Schaeffler Ag Ord

Dear investors, dear analysts, a good morning. Today, for the full year 2033, we meet with the Shepard Grouper, Mr. Klaus Rosenfeld, CEO of Shepard Grouper, Mr. Klaus Bauer Group, and us from the IARC are here to take you through the results and guidance for 2024. This conversation will be conducted as usual under the disclaimer you find on the deck. And without further ado, let's start the call. Start the floor, please.

Thank you, Renata. Ladies and gentlemen, welcome to our annual results call today on March 5th. We will share the call as usual between Klaus Bauer and myself. I will start with the overview and some information on the business development. Let's go to page number four first. I think you saw the The key figures, sales up 5.8%, what we think is a good result in a challenging environment, particularly driven by positive volume and pricing, margin 7.3%. The main drivers here were the two automotive divisions, in particular automotive aftermarket, with a stellar margin of more than 16%. Free cash flow, 421 million for the full year. And I think we are proud to say that we've overachieved our guidance and could even demonstrate strong cash flow generation despite a capex number that is 19%. above previous year dividend. We already announced 45 cents, the same number as last year. And you know that we increased the dividend payout ratio going forward from 30 to 50, from 240 to 60%. Guidance achieved. Yes, and you saw this industrial at the lower end. We'll come back to this. And for sure, as we indicated to you, the year 2024 is a year of transition. We will only provide you with guidance on group level. Klaus is going to explain that. That's a little bit of a complicated guidance as required by the rules. And for sure, the divisional part that we are not guiding for will be part of the explanations during the year, who is achieving what. But with all the structural changes that are in front of us as a result of the Vitesco merger, we think it's prudent not to go too much into detail, but rather focus on the year 2025 and beyond. Last point, the deal execution is on track. We are five months, more or less five months down the road with a rapid recovery. execution pass more or less every two weeks something new. The latest information was the exchange ratio with 1 to 11.4 or to say it in numbers of shares that you can count 5 to 57 shares for Vitesco and Scheffler. The AGM is in April as you know and we are still expect closing in the fourth quarter. Let me go to page five, this famous CEO page with the highlights and the lowlights. And let me start with the lowlight, and that's clearly the top line in automotive. We have not achieved our outperformance target. The reasons are not new. They were explained during the last quarterly calls. We see this as a temporarily situation where we are lagging global vehicle production. And second point also to mention here, industrial, also something that we debated in all the quarterly calls of the past. The industrial top line is and has been under pressure due to the overall weaker economic environment. You all know industrial is a cyclical business And as the chart later shows, it looks like that we have reached the trough and that the situation will hopefully turn soon. Today is the Congress in China. Let's see what that brings. And we'll see that also here in Europe and in the other markets, things develop to the better. On the positive side, I think group performance, It's on the positive. Strong portfolio management paid off. 7.2% margin speaks for itself. Strong balance sheet. The transformation... is ongoing even without the Bitesco merger, and we have shown that we can more or less self-finance our way forward. Cash generation is strong, good profitability, but in particular, effective working capital management led to the strong free cash flow, and that's the basis, as you know, for attractive dividend payouts. And for sure, on the strategic side, the merger with Bitesco Looks very promising. You all know the good reasons behind this. A strong strategic logic. Very well financed. Clearly something that has significant synergy potential. and then the one share, one vote simplification of the shareholder structure should all make it an attractive proposition going forward. Numbers on page 7. I'm not going to go into detail here. You see for the group 5.8% and a margin of 7.3%. If you see the growth of the EBIT before... special items, you see that EBIT grew by 13%. That indicates that we are finally in the year 2023 improving our operating performance stronger than the top line. The top line growth is shown on page number eight with all the different buckets. You see clearly here that while We can say all regions grew and all divisions contributed to the overall growth. Aftermarket, strong with 11.8%. Look at these numbers. China and Asia Pacific, the base is small, but in Europe, 10%, in America, 12%. That speaks for itself and demonstrates how important that automotive aftermarket business is going forward. When you think about the margin of more than 16%, then that in itself should be one of the value drivers going forward. From a