Schaeffler Group, a global automotive and industrial supplier, reported a successful fiscal year 2023 with a sales increase of 5.8% and a margin of 7.3%. The company's Automotive Aftermarket division delivered an impressive performance, with margins exceeding 16%.
The full-year free cash flow reached €421 million ($1 = €0.92), surpassing the provided guidance. Schaeffler announced a consistent dividend of €0.45 per share and increased its dividend payout ratio to 50%. Looking ahead, 2024 is anticipated to be a transitional year due to the Vitesco merger, with guidance given only at the group level. The merger is expected to close in the fourth quarter.
Despite challenges in the automotive and industrial sectors, the company remains optimistic about future growth, particularly in industrial automation and the wind sector in China. Schaeffler's commitment to sustainability and digitalization continues to be a focal point, with advancements in reducing emissions and increasing energy efficiency.
Key Takeaways
- Sales increased by 5.8% with a margin of 7.3%.
- Automotive Aftermarket division margin over 16%.
- Free cash flow of €421 million, exceeding guidance.
- Dividend maintained at €0.45 per share, payout ratio increased to 50%.
- Vitesco merger to close in Q4, making 2024 a year of transition.
- Optimism for improvements in automotive and industrial performance.
- Strong focus on sustainability and energy efficiency.
Company Outlook
- Transition year due to Vitesco merger with guidance provided only at group level.
- Strong growth in top line expected with an EBIT margin between 6% and 9%.
- Free cash flow outlook of €300 million to €400 million for 2024.
- No growth assumed in light vehicle production for 2024, but market share gains targeted.
- Order intake of €13 billion in 2023 with a balanced regional and powertrain split.
Bearish Highlights
- Low performance in automotive top line and industrial sector.
- Challenges in China's wind sector impacting the Industrial division.
- Net income affected by accounting technicalities related to Vitesco merger.
Bullish Highlights
- Strong margins and growth in Automotive Technologies and Aftermarket divisions.
- Confidence in the wind sector turnaround in China.
- Emphasis on growth in industrial automation, robotics, and automation sector.
Misses
- No specific impact details provided on content per vehicle changes by Chinese OEMs.
- Need for inventory optimization, particularly in the automotive aftermarket division.
Q&A Highlights
- The company's approach to the Chinese market involves adjusting cost structures to address price competition.
- Financial performance in China expected to be on par with other regions.
- U.S. strike impact from 2023 was recovered in Q4, minimal overall impact.
- No purchase price allocation relevant to 2024 group guidance.
- Focus on becoming a leading Motion Technology Company in the coming years.
Full transcript - None (SFFLY) Q1 2023:
Renata Casaro: Dear investors, dear analysts, good morning. Today, for the Full Year 2023 Release of the Schaeffler Group, Mr. Klaus Rosenfeld, CEO of Schaeffler Group; and Mr. Claus Bauer, CFO; and us from the IR team 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. Klaus, the floor is yours.
Klaus Rosenfeld: Thank you, Renata. Ladies and gentlemen, welcome to our annual results call today on March 5th. We will share the call as usual between Claus Bauer and myself. I will start with the overview and some information on the business development. Let's go to Page number 4 first. I think you saw 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 €0.45, the same number as last year and you know that we increased the dividend payout ratio going forward from 30% to 50% from 40% 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. Claus 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 5 months -- more or less 5 months down the road with a rapid 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 Schaeffler. The AGM is in April, as you know, and we are still – expect closing in the fourth quarter. Let me go to Page 5. This famous CEO page with the highlights and the low lights and let me start with the low light, and that's clearly the top line in automotive. We have not achieved our outperformance targets. 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 is on the positive, strong portfolio management paid off 7.2% margin speaks for itself. Strong balance sheet. The finance – the transformation is ongoing, even without the Vitesco 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 payout. And for sure, on the strategic side, the merger with Vitesco 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 – and make it an attractive proposition going forward. Numbers on Page 7, I'm not going to go into detail here. You see it 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 8 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% and Americas 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 was minus 6%. You know our exposure in wind that has hit us harder than we expected, and that is more or less shown by this number here. Claus 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 9. And I think it's fair to say that with 5.4% growth and with a margin improvement to 4.5%, gross margin more or less stable. This is a successful year for Matthias and Jens business. The performance has been driven, as you already know, by the mature businesses in full year 2023. We can show you a very promising order intake, both in Mature and in the New business, €5 billion in E-Mob and €8 billion in the other businesses. The positive effects from increased pricing have come through negotiations with OEMs are closed and 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. 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 a 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 HEV 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 growth business, a strong margin business, I don't have to say much here, nearly 12% growth, what is predominantly organic growth, plus 16.3% margin, I think, speaks for itself. We can only thank here [indiscernible], 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, expect that 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. The idea of providing tailor-made repair solutions for HEV from the experience we have in engine and transmission systems is definitely something where we see a strong competitive advantage. Just to mention one number by 2025 35% of new car registrations are expected to be HEVs. And for sure, at some point in time, these cars need repair solution and that's exactly where we see our strength 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 Ewellix PPA impact, but still a margin drop of 2% while sales are more or less flat. Ewellix 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 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 2023 – sorry, there is a page more on the transaction later on. But on 2023, I can say we have achieved what we've promised on group level, we have achieved what we've 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 bps is not where we want to be. Capital allocation, I think, I can cut that short Page 16. I already said, at €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, E-Mobility 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'll leave that to your questions with that 1:11.4 or 5:57. 