see a Q3 gross margin that is slightly below Q3 2022 when you compare the quarters. and clearly in that quarter, 2023, driven by the very strong contribution from our automotive aftermarket business. EBIT margin, 8.4%. That is a margin even better than our margin guidance range of 6% to 8%. Also here, the two automotive divisions are the ones that contributed, while industrial was below 8%. what we wanted to achieve due to the economic environment. But 8.4, ladies and gentlemen, is compared to what we have seen in the past, a good and significant step forward that comes together with continued strong cash flow generation. As you are used to, 182 million positive free cash flow in the quarter speaks for itself. and that is also the result of an effective working capital management, in particular in automotive technologies. On that basis, we confirm the group guidance. We have slightly reduced the top line in industrial, but confirm the targets for our two automotive divisions and are on track to deliver what we promised. If you go to page six, you see why we are saying in the press release, that this is a strong quarter in a challenging environment. You clearly see that in the third quarter, in particular China, our region, was not growing minus 9.6% across the three divisions, with a minus 22% in industrial. That clearly shows that there is headwind. All the other divisions have were positive or slightly positive in that quarter. The outlier here is clearly aftermarket with 8.8% growth in that quarter. Significant margin contribution that once again shows how important that business is. Automotive, as I said, flat. And if you go through the regions, you see Europe, positive. America is more flattish. And Asia-Pacific also with a positive outlook. contribution. If you go to the backup, you see the same numbers for nine months, and you see that we are on track. Page seven gives you my typical highlights and lowlights, and I already alluded to this automotive technologies, strong margin driven by the mature business. We think that this quarter once again shows that our approach to manage the transformation is exactly right. We're earning the money and the cash flow in the traditional business, and we're investing Going forward into the new business, the margin is at the high end of the guidance. And if you see what happened with order intake and e-mobility, we are now for the first nine months at 2.9 billion order intake. And that is, again, the high end of the range that we promised, two to three. We are confident that we can also generate more order intake in the fourth quarter. Automotive aftermarket, I said it, both strong growth, certainly also supported by our improved logistical performance. We have spoken about this many times. And that, together with favorable pricing, delivered a high quality of earnings. That is clearly a record result in automotive aftermarket. And I'm proud to say this is now the third quarter where that is. dynamic continues. That is clearly positive. Free cash flow generation, good profitability, and effective working capital management led to strong free cash flow better than in the previous year quarter. So we are very happy with this, and that will also pave the way for a very decent dividend. On the negative side, to be straight here, yes, automotive technologies, overall sales growth was below market in America and in China. Immobility sales were softer in Q3, also not a surprise, market-driven, and clearly also a function of the fact that we explained in the second quarter already that some of the expected ramp-ups come later than expected. So a temporary issue from our point of view. we clearly see upside potential from what is coming. Then industrial, I said it before, significant headwind from China, year-over-year sales and EBIT in Q3 with a negative development, not Schaeffer-specific, but due to the weakening economic environment. If I put that together, once again, it's a strong quarter that also makes us very confident that we will achieve our goals. guidance on the group level towards the end of the year. Page 9, I will do this quickly. Klaus will anyhow explain more details here. You see Q3 with continued strong EBIT momentum. As I said, also driven by our traditional business, good cost management from Matthias' side, good management of working capital. bearings continue to grow in the right direction and also perform better. And I think an EBIT margin of 5.8% in Q3 speaks for itself. If you go to the automotive technologies order intake page, next page, you see that we have, as I said, already delivered our target in the first nine months. you see that the order intake resulted in a strong book-to-bill ratio of 1.6 times in Q3. So that clearly indicates future growth. I can once again say we are always careful with profitability of orders and see the long-term strategic growth trend in e-mobility intact. Two business highlights here. The U.S. pickup market is interesting, and also more innovation in commercial puts in high-performance e-powertrains drives the order intake. Aftermarket, clearly the shining star in our portfolio, strong sales growth, very strong EBIT margin. You see 16.7% margin in Q3. You see 16.9% in the first nine months. significant improvement of EBIT. At the same time, significant growth, two digits in the first nine months. This is clearly a very convincing result and the function of all the good things that the team in aftermarket has put in place. We are very proud of what we have here. And it looks like that despite certain issues, we are performing very well also today. towards the end of the year. Next page then gives you a little bit of a deep dive. You remember that we announced the acquisition of a B2B e-commerce platform in India called Kuvers. The trade and the transaction is going well. It's a scalable platform that we acquired with high customer focus, a strong digital interface, And we are very confident that with the significant number of workshops, with the significant number of contacts we can generate through this platform, that will give us an edge in the growing