regional point of view, yes, China is more or less flat. Here you see also one of the weaknesses this year, industrial with minus 6%. You know our exposure in wind, that has hit us harder than we expected. expected, and that is more or less shown by this number here. Klaus will give more details. All in all, I think the 5.8% is a solid and promising number also going forward. Quickly on the divisions, you see automotive technologies on page number nine. I think it's fair to say that with 5.4% gross and with a margin improvement to 4.5%, gross margin more or less stable. This is a successful year for Matthias and his business. The performance has been driven, as you already know, by the mature businesses in full year 2023. We can show you very promising order intake, both in mature and in the new business, $5 billion in EMOP and $8 billion in the other businesses. The positive effects from increased pricing have come through. Negotiations with OEMs are closed for sure, and that is also what is behind the gross margin. Matthias has done very well in running his plans in an effective manner. I already mentioned the fact that we are not happy with the outperformance Number 10 gives you then a little bit more detail of the order intake. I already mentioned that 5 billion order intake with a strong finish in Q4 2023 has been more than what we promised, 2.3 billion, the same target as in 2022. So I think strong sign that we are in the business. You see some or two examples here. that also points to an important development that may be a surprise to the capital market, but HEF technology becomes more and more relevant both in China but also in the U.S. So it's not only pure battery electric that counts, but also the combination. Aftermarket, again, a strong gross business, a strong margin business. I don't have to say much here. Nearly 12% gross, what is predominantly organic gross, plus 16.3% margin, I think speaks for itself. We can only thank here Jens for the strong delivery. The market was certainly also helpful here because, as you all know, in a situation where there is rather an economic downturn expected, people rather repair cars than buying new cars. That's good for us. But let me also say this is not just the extension of combustion engines. We are getting stronger and stronger when it comes to repair solutions for hybrid and for e-mobility. That's on the next page. experience we have in engine and transmission systems is definitely something where we see a strong competitive advantage. Just to mention one number, by 25, 35% of new car registrations are expected to be halves and for sure at some point in time these cars need repair solution and that's exactly where we see our strengths and where we want to play. Industrial, as I said, a little bit of a disappointing result. Fourth quarter was difficult. We ended up with the lower end of the guidance, 9%. Just for the record, if you compare that to previous year, there is an effect of 50 basis points that come from the Evelix PPA impact, but still a margin drop of 2% while sales are more or less flat. If Alex here was the main driver for the 3.9%, without that, sales would have been slightly behind the previous year. We know that that is not really satisfactory. What I can say is this is the result of cyclical headwinds. We think that our position is okay and good, and as soon as the cycle turns, we'll benefit from that as well. That's on page number 14. You see in Q4 and also what we are experiencing in January that it starts to turn. Still a long way to go to bring it back to growth, but we've really... suffered from this two or three quarters downturn and for sure the diversification we have in our sectors with aerospace and rail continuing to see strong order intake is not strong enough to really compensate for the downturn in the most important sectors. My last page is then on the guidance for 23. Sorry, there's a page more on on the transaction later on. But on 23, I can say we have achieved what we promised on group level. We have achieved what we promised on margin level. And I already mentioned the outperformance that is not in line with the annual guidance. Don't forget, when we set outperformance 0% to 3%, that this was an average number over the years. However, it doesn't change the fact that minus 400 is not where we want to be. Capital allocation, I think I can cut that short, page 16. I already said it, 932 million was the group investment. That is 19% more than previous year. Shows that we are on the right track. The bulk of this investment was, as you see on the right-hand side, in Europe. If you go through the different businesses, for sure, immobility contributed to this, industrial contributed to this, with the localization becoming more important, in particular in China. But also in the other areas of business, we have continued to invest. You heard about the big plan for the U.S., That is clearly another proof point for our more diversified also footprint strategy. Let me continue with the pages on the transaction update. I think you all saw the exchange ratio. I leave that to your questions. With that 1 to 11.4 or 5 to 57, I think all