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 in 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 February – sorry, March 14, where you will see the published merger documents, also the valuation documents with the stand-alone plans of Schaeffler 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 25, our AGM 2024 is the AGM of Vitesco. Let me also add the integration is on track. We are in good shape with 2023, 2024 integration teams, weekly meetings, some high intensity, positive spirit. And clearly, with the understanding that the year 2024 will be a very important year to lay the ground for what will come out then out of a joint business plan for 2025 and the years thereafter. So don't judge the merger on the year 2024. It's a lengthy transaction and dealer 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 Claus 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 ten 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. Happy to share with you that in terms of Scope 1 and 2, we have made significant further progress, reduce the greenhouse gas emissions from 2022 to 2023 by nearly 24%. At the same time, on the Scope 3 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 3 upstream is critical because we need greenfield, 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 gigawatts 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 2024 globally, and that is also promising. Then on other targets, freshwater, 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 that 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 2025, 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 Claus for the detailed numbers.
Claus Bauer: 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 6th quarter in a row above €4 billion of sales despite foreign exchange translationary headwind. But anyways, for the fourth quarter, you see excluding from exchange, we grew 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 gross 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. And – 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 shut down in the Christmas period that was longer this year than it was last year, and the under absorption that's coming with it. On the next slide, I'm coming to the overhead. Overhead as a good news, stayed 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 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 – and 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-over-year and 2% for the full year. At the first glance, that sounds like a 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 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 a cyclical headwind. 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 already reflected by the headline. You see it in the table below. Engine & 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 you might remember, it's driven mainly by China. China is the participation in the E-Mobility sales right now that will improve, as we said over time. However, the BYD (SZ:002594) – the famous BYD effect in China is also not lost on us. BYD is really 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 under proportional as every other supplier as well. And then secondly, you might remember the situation in Americas 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 Pesos. 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. And if the Mexican Pesos 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. Its 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 the – and is not the long-term ambition there. You see clearly, if you look at the numbers on the left side, clearly 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 -21 – -20.1%. And in the graph below that, you see renewables with -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. 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 a 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, industrial applications is a focus field besides renewable for us that we invested also with Ewellix 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 €0.47 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 November 15 of last year. The offer period ended on the December 15. You know that we got offered around 30% of Vitesco shares at that point. That was then settled in the New Year January 5. And that was the reason why at the end of the calendar year at the December 31, 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 per share. We had to value these shares at the fair value at the balance sheet or the reporting period end December 31. 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 - €188 million that was the 30% of the shares multiplied by the difference between €94 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 at 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, 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 valuation impact of -€47 million. So 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. 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 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, what we are always saying that we have around €600 million 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 €0.45 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 40% to 60% for sure. A 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 Ewellix 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 even 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 DRS20, 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, Schaeffler 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 Schaeffler 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 Schaeffler 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 AG. 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 Schaeffler operating model towards the target model that we explained to you throughout the transaction. That means our automotive aftermarket business will be renamed in 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 & 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's 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 Schaeffler 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 actuals 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’ 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. Vitesco shareholding of Schaeffler AG 40% at equity Consolidated and recognized in the Schaeffler 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.
