Schaeffler Ag Ord

Dear Darwin, thank you very much. Dear analysts, dear investors, welcome to the Q1 2024 earnings release. And without further ado, I pass the floor to Mr. Klaus Rosenfeld, CEO of the Scheffler Group. Klaus, the floor is yours.

Thank you very much, Renata. Ladies and gentlemen, welcome to our Q1 earnings call. are ready to share that presentation with you that you should have on your screens or that you should have received this morning. As usual, the presentation is structured into two main parts. I will take the overview and the business highlights, and Klaus is going to go in detail through the numbers. Let me start on page four with the key messages. we can present today a strong Q1 in a continued difficult market environment. I think the numbers speak for themselves. If you look at the top line, Q1 sales are flat, but we have to look at that against the high comps of Q1 2023. Automotive tech with a positive development, also positive outperformance. Vehicle lifetime solutions with a strong top line, good growth, very positive for us. And then weaker sales and bearings in industrial solutions. As expected, a difficult market environment You already see from the terms that we're using here that this is now the new segment reporting where automotive bearings has been transferred into the bearings in industrial solution division. Second key message, order intake in Q1 strong. We are proud to say that we already booked in the first quarter 1.5 billion in e-mobility against our proven target 2 to 3 billion. That is half the way. And I will come back to that later where that is coming from. Order book situation industrial. One of the key questions from the conversations we had with you, how is that going to develop? And we see that Q1 indicates that we see the trough in Q2. The order book industrial is clearly gaining momentum margin. Q1 nearly at the same level as in Q1 2023, 7.9 versus 8.1. Strong in automotive tech, very strong in vehicle lifetime solutions above 17%, and solid in bearings in industrial solutions. You see already from this first page, and Klaus is going to explain that in detail, that there is a bigger delta in gross margin, 26.6 versus 23.1. That is a one-off impact that comes from a technical change in how we value inventories. That effect is not included in the EBIT margin. So we're talking here about the adjusted version. So 8.1 versus 7.9 compares and does not include this 3% delta in gross profit. Free cash flow minus 166. That is a number a little bit higher than expected. Working capital drove this. Ensure the higher sales in inventory-intensive areas have impacted this. We confirm the guidance for all metrics. You know the guidance this year is only a group guidance. And I can also report that our transaction is on track, not only from the deal execution, but also from the integration. We continue with a strong focus on business continuity and preparation for day one. And as I've said before, 2024 is an interim year where things are changing for us. We are preparing things where we're laying the ground for a successful combination that should then take off in 2025. The famous page five with a CEO judgment highlights and lowlights, I think I said it already, automotive tech, strong order intake, strong EBIT margin, certainly also driven by the mature business, Vehicle lifetime solutions with a record quarter. We also see that the trend that started end of last year continues. So strong growth momentum and continued strong EBIT margin. And in bearings, industrial solutions is a little bit mixed. We see, as I said before, the order book industrial bottoming signaling that the declining market pressure across multiple sectors is declining. On the other hand, we are digesting a challenging situation in the Vint market in China where there is increased price pressure and where we can, to some extent, compensate this with lower costs but not fully, and that clearly leaves impact on the margins. Let me go to page 7 for briefly on the numbers. You see here what I said before, sales flat, EBIT margin slightly lower. That also includes an impact that Klaus is going to explain from the equity consolidation of BTESCO that sits in this 322 with minus 8 million euro. If you go to page number 8, you see what I said before. top-line performance flat and a little bit mixed. You see here that America's was strong with 4.2%, Europe flat, and China below Q1 2023. And if you look into the columns, you see that that is more or less driven by the Bering's industrial solution division with minus 9.8%. What is also interesting to see is how in that first quarter, and that's just an indication for the rest of the year, the regional mix has rebalanced a little bit. 45% from Europe, 23% from America, and 19% from China, 13% from Asia Pacific. So typically we have America, greater China, more or less on the same level. And here you see that the impact, China also impacts the mix. That doesn't mean that we will reduce our Chinese business. The opposite is true. We are positive on China, and this is in particular true for the automotive business. Quickly on the divisions, I'm not going to say much here, but the key numbers, sales, automotive, more or less flat on a FX adjusted basis, slight growth, EBIT margin slightly up, 5.3, I think, is better than what people expected, and also above previous year. You see a little bit of detail on the order book on page 10. 