the data points should be there to calculate the shareholding structure post-transaction, provided everything goes through as we think. There's no indication that that is not the case, and with that, we will probably end up with a free flow that is below the 30% rather than the area of 22%. Transaction update, I think I can cut this really short. After the 26th ad hoc statement, The next bigger one is March 14th, where you will see the published merger documents, also the valuation documents with the standalone plans of Scheffler and Vitesco. A new situation for us. We have never published plans for five years, at least on group level. So important information, interesting document that will come out. And then on the 25th, our AGM, 24th, the AGM of Vitesco. Let me also add the integration is on track. We are in good shape with 23, 24 integration teams, weekly meetings, high intensity, positive spirit, and clearly with the understanding that the year 2024 will be a very important year to lay the grounds for what will come out then out of a joint business plan for 25 and the years thereafter. So don't judge the merger on the year 2024. It's a lengthy transaction and deal execution process. And it's now up to us, together with our colleagues at Vitesco, to lay the grounds for successful delivery of synergies going forward. Last page before I hand over to Klaus for the more detailed explanation of the numbers. Sustainability. Sustainability is very important to us. As you all know, we have published today also our sustainability report. The sustainability report has a significant number of KPIs that we have also listed here on page number 12. From the report, you know that we have agreed to work towards 10 different action fields that are structured into ESG according to the customary structure, and you see of these ten action fields, we have at the moment seven major KPIs that we want to share with you. The first two ones are on climate neutrality. I'm happy to share with you that in terms of scope one and two, we have made significant further progress, reduced the greenhouse gas emissions from 2022 to 2023 by nearly 24%. At the same time, on the scope three upstream, there is a slight increase that is more or less activity driven. You see it later on when you come to the growth. So more to come here. Scope three upstream is critical because we need green steel and we need to make sure that that then finds its way into the most important products. Energy efficiency, we're already in the year 2023 more or less on target for what we want to achieve in 2024, 100 gigawatt annual efficiency gains, very good progress in terms of energy efficiency. also helps to save some cost. Renewable energy also here, positive delivery, close to the 100% target for 24 globally, and that is also promising. Then on other targets, fresh water, very important. We have promised... Until 2030, base year 2019, 20% reduction. We are at 12.9%. So also here we are optimistic to overachieve our targets. Employee safety at 10% improvement. We achieved a 2.7 LTIR rate, and there's still some way to go. But it's an important indicator and also diversity in top management on track by 25. We want to have 20% of our top management led by women. That's a sign for diversity and diversity is important not only for innovation but also for performance and future success. With that, I hand over to Klaus for the detailed numbers.

Thank you very much, Klaus. Klaus, you already showed a few numbers focusing on the full year results. I will, in my portion now, mainly stay with the fourth quarter. Let's go to the first slide here. You see the sales development, remarkable sixth quarter in a row, above $4 billion of sales, despite... Foreign exchange translationary headwind. But anyways, for the fourth quarter, you see excluding foreign exchange by 3.3%. On the right side, you clearly see what Klaus already indicated. mainly driven by our automotive divisions and mainly automotive aftermarket here. And from a regional split on the bottom, you see that Europe, as Klaus already mentioned, grew strongly and contributed the most. On the next slide, it's cross-profit. The two remarks that I want to make here is you see in the waterfall chart that we maintained our pricing levels, which is good news. But you see a little bit of an impact in the fourth quarter in production cost. That's a normal seasonal pattern because of lower volumes in the fourth quarter. It has to do with the shutdown in the... in the Christmas period that was longer this year than it was last year, and the absorption that's coming with it On the next slide, I'm coming to the overhead. Overhead is a good news state flat. You see year over year it's an increase of 0.3%. You also see throughout the year in all four quarters a pretty stable overhead situation. And that is despite the fact you see that reflected a little bit in the In the bars at admin, these are a little bit increased for the third and fourth quarter. These are the transactionary expense impacts from our Vitesco transaction, mainly M&A consulting services here. Maybe as Klaus touched already a little bit on that for the full year, but