Klaus Rosenfeld: Yes. Ladies and gentlemen, let me conclude the session and open the floor for your questions with the summary statements on 35. I think it’s fair to say that this was a good performance in a challenging year. Don’t forget, fourth quarter was also clearly impacted by all the activities around the envisaged transaction with Vitesco. We are proud of the strong cash generation and the robust balance sheet. That’s the basis going forward and I think the divisions have shown and also the region’s resilience. Let me add here in terms of the outlook. There is a challenging year ahead of us, both from a macroeconomic perspective, but also from the market in particular in the main sectors where we are in. And I would like to stress one more time for you that that situation supports our view that it is good to be not only in Beth, but it’s good to be in ICE (NYSE:ICE) half and BEV altogether. This three pronged approach with a more universal approach to powertrain solutions is from our point of view, the right strategy going forward in a dynamic environment. It is win-win because we can leverage technology and also customer relationships. And I think the changes that you have seen in customer behavior in large OEMs changing the direction is exactly going into that direction for sure. Due to the transaction, as Claus described, 2024 will be a year of transition. As I said, we are looking ahead of 2024. It’s now the time to lay the grounds for a solid multi-year plan that will then also give us the basis for proper mid-term targets. And let me add once again, we will in all of this not overlook our duty in terms of sustainability, will not overlook the future in terms of digitalization and KI. It’s a fascinating world with all sorts of opportunities. And I want to close with an optimistic statement that all of that is a basis for further building something that is unique. We called it the leading motion technology company. More cross selling, more product orientation, more customer orientation. We shared that with you in numerous calls and I’m very confident that in some years ahead, we’ll sit here and say what a great year 2023 and 2024 for building that new company. Thank you very much and I’ll hand back to Renata and the operator for questions.
Operator: [Operator Instructions] One moment for the first question, please. And the first question comes from Akshat Kacker from JPMorgan (NYSE:JPM). Please go ahead.
Akshat Kacker: Thank you for taking my questions. Akshat, JPMorgan. Three from my side, please. The first one on the strong order intake in 2023, especially on the mature combustion engine technologies. If you could just highlight where have you been successful in terms of regions or customers? And do you think we are entering a phase where you could see further consolidation and Schaeffler could win more market share in combustion engine technologies. The second one is on the industrial business. I know there is no divisional guidance for 2024 as of now. But in terms of the underlying trends that you’re seeing, what are your current expectations for organic growth and margin development in this business division, please. And the last one on standalone auto-tech. How do you think about outperformance on the underlying business? As we know, there were quite a few e-mobility ramp ups that you had initially expected in China coming through in 2024 and 2025. So would be interested to hear your thoughts on outperformance improving? And also how we should think about the big puts and takes when we consider margins for 2024? Thank you.
Klaus Rosenfeld: Okay. Claus, let me start with the first one with the strong order intake, and I think you’re referring to the €13 billion for the full year. Let me break this down a little bit. €5 billion is from e-mobility, then €4.3 million is from engine and transmission, and then €2.5 million is from bearings and another €1 billion from chassis systems. If I look at the regional split, I can basically say it is very balanced with 35% coming from China and the other 65% more or less equal in Europe, Americas and Asia Pacific. When I look at the powertrain split, then you can also say here it is more or less balanced. I can say that a third is ICE, another third is hybrid, including mild hybrid, and the other third is EV. So you can basically say with a little bit more from China, very balanced across the four regions and also across the powertrain split. And I think I gave you the right numbers. If you think about size of the things, I can also say here and we’ve never given these numbers, that this is not two or three big ones. The big ones are in the billion area and there are numerous smaller ones that are somewhere between €300 million and €600 million. So you can see again, we are not going after the big ones only. We are going after the ones that are interesting also, either from a customer point of view or from a profitability point of view. Maybe that gives you enough color here, but it’s wrong to believe that mature is only ICE. There’s a significant half portion in this. This is why I said, gentlemen – and ladies and gentlemen, our view going forward is it’s great to have activities and competence in all three main areas. In terms of Industrial, as I said, the situation in 2023 is a function of the cycle, we are convinced that the cycle turns. There's the extra impact from wind in China that makes it a little bit more difficult for us, because we have that large market share there. But I would say, Claus, it's fair to assume that we will see some growth in 2024. And I also believe that the 9% is the absolute minimum that we should achieve, we achieved it in 2023. So, I do hope that we will also see some with the turning of the cycle also improvement in margin back to the two-digit numbers. On outperformance, maybe, Claus, you help me here on that one.