2.1 billion is the overall order intake for automotive technologies without the bearings that are now part of industrial, and 1.5 of that is from e-mobility. In e-mobility, one of the interesting new orders that came in is an OEM nomination for an e-motor and inverter for heavy-duty business. That is an area that is quite attractive, and we are happy about this order intake. And certainly, as you would expect, it's not only e-mobility, but also in our mature business, we see order intake. This is for the medium-duty sector, and we are happy about this project because it shows, again, the strength of our mature business that will probably run longer than we expected some time before. before. Vehicle lifetime solutions, as I said, the shining star in this Q1 report, 17.4 margin speaks for itself. At the same time, 8.6% growth. That is all on the positive, and I can already say here, it looks like that this trend continues also in the second quarter. It is clearly driven by the fact that There are more repairs, but also we are gaining market share because people like to repair their cars with our repair solution. That is on page 12, the heavy investment in the last years into modern customer portals, into the right product mix, into logistics. All of this is now paying off, and we are optimistic that also the capital market will at some point recognize the strength of our vehicle lifetime solution business now let me come to the last division bearings and industrial solutions as i said challenging market environment minus four percent um and uh 8.5 is uh more or less the same margin like last year klaus is going to share with you the details i talked already about the wind business in china that is a challenging situation because of the significant price pressure, but we have decided to stay the course there and try to counter this price pressure with further cost improvement, and we see some good development here, but it's not possible to compensate the price reduction completely. In terms of order book and how we see the next quarter. You know this famous chart with order book industrial for three months. Here is now the situation where the order intake, order book development cuts from below into the sales curve. That's typically an indicator that the development bottoms out. And let's see how that develops. We are a little bit more cautious here, but in the second half, I think hopefully the situation stabilizes. There are some good indicators here, like the aerospace business that is already on a positive track, and also in some of the new businesses. We show you here a project for solar farms. We are seeing good growth, but the bulk of the business has clearly suffered from the difficult market environment. Last two pages, the famous one on capital allocation. Not much to say here. We continue to be disciplined in how we invest. 5.4 capex ratio reinvestment rate, slightly below one, very similar to Q1. No big changes here. Clearly important to follow up with the big automotive tech customers. We have enough maneuver room in our budgets to support customers and with the capacity we have overall also in bearings and industrial solutions, we feel quite good. That also leaves room for investments into sustainability. We are, as you know, a big believer in sustainability becoming a key quality indicator. And Klaus will continue to invest in that area and to achieve our decarbonization goals. Last page from my side before Klaus takes over is then on the transaction. I think you followed the annual general meetings. They have approved Scheffler with 100% and Vitesco also approved. with a very dominant majority above 90% the transaction. We will now focus clearly on getting our preparation for day one right. The disciplined execution clearly pays off. So far, everything perfectly on track. And on the integration, I can say here, without going into too much detail, So far, it is a constructive exercise. The teams are working very well together. The respect for each other grows, I would say, every day. And we will certainly meet the deadline for day one. That is probably even earlier than what we thought so far, maybe already beginning of the fourth quarter. But the most important thing is that the investments into cooperation, into understanding each other, to understand the strong focus on business continuity, all of that lays the ground for 2025. The same holds true for synergies, where we're working heavily on the right numbers, on getting accountability for synergies right. All of that certainly requires a little bit of extra time. But I'm optimistic that we will be able to present to you at the beginning of the year a good plan how this merger then starts to generate the synergies and also get to the value potential that we promised to you. With that, I hand over to Klaus for more details on the numbers. Thank you very much.