talking a little bit about the table on the right bottom, you see here the industrial situation where we have for sure an impact in EBIT and some of that is driven not just by the volume fixed cost under absorption in gross profit, but also in the overhead ratio, see that increased 3% in the quarter year and 2% for the full year. At a first glance, that sounds like bad news. However, I would really focus on that. and turn it around and tell you that, and Klaus mentioned that in the highlights already a little bit, that despite the very difficult market environment that we are facing right now in industrial, we are not foregoing any investments in our future and continuing our R&D work, for example, in the area of robotics and in the area of hydrogen. with a lower volume that naturally mathematically then increases the overhead ratio, but see that as a sign that we are investing into our future and are not carried away too much by the cyclical top line of industrial. And therefore, as Klaus said, once the volume comes back, the industrial division should be in good shape. By the way, with automotive aftermarket and automotive technologies offsetting that trend for the year and also for this quarter, as you see in the numbers here, that is the beauty of diversification, and therefore we can afford to invest also in a division in times where there is cyclical headwinds. Coming to the next slide, the EBIT levels, 5.5% for the quarter. You see that's in line with what happened last year with 5.8%. So it's a normal seasonal pattern here. And when we go to the table on the lower right side, you see pretty much reflected everything that I already said now in gross profit and overhead. Strong performance, as Klaus said, for the quarter as well as the full year for automotive aftermarket with over 3 percentage points of margin improvement. Also strong performance for automotive technologies, still 0.3 percentage points better in Q4. And despite the volume impacts that I explained that were a little heavier in the Christmas shutdown this year than last year, and strong 1.4 percentage point improvement year over year. On the next slide, we are starting to now look into the divisions, starting with automotive technologies. Let me just... make two observations on this slide. You see one is all reflected by the headline. You see it in the table below. Engine and transmission and bearings had solid growth and continued the growth in the fourth quarter. Chassis, obviously from a percentage standpoint, the highest number in the table, but as you see on a low starting point with 101 million, So therefore, really engine transmission and bearings driving the growth in the fourth quarter. And below that you see, and that's now also a full year picture, not just the fourth quarter, but you see the outperformance explanation that Klaus already indicated. We explained it, I think, throughout the last two quarterly updates. And you might remember that. It's driven mainly by China. China is the participation in the immobility sales right now that will improve, as we said, over time. However, the BYD, the famous BYD effect in China is also not lost on us. BYD is really important. having a high vertical integration in-house. We participate in their growth. We are a significant supplier to BYD, but from a content per vehicle underproportional as every other supplier as well. And then, secondly, you might remember the situation in America that's mainly technically driven by the strong Mexican pesos versus the U.S. dollar. We have a lot of Value added in Mexican pesos and selling in U.S. dollars into the U.S. market, therefore, are impacted by the strengthening of the Mexican peso. That should, as I said in the last call, should now phase out and go away as we go into 2024 because it's now in the baseline phase. And if the Mexican peso doesn't strengthen further, which is not expected, then that should also phase out and turn around and normalize. Let's then go to automotive aftermarket on the next slide. Automotive aftermarket, I think, not... Much to say, it continues to be the shining star, also in that quarter. And you see maybe on the left top side that Greater China grew by almost 44% on a low level, though. That is the increase mainly due to our platform business that you know we have set up and are ramping up in China for China. On the next slide, we are talking about industrial. Surely, the division currently with the most difficult market conditions I think for the circumstances we are weathering the storm pretty okay. But nevertheless, as Klaus said, 5.8% EBIT margin cannot be and is not the long-term ambition there. You see clearly, if you look at the numbers on the left side, clearly the The drivers, and Klaus mentioned both of them, and they're connected also. It's in the region Greater China with sales quarter over quarter with minus 20.1%. And in the graph below that, you see renewables with minus 32.7% year over year. And if you now combine it both together, it's really China wind. And as we said in the past, China wind is the driver of the current performance in our industrial division that is more prominent and emphasized