Claus Bauer: Yes. I think the outperformance question was mainly related to China, or at least that was the second part, but let me first start and reiterate also the mathematical impact of the region Americas due to the Mexican peso-U.S. dollar exchange rate. As I said, that is now rebased, if you will, with all of 2023 having that included. And therefore, I think the playing field for 2024 is level and therefore, should show a much more volume-oriented performance versus the market than it was, if you will, distorted by foreign exchange impacts in 2023. So I have – I would see and forecast a solid performance versus market volumes in the Americas market. As it relates to China, and there was, as I said, I think, in the center of your question. It's, of course, and it's almost strange to say it's a function of BYD. But BYD, as you know, in the last two years, we doubled its market share, which is a tectonical market share shift that was never seen in the past. The content per vehicle for us is under proportionate with BYD. We are growing with them, as I said, but under proportionately. But if BYD should double their market share again, which gets more difficult as they are doing it. But then obviously, we have a mathematical issue there as well. But it is indeed, as you said, we are participating definitely more and more in the new E-Mobility and also electrified chassis applications in China. We are perceived as an engineering powerhouse in China for China. We are not importing engineering services from Germany or the U.S. into China. We have all the capabilities in China. We are in contracts with all significant Chinese domestics. And therefore, it's also only a matter of time until that performance also in that market will normalize. The big unknown is, of course, as you know, there is a lot of Chinese OEMs, which most of the times we here in the Western world don't even know the names, but it's now important to really filter the few OEMs that will also have the staying power and therefore, will provide a sustainable business and cooperation model for us. I think we are doing a very good job in selecting the OEMs in China where we see a high likelihood of sustained growth. And therefore, I'm optimistic for our performance also in the Chinese market. I think I said it before, you sounded a little different, but I think I said it before, it's not a matter of quarters, it's not a matter of weeks. It will be a turnaround as the new models will phase in. And again, the special impact BYD just because it's so significant for this market needs to be observed as well. But I'm optimistic that 2024, we will see – starting to see also in China normalization.
Akshat Kacker: Understand. Great.
Operator: And the next question comes from Horst Schneider from Bank of America (NYSE:BAC). Please go ahead.
Horst Schneider: Yes, good morning, good afternoon. Thanks for taking my questions too. I have got also a few questions relating to the outlook, as you can imagine. So when we look at the Group guidance is 6% to 9% margin. I mean it's a range. So therefore, the base case is, I assume that you assume midpoint of the range, which means for all Schaeffler, that the situation is not getting worse. It's rather getting better, means slight revenue growth. And also given that maybe items such as overhead costs come down, that the margin can be slightly up, and there should be also some leverage if you could confirm that. You made already a statement on Industrial. It's maybe you can give more comments on Aftermarket, which is also less affected by the merger with the Vitesco. Here, the margins, I assume, can stay high. I mean they are already – we come from a very strong 2023. But I assume they can't stay that high. And also here, the revenues will slightly increase, if you could confirm that? And then last one, follow-up on Automotive itself. You alluded to the performance in the various regions, but what is your underlying assumptions on light vehicle production for 2024?
Klaus Rosenfeld: Horst, thanks for the question. I could give easy answers and just confirm your assumption on one, confirm your assumption on two. And let's look to the appendix, because there you have the underlying assumptions for light vehicle growth. But let me give you a little bit more color. First, on the margin outlook. Yes, it's a 300 basis points range, 6% to 9%. The midpoint of the range is never a bad guide, but let's also not forget this is also on a consolidated basis. When and how Vitesco will come in remains to be seen. So we put a little bit of caution around this. Leading to your second point, yes, we believe the aftermarket was not exceptionally strong only in 2023. All the trend indicates also the first information for 2024 indicate that this is continuing to go well, and that clearly helps also the margin. If you then think that through what we said about Industrial, I think that gives you a little bit more color. And in terms of the Automotive Technology number, in the Page number 39, we said around 90 million, that means that we, at the moment, assume that the market is not going to grow. We had 90.1 million cars in 2023, and that's also at the moment what we more or less assume for Schaeffler going forward. So no growth. That means it needs to be – it needs to come from margin for market share gains.
Horst Schneider: Okay, that's great. Just a quick follow-up in this guidance, also in this group guidance, then for 2024, there is no purchase price allocation that becomes relevant.