Thank you very much, Klaus, ladies and gentlemen. Good morning also from my side. Let's now have a more detailed look into the numbers. Thank you. Sales at prior year level, as Klaus already alluded to, is a strong result based on the strong comps and the difficult circumstances that we are facing currently. And it's also testimony to our diversification and resilience, as you see on the page. This time it's vehicle lifetime solutions in America that are really offsetting some of the weaker areas in the other regions. So a good result. And let's jump into gross profit. I think that's the exciting chart this time. And as Klaus already said, I will explain to you one special impact here. And you see it best in the waterfall chart on the left side. The inventory evaluation has a positive impact of $117 million, and that is still included in gross profit, but adjusted in EBIT. What is it? We started to use new capabilities of our ERP system landscape and harmonized now our inventory evaluation, especially finished goods and unfinished goods globally. And as shown here, that has a one-time impact of $117 million. Now going forward, obviously, that system is stable and will not cause any deterioration or distortion anymore. As you see then on the bottom right side, we showed to you the gross profit development in the three divisions, but also then the positive impact of the inventory evaluation. And as you easily can see based on the numbers shown, every single division also excluding this extraordinary impact. improved its margin above prior year. In total we see an improvement of 60 basis points excluding this special impact. Overhead cost on the next slide is a little bit higher than you used to see and as we have seen in the last year that has some obvious reasons and some reasons that I am happy to explain. In admin, you see obviously an increase in the level based on the M&A related services that we are absorbing currently due to the Vitesco transaction that is completely explaining the difference to the level that we have seen in the second half of last year. And in the selling expenses, Klaus already alluded a little bit to it, obviously with the strong sales development in areas where we have higher selling costs, especially vehicle lifetime solutions, you see then a little bit of a mixed impact also in the amount of selling expenses. Now, if you look at vehicle lifetime solutions in the table on the right bottom, You see also for vehicle lifetime solutions a little bit of an increase of the relative level of the overhead expenses. It has half of that in vehicle lifetime solutions is also the allocated M&A related cost increase in admin. But there's also some fixed step cost in selling M&A. And Klaus said it already, logistics, digitalization, everything that we are doing to exploit market opportunities and gain market share. And as you see in the top line, we are pretty successful in that with a significant sales increase in automotive aftermarket business, or how we call it now, vehicle lifetime solutions. If we then go to the next slide, as a reminder, in EBIT, you see it like for like. There's no inventory evaluation impact as in gross profit. And we think the maintaining the level is a very strong result. Klaus said it already. There is also a minor impact in there. of the equity evaluation of our shareholding in Vitesco. Now, please don't confuse that with a full consolidation that will start with the merger registration, so sometime in the fourth quarter. Here, it's only the equity inclusion. Equity means that proportional net income after taxes will be recognized Here in our P&L, you know that we hold around 39.9% of the shares in Vitesco. So what you see here is the impact of the proportional net income after taxes of Vitesco plus a purchase price allocation. You might remember that we said we will continue with the book values once we fully consolidate with Tesco, but in the equity space, we have to also include a purchase price allocation effect. With that effect, the amount that is now included in our EBIT is slightly negative with minus $8 million. You see that also in our new division, if you will, in our new column in our reporting in the so-called others category. There is the minus $8 million of net income, proportionate net income after PPA from Vitesco included, as I said, at amount of minus $8 million. Interestingly enough, if you now correct and adjust the EBIT by this equity impact, then you are exactly at the prior year margin with 8.1%. So again, I cannot emphasize enough in the environment, in the circumstances. And with the first quarter of last year being the strongest quarter of last year, a very strong result, especially As we go forward and have some optimism still of improvements in the second half of the year, I think that is a very good start into the year. Maybe on the table on the bottom right, you see it also, obviously, cloud-headed shining stars, shining star, big lifetime solutions with an EBIT improvement of 2%. but also automotive technologies on a relatively strong prior year quarter, even an improvement of 40 basis points, I think should be something that we should be proud of. Bearings and industrial solutions, considering the volume impact that you see in sales here with a loss of only 40 basis points, also a strong improvement. result and I think testimony of the countermeasures that we reported on the last few quarters now really taking effect also in that division. Now let's get into more detail regarding the divisions. First