as with our peers. And we also were transparent about that. The wind sector in China is much more important for us in our portfolio than for our peers. We are by far number one bearing supplier into that segment. Good story or good news with that is once that turns around and there's, I think, no doubt in the market that it will turn around. The timing, we can have all different opinions, but China is dependent on further installments of wind energy So it will turn around, and if it turns around, we will be the one who is participating the most in that. Ending up on a positive note on that slide, you see on the left button also the industrial automation sales development. We told you industrial automation with its focus fields including robotics, automation and so on, linear automation in industrial applications is a focus field besides renewable. For us, you know that we invested also with Evelix in that area heavily, and that is really also the sector that is growing already in the fourth quarter of last year. And we have great hope that we will execute our strategy in that sector. That leads me now to the rest of the P&L and the balance sheet net income, 47 euro cents earnings per share. That needs explanation. It's heavily impacted by pure bookkeeping, accounting technicalities. We have, as you know, offered the Vitesco shareholders to tender their shares, and that tender offer started on the 15th of November of last year. The offer period ended on the 15th of December. You know that we got... offered around 30% of Vitesco shares at that point. That was then settled in the new year, 5th of January, and that was the reason why at the end of the calendar year, at the 31st of December, we had to value the tender shares that we had a binding offer out there for the 30% of the shares for a price of 94 euros per share. We had to value these shares at the fair value at the balance sheet or the reporting period end 31st of December. You might remember that the share price after the tender offer period ended returned to a lower level. and therefore the fair value had to be reflected with the share price at the end of the reporting period. And we had to realize a negative valuation impact of minus $188 million. That was the 30% of the shares multiplied by the difference between 94 euros and the share price at the stock exchange at the end of the year. Again, pure technicalities will never lead to cash outflow and will not impact our P&L going forward. It's just the technicality of IFRS 9. this point and the same is true then for the second impact related to the transaction as you are aware we entered into a total return swap agreement with a bank and were economically responsible for the share price development in that swap. The swap was filled right at the beginning of the offer period with 9% of the shares The 9% of the shares were acquired at around the offer price at that point, which was 91 euros, as you might remember. And same logic at the end of the year. The stock exchange value or price was share price was lower than the 91. And therefore, we had to realize evaluation impact of minus 47 billion. two pure technical impacts. And without these two impacts, the earnings per share would have ended up in the range of the prior year. So no concern here, although it looks admittedly strange at first glance. On the next slide, you see a free cash flow. I think that is a number that we are very proud of. We beat our guidance with water 21 million euros. Klaus mentioned it already, and you see it in the waterfall chart on the bottom right. The increased capex also in the fourth quarter could be almost completely financed with effective working capital management as you see a positive contribution in the fourth quarter of over $200 million. So good result there. Normally what I do on this slide also comment a little bit on the underlying cash flow generation power, and that corrects especially, of course, the restructuring expense and cash, not expenses, cash outflow that we experienced. was still 208 million. You are also aware that that will significantly drop now in 2024, but in 2023, full year was still 208 million for the total year. And if you add that back and deduct a few positive cash inflows from legal cases, then you come up with a cash flow generating power of 600 million right in the range of what we are always saying, that we have around 600 to 700 million of cash flow generating power per year. That then allows us also on the next slide to continue paying attractive dividends. It stays at 45 euro cents this year. This is a payout ratio of, again, close to 50%. That was also a reason, if you now look over the last five years here, we always were rather at the top of our target range of 30% to 50%. So therefore, we said, let's now just adjust that range so that we are more in the middle of this range going forward. So that will be increased to 60%. For sure, a good... Good news for our shareholders. On the next slide, we are talking about now a little bit balance sheet items. In that regard, it's the leverage ratio known chart. It increased this year to 1.5. Clearly, the main driver is the Avelix acquisition