Indian market that clearly is attractive for aftermarket sales. Industrial next page, page 13. I've already mentioned the difficult issues here. We all know that Q3 2022 was a very strong quarter. So volumes in more or less all regions are below previous year quarter due to the weakening economic environment and also to some extent in stocking. That also has impacted the EBIT margin. And for us, clearly China has been an issue. Minus 22%, in particular, the high-performing wind business is something that you cannot just compensate from other growing areas. That, together with continued investment in growth areas like industrial automation, like rail, has then resulted in a certain reduction of profitability. We have put in place tactical cost-saving measures, so nothing structural. We are confident that at some point in time the cycle will turn And the tactical cost-saving measures are in particular addressing SG&A and overhead costs to smoothen the path. As we said, we are confident that we will make our guidance going forward. The order book clearly indicates that the bottom has not reached so far, so let's see how that fourth quarter goes. And clearly China with wind there has an impact on profitability. But there's also positive things to mention. In particular, in aerospace, we see that we are winning market share by long-term agreements from key OEMs. And also in the rail business, there is significant upside potential there. and good order intake. So both these sectors are growing and will also continue to grow going forward. Capital allocation, the last page from my side before I hand over to Klaus. All on track. Investments for the first nine months, 641 million. We continue to prioritize CapEx for gross businesses. We are absolutely in line with what we suggested here. CapEx ratio 5.4%, or more importantly, reinvestment rate slightly below one. That makes a lot of sense. And the company is, as we said, cash generative. So we will continue to invest going forward in the areas where we see future growth. With that, I hand over to Klaus, and we'll come back for the last chapter then.

Thank you very much, Klaus. Ladies and gentlemen, let's look at the numbers. A little bit more detail. First slide is sales. Klaus already mentioned the Fletish sales development of foreign-adjusted 0.5%. Let me put that a little bit more in perspective. If you look at the prior year, you see strong sales of 4.2 billion. There's two impacts that I would like to stress. First of all, you see also on the bottom when you compare reported to foreign exchange adjusted sales, a very significant negative foreign exchange impact of almost five percentage points. And secondly, you remember in Q3 of 2022, we had this retroactive price recovery for automotive OEM we explained in past calls that we don't have a renegotiation of most of our sales price adjustments and therefore sales price impacts are much more equally distributed in 2023 versus 2022. So I will mention that impact a couple more times as we go through the numbers. Klaus already mentioned the quarterly distribution. Here you see it also depicted with the very significant sales decrease in greater China. When we come to the next slide, cross-profit, the headlines are on the right side under key aspects. You see on the waterfall chart that we maintained our pricing levels actually slightly positive versus Q3 of 2022. That is especially remarkable because, as I said, there was this retroactive one-time year-to-date price adjustment very significantly in the prior year. You see the volume impact that is mainly driven by industrial, as Klaus already described, And then you see the positive impact of production cost. That is the productivity that we are driving, not just in automotive, but also in industrial, as I will mention later on the divisional slide. The foreign exchange impact that I also already mentioned, that is also impacting our gross profit and therefore also having an impact on the gross margin, which Klaus already said is slightly below last year. But the two impacts, foreign exchange and the retroactive one-time price recovery impact of the prior year quarter would explain all of that. And actually without these impacts, we would have been cross-profit improving also from a margin standpoint. Regarding the divisions, I will talk in more detail on coming slides, so I will skip that and go into the next slide, which then shows you the overhead cost development. We stay below 16%. That is definitely our threshold that we are monitoring very closely. You see a little bit of an uptick in admin. For this quarter, the main driver behind that is that we had to adjust our year-to-date variable compensation accrual for the expected higher target achievements for this year. So from a cost standpoint, a slightly negative impact for the quarter, but in general, obviously, a positive background for this development in this single quarter. When we come to the next slide of the EBIT margin, then as Klaus already said, 8.4% EBIT, very strong quarterly result. You see it, if you compare it to the first half of the year, it's the strongest EBIT margin for the year. It's actually at the same level as last year's Q3 EBIT, and again, I cannot repeat it often enough. Last year's quarter, three was impacted by a year-to-date one-time price recovery for the automotive OEM customers that would be equally distributed this year. So definitely on the right trajectory. And again, I will talk about these single divisions on the upcoming slides, starting with automotive technologies. At the next slide, you see what Klaus already mentioned, e-mobility. We had a sales decrease of 9.4%. That is in line with the currently stagnating e-mobility and market volumes. But you also see that in all other business divisions, we had solid growth. If you go to the bottom of the left side, you see our relative performance and Klaus already mentioned that as well. We are at the market levels in Europe and Asia-Pacific. But especially in America, the relative underperformance continues. I explained that in past calls. That is heavily driven also by the