Klaus Rosenfeld: No, that's confirmed. We are doing it with what is called a [indiscernible] and therefore no PPA in that number. There is a little bit of an MPA [ph] impact in the equity, but that's not relevant for the margin.
Horst Schneider: Okay, that's great. Thank you so much.
Klaus Rosenfeld: You're welcome.
Operator: And the next question comes from Marc-René Tonn from Warburg Research. Please go ahead.
Marc-René Tonn: Yes, hello and thank you for taking my questions as well. The first one would be on the development of profitability, and also let's say, sorry for, let's say, still talking in the old scope of the business, would you see in the current year, when it comes to growth at automotive OE and efficiency gains versus inflationary cost developments, what your expectations would be for this division would be interesting to learn about? And secondly, when looking at also your very strong free cash regeneration, I think also, let's say, very stringent and great success you show in working capital. When I look back a bit in the historical figures, I think the only, let's say, item you had been better in the past was, let's say, inventory turnover is there, let's say, still potential to improve that in the future. And also here, admittedly, of course, in the old Schaeffler world, or is it something which is, let's say, now a bit structurally lower, perhaps with, let's say, reshoring and reassuring when compared to previous times? Thank you.
Claus Bauer: Yes, thank you very much for your questions. I start with the second one. And I mean, inventory and inventory optimization is closer to my heart as the CFO, although I have to say that I don't think that reducing inventory and inventory turns for the total operation is sufficient enough to really optimize it and not just minimize it. You see that the relative weight of our automotive aftermarket business is increasing. You see also the profit contribution that this division is providing, and therefore that division comes then with a higher inventory need to fulfill the service levels that our customers require. And that's really necessary to have the success in the marketplace. So I think it's also a little bit relative to the weight of the different divisions. For sure, industrial is then a mixed bag between a little bit more like the automotive turns on the OEM side, and then a little bit more like Automotive Aftermarket and the Distribution business. So also heavy on inventory. So we are really trying to optimize the inventory by business model. And I wouldn't be the CFO if I wouldn't say there's always improvement possible. But I think the improvements that we have made, especially in inventory, and also the reduction of slow moving inventory in the kind, is satisfactory. To your first question, that was, I think, in regard of how we view the margin development in our automotive business, I think we were transparent and clear about that, that any volume increases in the Engine & Transmission and Bearings related businesses would use existing capital. We are not at full capacity. Therefore, the relative weight of the sales mix is going toward the mature business. We will immediately from a margin impact, also profit and benefit from an increased fixed cost absorption of that capital. And therefore, I think we will see similar patterns in that regard in 2024, as we have seen in 2023. So therefore, with also the ongoing and continued effort to improve efficiency on the shop floor, I think I would see definitely a tailwind in the margin for that business. But remember also one part of the business, the Bearings business, will now be reported 2024 in the Bearings & Industrial Solutions area. So you will see it maybe then also in the restated numbers that might shift a little bit, but on a relative basis, there's clear tailwind from fixed cost absorption and efficiencies on the shop floor. You also mentioned inflation. Inflation is not the topic that it was two years ago based on material, but we definitely have to experience and address wage inflation, and that's what we are doing. But from a pure pricing pattern with automotive OEM customers, I think we will be going more in the direction of a normal contractual price reduction than further price increases as we have seen the last two years, and I think I called in the last call. We are now playing defense, not offense. So we are not going for price recovery of inflation. We are just defending the prices that we have achieved in the past. You might remember that we said we did not negotiate recoveries of inflation on an annual basis in the past. We increase prices, and these price increases are obviously carrying over in the new year. And that's the same situation now. And we just have to defend these prices to protect our margin and to cover wage inflation.
Marc-René Tonn: Thank you very much. One short follow-up, if I may. You talked about the Automotive Bearings business, and if I remember it correctly, for the, let's say, industrial business old, you had this 2025 margin target of 12% to 14%. Can you give us some indication on how this business compares to that number?
Claus Bauer: Yes. So I think we will guide then, once we have a fully developed business plan. Klaus indicated a little bit the timing of that in other calls already. So we try to do early second half of this year. We try to have a combined business plan and then also prepare for orderly guidance, then again on a divisional level for 2025, but I have to ask for your patience in this transitionary period. But it's clear that the Automotive Bearings margin is not at the midterm targets of Industrial. So there will be a dilution effect – margin dilution effect.
Marc-René Tonn: Perfect. Thank you very much.
Operator: And the next question comes from Michael Raab from Kepler. Please go ahead.