at the beginning of the year. And we would have then reduced that throughout the year to a level of around 1.3 due to the cash flow that we generated. However, as you are aware, we are also securitizing the total return swap and therefore had to finance another 261 million. As you see on the right side, therefore, it stayed at the 1.5 times level. but that doesn't change the situation that we continue to have a strong liquidity situation around 3 billion of liquidity, strong balance sheet, which is also reflected in the confirmation of our ratings in the light of the Vitesco transaction. So towards the end, that's a new slide, and it will be only the exception, and that's explaining you a little bit how we plan to report the year 2024 to also get maybe your feedback on that. Klaus mentioned it and it's clear 2024 will be a year of transition. It will be the year where we are executing in steps as described the merger with Vitesco and therefore we have to account for that also in the communication to the markets. The one guiding principle is DRS-20, the standard that's governing our outlook for our reporting. This is a complicated standard and the standard says that we have to guide and put an outlook out based on the entity as it will exist at the end of the reporting period. And we know almost with certainty today that at the end of the period, Scheffler AG will be a different company as it is today. Today, it's still standalone. Today, we have a shareholding in Vitesco AG of around 40%. But we also know almost certainly that at the end of the year, there will be a Scheffler AG that is merged with Vitesco. Therefore, we had to... put our outlook based on that timing. The timing is very important, and you see it a little bit here in the explanations. We think that for the first three quarters of 2024, we will report an entity that is still Scheffler AG standalone, as you know it today. including the 40% shareholding in Vitesco. And that means from a consolidation standpoint, we have to consolidate the Vitesco shareholding at equity. At equity means that we will recognize the quarterly results of Vitesco, but only on a net income level. on that 40% shareholding level. And then our assumption is that for the fourth quarter, we then will have a situation where the merger is registered and we will fully consolidate the VITESCO and therefore then you have the full balance sheet and P&L structure included. So why do I explain that? Because obviously now we have a few moving parts in 2024 in regard to the reporting. You see it described here under the bullet one. We will already transition the Scheffler operating model towards the target model that we explained to you throughout the transaction. That means our automotive aftermarket business will be renamed Vehicle Lifetime Solutions, not more changes there. But then the automotive bearings business division will be already reported together with our industrial division. and will be renamed as Bearings and Industrial Solutions. And the third adjustment is that we will allocate corporate center overhead expenses not by sales, but by number of divisions. So every division will get the same portion of these overhead expenses. Of course, that means that there will be not any impact on a group level, but there will be a different segment reporting. Therefore, we will be very clear with the first quarter actual reporting of 2024 what these changes will be. We will restate 2023 quarterly actuals accordingly so that you clearly can see how these divisions develop. But there is no question that there will be adjustments needed in your modeling and in our modeling as well due to these transitionary actions already on a Scheffler standalone basis. So we also decided therefore that on a group level with these complicated technical impacts we will guide for this transitionary period only on group level, so the 2024 guidance is on group level, but actually we will report in a segment way and also give you the restated adjusted prior year numbers as a comparison. That leads me now to the next slide, already in Klaus's section again, but since I started it here. That is the guidance based on these technicalities that I just explained for 2024. As I said, you see it on the right side, mentioned again, for three quarters, the Tesco shareholding of Scheffler AG, 40% at equity consolidated, and recognized in the Scheffler AG financials. And then from the fourth quarter on, full consolidation of the merged entity after the merger is registered. That leads us to the guidance as written here. We think in total year over year. although now it's not necessarily comparable, but on these assumptions with the consolidation, there will be a strong growth of the top line. We will achieve an EBIT margin between 6% and 9% and have a free cash flow outlook and guidance of $300 million to $400 million. In other words, despite the efforts and also the expenses that come with the transaction and the integration, we think that we will have a year 2024 that in the full year will be comparable to our standalone performance for 2023. And with that, Klaus, sorry for the technicalities, but back to you.