Schaeffler Ag Ord

Dear ladies and gentlemen, welcome to the Schefter Group Q3 and 9-month 2024 earnings conference call. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be the opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. At our reserved customer's request, this conference will be recorded and the replay will be available shortly after the call on the website. May I now hand over to CEO Klaus Rosenfeld, CFO Klaus Bauer and Head of IR Heiko Eber, who will lead you through this conference. Please go ahead.

Thank you very much, operator. Ladies and gentlemen, I'm very happy to welcome you to our today's call on the financial results of the third quarter 2024. The press release, the presentation, and our nine-month report have been published today at 8 a.m. CET on our investor relations homepage. And for sure, we will provide a recording and a transcript of this call on our website afterwards. Now, before we take a look at today's agenda, I'm sure that you have all taken notice of our well-known disclaimer. Looking at the agenda, Klaus Rosenfeld, our CEO, and Klaus Bauer, our CFO, have joined the webcast to guide you through the key information in our presentation. Afterwards, those will be available for our Q&A session. And now, without further ado, let me hand over to our CEO, Klaus Rosenfeld.

Thank you, Heiko. Ladies and gentlemen, welcome also from my side. I would like to start immediately after the kind introduction of Heiko on page four of the presentation, where you have the key messages and some of the key numbers. Six key messages. Sales, Q3 slightly below previous year. The trends that we already outlined in Q2 continued with outperformance in Atec, strong sales. I would even say remarkably strong growth in vehicle lifetime solutions and market-driven sales decline in bearings industrial solutions. Slightly below $4 billion, certainly not what we would like to see, but something that I think is an acceptable top-line development margin. Q3, overall 4.7% impacted by the immobility ramp-ups, VLS continuously strong, and BIS disappointing, but hopefully now reaching the trough. On the positive side, Q3, free cash flow, $188 million. Once again, testimony for the strong free cash flow generation. And we can clearly say Klaus is going to explain that in detail, stronger than previous year, despite the VITASCO integration, despite financing costs. So all in all, when you take these first three messages, an okay quarter, certainly we are on track, but also a quarter that shows there is need for action. And that's key message number four. We announced today program forwards. For me, the fifth is program of self-help measures consisting of three main buckets that we'll explain later on. The target here is to achieve a recurring EBIT impact of $290 million per annum that shall be 100% realized in the year 2029. That means more or less every measure fully implemented by 2020 and then the EBIT impact phasing in in 2028 and 2029. The logic is, as I said, a function of the headwinds in Barrington Industrial Solutions, the promised headcount-related cost synergies from the Vitesco merger, and on top of this, we have decided with all what's going on in the global market and in particular European automotive industry, to also put additional measures in place to respond to the ongoing transformation and weaknesses in particular in Europe. Let me also say here up front, we know how these programs are developed. We have done this again in a constructive dialogue with our workers' council. They know the logic. They are informed about this. All these programs are always as good as they are executed and implemented, and I'm very confident that we are very good and very well positioned to realize these benefits as promised. Number five, the merger of Utesco has been successfully completed, and that is something that we are really proud of. In time, also in line with budgets and expectations, it's now up to us to push the integration. And for sure, the strategic logic is absolutely right. We are believers that e-mobility will come. It's only a question of how and how fast. But that trend is, from our point of view, not to be reversed. Numbers are complex. Klaus is going to explain this until end of the third quarter. Still the usual logic with Vitesco consolidated equity from Q4 onwards, full consolidation. So you will see a unique year 2024. 25 will then be the first year where you have the full divisional setup. We'll come back to that in a moment. Last but not least, we confirm our guidance based on what we know today. And I would like to reiterate our promise that dividend payout ratio should be 40% to 60% for the year 2024, and that is unchanged compared to what we said before. Page 5 has the highlights and lowlights. I will do that rather quickly. On the positive side, strong order intake in e-mobility, 2.4%. A billion, a large transaction in the U.S. that is, again, a proof point for our investment strategy in the U.S., also a proof point for the fact that we've always said hybrid will play a role in the next years to come. ARTEC book-to-bill ratio and ARTEC being here, all the automotive business in the existing setup without bearings to point out Zero times vehicle lifetime solutions, continued strong sales growth, continued EBIT margin at a record level. We are really proud of that business. And when you compare that to competitors, I think we can say we are the leading company in terms of margin and also growth trajectory. Free cash flow strong. Again, I believe that in these challenging times, free cash flow generation, ladies and gentlemen, is absolutely key as cost and capital discipline. And I think we have shown that in the past that we are effective in managing these levers. The effective working capital management in the third quarter is once again a point that proves that we mean what we say. On the weak side, market environment is challenging. Lower automotive production, especially in Europe, ongoing weakness in various industrial sectors. All that makes it not easier. I am unhappy with the earnings quality in automotive technologies. Still the old setup, as I said. It's impacted by volumes and also by the e-mobility ramp-ups. We have our issues there with all what's coming together here. Customers are demanding in a sense that we need to deliver what we promised. And with all what we have on the books, that's a challenge. We will go through some headwind there, but we are on the right track also to deal with the more critical projects. And bearings and industrial solutions, margin levels are below expectations. The call for self-help measures is absolutely necessary. The development is disappointing, and we need to respond and address that. That's why we announced the program forward. On the next page, you have The structure here, it's a threefold response to different challenges. As I said before, performance in BIS, the promised and already indicated cost synergies that are headcount related, and then the continuous need to drive and manage the transformation. You have the different levers there from consolidating footprint, reducing