Mexican peso US dollar exchange ratio that continues to be in that metric unfavorable for us. If you would correct for that, then our volumes would be also in America's at the market growth levels. On the right side, you see then reflected everything that I already mentioned. Also, from an EBIT perspective, you see the gross profit contribution, the positive one. That is now excluding the foreign exchange impact. That's in the last column here of the waterfall. So, therefore, that is clearly driven by our maintained pricing levels and, therefore, positively then net positive our productivity gains in our production facilities. Maybe a short comment to others. I made the same comment in past calls. Remember last year we reported a shareholding in Scheffler Paravan, which is today Scheffler Barwire, in We accounted for that at equity and therefore put the result in others. It's now reported mainly under the R&D column. Therefore, there's a reclassification impact between R&D expenses and others that explain the favorable others portion and also some of the higher R&D expenses that you see. In total, and Klaus already mentioned that all of that is leading to to a strong EBIT margin for the quarter in automotive technologies of 5.8%. Next slide, then automotive aftermarket. Not much to add to what Klaus already said. That is and continues to be the shining star. Everything really going in the right direction at the moment. You see the significant sales growth really supported by all regions and also supported, as you then see in the waterfall chart on the right side, by strong gross profit contribution. That is due to still solid pricing and also then obviously the volume increase that you see in sales. Outstanding EBIT margin of 16.7% for the quarter. You see over three percentage points better than last year and in line with what we have shown every quarter so far this year. And last but not least, regarding the industrial division. everything that is significant was already touched upon by Klaus. You see on the left upper side the 22% sales decrease in China. You also see that reflected on the bottom part of the left side, especially in renewals. Klaus already mentioned that the Chinese market in general, but in particular also in wind is declining at this rate, and therefore no surprise that renewables here is at almost the same declining ratio. There's, I think, no question that renewables also in China, wind also in China, will have to play a significant role going forward. So we expect that being a temporary situation, although maybe still ongoing into the fourth quarter and maybe even the first quarter of next year. On the right side, you see then the EBIT development. A lot of that is driven by volumes, especially out of China. There is a fixed cost absorption impact, but also a margin mix impact. Therefore, significant margin decline as compared to last year. But the 9.7% is almost one percentage point better than, as you remember earlier, Our Q2 result was, which is testimony to the effective tactical cost savings measures that we are undertaking in that area. That leads me into the next slide to net income. You see, first of all, over the quarters in this year, a very good trajectory of net income. We increased it quarter over quarter. throughout the year and secondly you also see technically the relatively big decline versus the prior year quarter and again by now I mean you know it by heart that is again the distortion of the prior year quarter by the one time retroactive price recovery that we realized last year and is reflected on an ongoing basis this year and You see on the right side, Rosie and Sheffler, where you added, are significantly improved over last year based on the mathematical formula. That shouldn't be a surprise based on what I reported so far. Coming to free cash flow on the next slide, it is a strong free cash flow. Also, the trajectory is similar than net income, very positive. It is pretty much in line with what I think we also predicted for this quarter, maybe a touch stronger than that. You see, again, as compared to the prior year quarter, the impact of the retroactive price recovery, not going now for the X time in more detail, but 182 million, definitely a strong cash flow generation here. As always, we show you a little bit the detail on the bottom right side. where you see also especially the restructuring cash outflows for the first nine months of 2023. These were 181 million. You know that these cash outflows will significantly normalize starting next year. and therefore there should be cash generating power from that line alone. If we hadn't had these restructuring expenses and cash outflows, And the other line items you see that our underlying free cash flow generation power has been 362 million for the first nine months of 2023, which is almost 100 million stronger than last year. On the waterfall chart on the top right, you see everything that Klaus already touched in his highlights. We have the effective working capital management in place. A working capital change of 108 million for the nine months is a good result considering the sales development. You see also that with a cash flow of 182 million, With a free cash flow of 182 million, we financed almost 250 million in more capex than in the last Q3. That makes this cash flow number even stronger. That brings me to my last page. On the left side, the leverage ratio from end of last year of 1.1 increasing since the beginning of the year to 1.4 times. You know that from prior calls that that is due to the financing of the Avelix acquisition. We have drawn a term loan of 500 million to finance that acquisition. That brings us to 1.4 that we are now with our cash flow generation managed down. And clearly the bottom of the left side, including the leverage ratio, indicates our continuing strong liquidity situation and strong balance sheet. And therefore, it was also no surprise that even in the light of the announcement of the Vitesco transactions, all three rating agencies confirmed our current credit rating. And with that strong message, back to you, Klaus.