Michael Raab: Yes. Hi thanks. Mike Raab, Kepler Cheuvreux. I'm afraid I got to get back to your full year guidance of 6% to 8% adjusted EBIT margin. Just a very simple technical question. Does the EBIT number embrace the equity income contribution from Vitesco for the first nine months?
Klaus Rosenfeld: No.
Michael Raab: It does not.
Klaus Rosenfeld: It does.
Michael Raab: It does. Okay. That triggers the follow up.
Klaus Rosenfeld: My mistake, my mistake...
Michael Raab: So it does include because I realized you also included in the past in your adjusted EBIT number and the income from associates.
Klaus Rosenfeld: Yes.
Michael Raab: Okay. So you confirm it's also going to be the case for the first nine months contribution of Vitesco.
Claus Bauer: You might remember, Michael, we changed that accounting policy for equity a few years back when it was actually a negative impact, we obviously hope it will be a positive impact this year.
Michael Raab: Yes. Okay. Yes, you're right. I do remember, also I'm growing older, yes. But then on to the other question, and I guess you can already guess what the follow-on question is. Out of the 6% to 9% EBIT margin that you're guiding for, how much would the first nine months net income contributions from Vitesco account for, please?
Claus Bauer: Yes, I think I would – I mean, we simulated that also in different scenarios. And now if we would be too clear in that, obviously, we would also release information about the Vitesco planning, which I think I'm not authorized to do but...
Michael Raab: Okay. That sounds, plausible.
Claus Bauer: You can be ensured that we simulated it on a quarterly contribution level, not just on the total year. You also – if you look at Vitesco, the normal seasonal pattern is not linear throughout the quarter. So all that is included in our thinking about the guidance – about our guidance.
Michael Raab: Okay. I accept this is as far as you can go telling us details about this. Thank you.
Klaus Rosenfeld: Very kind, Michael.
Operator: Thanks. The next question comes from Stephanie Vincent from Bank of America. Please go ahead.
Stephanie Vincent: Hi, thank you so much for taking my questions. You have had some commentary about content per vehicle for Chinese OEMs. Just wanting to know on post the content per vehicle question. If you can give any qualitative or quantitative comments about just not only the changes in content per vehicle, but also the changes in EBIT margin and potentially cash flow and working capital that maybe we would under appreciate as that transition continues. What you were just talking about as Chinese OEMs are gaining market share. So as they gain market share, you've already talked about the changes in content per vehicle with these new customers, but also any indication of how that would impact profitability as well as cash flow generation versus your legacy business?
Claus Bauer: Yes. I mean – so no specific – I cannot specifically answer that now through that market segment. What I can tell you is that our capital employed in total in China is similar than in others also related to the customers. So – and I think that is a very important comment that I also made during the presentation. I think our approach to China is not different than in any other region. There's obviously central support, but the real customer relationship and the customer developments and for new products and new applications is in the region for the region. So the deployed – capital employed and the resources deployed also human resources are similar in China than you would see in Europe and the Americas. So therefore, obviously, we are hearing about the price competition in China. But again, we are conquering and addressing the price competition also with our own cost structure in China for China. We don't have now to mitigate expensive German resources in a price competitive market. So I think everything being the same, and I understand it's a very, very high-level generalization, but I would not see a big difference between the financial KPIs in China with Chinese OEMs than anywhere else.
Stephanie Vincent: That's helpful. And then just a follow-up question about your comments on the Annual Report about the U.S. strike. Did you have a sales and EBIT impact for that for 2023 that won't be repeated in 2024? Or was that all made up in Q4 2023?
Klaus Rosenfeld: It's all made up in Q4. And it's a small impact.
Stephanie Vincent: Okay. Perfect. Thank you.
Klaus Rosenfeld: You’re welcome.
Operator: So there are no further questions at this time. And now I would like to turn the conference back over to Klaus Rosenfeld for any closing remarks.
Klaus Rosenfeld: Well, ladies and gentlemen, thanks for the interest. Thanks for the questions. As we said, it's a year 2023 is over, 2024 is a transition year. We have a big project in front of us. We're addressing this with all our responsibilities, and we are convinced that this will be a very interesting journey from here to the leading Motion Technology Company. Thanks for staying with us. Thanks for the interest, and we'll keep you updated on whatever is happening in the next weeks and months to come. Thanks a lot. All the best, and bye-bye.
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