capacities to integrating headquarters, For sure, there is an element in the continuous transformation where we want to continue with the product portfolio alignment that Vitesco started. Think about the torque converter, for example, or where we can do more in terms of best cost approaches in central functions, nothing else than use of shared service center opportunities. On page seven, the program is a European-focused program with 4,700 gross positions to be reduced in Europe. We have on purpose that we will focus this on Europe. We are not including the U.S., we are not including China, and for sure within Europe, Germany has the biggest part. include the transfers into that calculation. The gross reduction is reduced by 1,000 positions to 3,700. Just to put that into perspective, that is around 3% of the overall population that we have. Is that a program that is too large or too small? I believe it's exactly the right program now. And what is more important than size is proper execution. We know how to do that. And we announced something today that should be realized predominantly in the years 25 and 26. It all works well if you can do it in a socially responsible manner and in good constructive dialogue with workers' council. We are known for that. We are addressing 15 locations in Europe. There are 10 in Germany. and we will announce in the next weeks to come two closures outside Germany to streamline our footprint. The financial impact is on page eight, ladies and gentlemen. Not too much to say here. $290 million is the target, and to be fair, that $200 million includes $75 million of already communicated cost synergies, You remember the $600 million, the $75 million that you see on page 8, left-hand side in dark blue, is exactly that part. So $250 million on top of the synergies that has nothing to do with VTESCO directly. We'll need for these numbers $580 million restructuring cost. Not everything will go into restructuring provisions. Klaus is going to explain that. And also here, if you break that out, $150 million of that is already communicated integration cost under the $650 million. What is important here to note, we expect at the moment that the first positive impact on EBIT will come in the year 2026. 2025 remains to be seen, but it's expected at the moment to be without any major EBIT impact. Cash flow will take a little bit longer because the restructuring payouts typically come up front. So in 2027, the new program should also yield positive free cash flow contribution. It's very important not only how big these measures are, but how they are implemented. And there I can say we are experienced. We have done this before numerous times. And I see today that there is on every front that we have looked at today support, support from customers, support also internally. And we'll now see that we get all of that on track. Back to the numbers. Page 10 gives you the normal page in terms of sales performance. That's, I think, a nice reflection of what's going on in our markets. You see our auto tech in Q3, minus 2.5% for Schaeffler as a whole, except for Americas and except for the smaller Asia-Pacific region. The main regions, Europe, minus 2.9%, China even 10.8% down. What you also see is the Americas, the only region that grew across all three regions, divisions in their current setup. And if you look at vehicle lifetime solutions, 13.2% growth in that environment, I think speaks for itself. Superb business that we will continue to grow going forward. Very quickly on the divisions, Klaus will give you more. Automotive technologies, Q3 2024, 2.3% margin, clearly disappointing. However, there is positive momentum on the top line and I think it's fair to say to deliver something that is more or less flattish over nine months and slightly down in Q3 is not a bad result. We are benefiting from the diversification. Engine transmission systems is a resilient contributor in a generally weaker automotive market and for sure the ramp up of e-mobility will remain challenging, but in terms of growth opportunity, what we see here, we're definitely very well on track. Page 12 supports what I said before, strong order intake in Q3, $2.4 billion in e-mobility, two remarkable, one big remarkable transaction here in the U.S. market, a program for a three-in-one beam XL for a prominent customer, um that is the main driver of the order intake and immobility but also the chassis side um that is part of as you know ptc a also a gross business going forward a very nice order from a new mobility player in china chinese um top name for a rear wheel steering uh product so we are definitely uh fine with our order intake and also the quality of our order book. Vehicle lifetime solutions, I've said it already before. Page 13, I can do that very briefly. The numbers speak for themselves. 17% margin in the first nine months, 16% growth. I don't know what I should say here else other than a superb result that proves that this is a perfect hedge. and a very good diversification element of our portfolio where we beat competition. And that has to do, page 14, with the way this business has been set up. It's not what you sometimes hear, just selling some spare parts. It's a solutions business. It's a business that is forward-looking in terms of technology, not only an extension of combustion engine, but clearly the transition to e-mobility is ongoing. What you see on this little table is a little development from the tooling side that we showed at AutoMechanica where we won the Frankfurt Innovation Award. It's a repair tool for EXO repairs where you can basically lift the stator out of the rotor without any damage. That is something that gives us an edge, our customers, are thrilled by these types of solutions because they help customers to do their business in a more efficient and better way. Barings and industrial solutions, I said it before, disappointing result, need for self-help, obvious tactical measures are announced. It's something where we need to continue to be straight and fix the problems. What page 16 tells you is that there is, at least from these indicators that you know over years, order book industrial three months and sales. There is some light at the end of the tunnel. It looks like that. We're seeing a situation where order book for the first time since several quarters now cuts the sales line from below, and that's typically an indicator that the situation changes. will stabilize. We are also here okay with certain order wins, but that should not say that we are not focused on the right issues. The right issues are on the cost side and they need to be addressed. Capital allocation, last page before I hand over to Klaus, is a continuation of what we've done before. CapEx ratio in Q3, 5.7%. reinvestment rate slightly above one that's absolutely within the range for the nine-month period, 1.0. We invested so far $648 million, and that is certainly below the plan. It shows you that capital discipline is also part of our toolbox. how to make sure that we get to the results that we promised. With that, I hand over to Klaus before I come back for the outlook. Klaus.