I'll start with automotive technologies. You see the new Businesses, e-mobility and chassis are the growing businesses, but engine and transmission, year over year, almost flat. So that is obviously driving the sales and marching mix also. Important is the information on the bottom left. I think that is what I indicated to you throughout the second half of last year when we had to report underperformance. in our automotive business globally. I said because it's mainly technically driven, especially in the Americas, you now see the technical impacts phasing out, and we are back into a solid outperformance with 160 basis points on a global level. And you see that this is happening in all regions except Greater China, but also Greater China is a significant improvement over the performance of last year. And please be also aware that the outperformance that we are showing here is now tailored to The division and the mix of the division, that means that automotive bearings, which are not reported in this division anymore, but in the bearings and industrial divisions, is not included in the outperformance calculation anymore. And you might remember that I reported in some of the prior calls that especially, for example, with BYD in China, we are very strong in the bearings business and are growing significantly with these players. And if we would include bearings in China, which had a significant outperformance, then it would look even better. So on the right side in the EBIT waterfall chart, it's displayed also the big adjustment for the inventory evaluation. You see it in the columns, others with minus 21. That is the portion of the 117 million that is allocated to this division automotive technologies and you will see similar numbers in the other two divisions. Let's then jump to vehicle lifetime solutions. I mean, not much to add to what Klaus already said, shining star sales up in all regions, strong EBIT margin driven by volume and also a positive pricing carryover from last year. And you see in the waterfall chart in others only a slight inventory evaluation effect here in this division. The reason is because there we are talking about repair kits and in the repair kits we already had our evaluation logic that we now extended to other areas predominantly included in the past. And last but not least, from a divisional side, bearings and industrial solutions. I think the sales development in all regions except America's reflect the difficult market circumstances. Klaus said it, especially China wind is also reflected here with minus 9.8 for all of China. And then on the bottom left with minus 29% for renewables. But the good news is and also a little piece of resilience through diversification is America's with a positive trend. Klaus said it already, that's mainly driven by the very strong aerospace sector that's mainly reflected in the region, America's. On the right side, same as in the other divisions, in the other column with minus 79 million, you see the correction, the adjustment of the positive impact of the one-time inventory evaluation change. Net income on the next slide, obviously, as you see, significantly increased over prior year. Rosey value added in a good range with 12% in the corridor of our midterm targets, standalone midterm targets that will be discussed on a later point. And that leads me into free cash flow. Free cash flow is negative as expected due to seasonal increase in the working capital. Also, strong sales development in vehicle lifetime solutions. Vehicle lifetime solutions always carries relatively more inventory than, for example, automotive OEM. I think that's natural. So, therefore, you would also have a little bit of a mixed impact in the level of working capital. And please also remember that we have, in the first quarter, refinanced all our bridge financing for the Vitesco transactions, and therefore there's a significant amount of one-off financing transaction payments in this cash flow number. It's around 30 million, you see it also in the waterfall chart on the top right. net interest compared to a prior year. That includes the one of financing transaction cost is for 84 million higher than last year. As I said, 30 million is about one of transaction costs and the other remainder is then increased financing cost due to the increase in the debt. That comes until we fully consolidate Vitesco obviously without the positive impact on a cash flow contribution by Vitesco. So it's now going against the standalone free cash flow of Scheffler and therefore a little bit of a distortion until we fully consolidate Vitesco. This brings me to my last page. I pretty much explained it already in explaining the interest development on the prior page. You see gross debt increased significantly. That's $1.4 billion for the acquisition of Vitesco shares. And also, if I look to prior year, There's also some of the VELIX financing that we started in Q1 of last year, but didn't quite draw in completeness until April of last year. So there's a little bit of an effect there too, but I think very well explainable. And as we explained, the leverage ratio of 2.1 Now you have a gross debt increase due to the acquisition of Vitesco, but you don't get the EBITDR benefit of the Vitesco consolidation. That will start with the full consolidation, and then this leverage ratio will technically correct itself, and it is our view that latest developments we will be significantly below the level that you see here before the effect of the acquisition of David Tesco shares.