Schaeffler AG (SHA0) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Schaeffler Group Q4 and Full Year 2024 Earnings Conference Call and Live Webcast. I am Yusef, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Heiko Eber, Head of Investor Relations. 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 2024. The press release, the following presentation and our annual report has been published today at 8:00 a.m. CET on our Investor Relations home page. And for sure, we will provide a recording and a transcript of this webcast after the call. 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 Claus Bauer, our CFO, have joined the conference call to guide you through the key information in our presentation. And of course, we will also discuss our guidance for 2025. Afterwards, both gentlemen 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 to our earnings call. I start on Page 4 of the presentation that you received and would like to quickly summarize the key messages for the past full year. You see it here on this page, mix performance in 2024, sales up by nearly 13%, but more or less driven by the full consolidation of Vitesco in the fourth quarter. From an organic point of view, certainly worth to mention that VLS continued to grow also in the fourth quarter very nicely with double-digit growth for the full year margin at 4.5%. Certainly, a blended margin of the Schaeffler's stand-alone businesses plus Vitesco for the specific consolidation logic in the year 2024. Schaeffler stand-alone margin would have been somewhere at around 6%, and that then explains -- the delta is then explained by the consolidation of Vitesco at Schaeffler IFRS. Free cash flow, I think, a positive development, strong, better than expected, EUR 363 million. And that is true despite a lower EBIT as well as the integration and financing costs that Claus will explain. You see our guidance. Our guidance not for the 3 segments that we reported in 2024 plus other, but guidance for the 4 new segments with the structure that we already indicated, E-Mob, PTC, VLS and the Bearings & Industrial Solutions part plus another column that I will explain in more detail. For sure, that guidance becomes even more readable if you get the proformas, they are not ready yet today, but they will be provided in due course, and Claus will explain that in more detail. Our guidance is cautiously optimistic. That's how I would describe it. We are certainly moving into another challenging year, uncertainties remain high. Just think about the whole question of tariffs that we will certainly discuss then also in the Q&A session. Despite all of this and despite a negative net income driven by one-off restructuring provisions and also the write-off of the deferred tax assets, we are paying a dividend of EUR 0.25 above our target range of 40% to 60%. Let me go to the highlights and low lights on Page #5. I think what is fair to say on the positive resilient performance in ATech, the numbers that you see are Schaeffler's stand-alone numbers, 4.2% in a challenging environment, top line stable. Very strong earnings in VLS driven by the outstanding growth and the high profitability of this business. You see here the hedge between the OEM business in automotive and the aftermarket business in automotive works well. I think we can say that Vitesco was successfully executed as a transaction in record time, exactly according to plan. And for sure, we are proud to say we have done our strategic homework. It's now all about synergies and profit improvement that is conceptually laid out and fully integrated into our plans. So it becomes an execution play for the next years to come. Free cash flow was strong in the year, also because Claus managed our divisions in a tight manner so that they also delivered on working capital promises. On the negative side, market environment is challenging. You all know this, EV market is soft, in particular here in Europe and also in the industrial sector, we had to cope with weaknesses. The Vitesco contribution is weaker than what we would have liked. But it is now from a technical and also operational perspective, fully aligned with what we want to do going forward and that also applies to the application of consistent accounting standards. We are applying the more conservative Schaeffler accounting standards, in particular when it comes to capitalization of R&D expenses. On the negative side, also, you remember the painful profit warning in December is the subdued performance of BIS. We explained that, I think, in all details, and it's now up to us to bring that back on track. I'm quite optimistic that, that is possible for sure, the structural measures that we introduced in November will help to achieve that goal. So all in all, a year of transition, a year where we laid the ground for the year 2025, that will be the year of the Motion Technology Company, the year of execution and certainly a year where you get through the guidance, the promised transparency. Let me move through the next pages rather quickly because this type of segment reporting is, to some extent, historic. You will see a different reporting going forward. Automotive technologies, as I said, year-on-year flat top line and resilient EBIT margin, 4.2% is okay. If you see on age, the order intake with 4.7% more or less in line with 2023 for Schaeffler stand-alone. If I add, you see it up on the right-hand side in the bubble, 4.8% for division electrification from Vitesco, it's around EUR 9.5 billion additional orders in this E-Mob space that is clearly showing that we are well underway to generate even more order intake. I have to say the plan for the year 2025 and beyond is to execute now and deliver on this order book. And therefore, let's not just look at how much orders we are taking in, but also how we execute on what we have on our books already. When you see on the right-hand side here, it's a broad order book that includes also across the different regions, very interesting projects. There's one in China with a coaxial E-Axle gearbox and another one in engine transmission, so our classical PTC business, where we're also securing orders in the continuation of our foundation business. So you can see here already on this page that the in-built hedge in our automotive technology business is working. And in future, that will span around to divisions. Vehicle Lifetime Solutions. I think the numbers do the talking here, not much more to say, an outstanding result. And once again, testimony why it makes a lot of sense to separate this business into a separate division, also again to show you the hedge -- the in-built hedge between OEM businesses and aftermarket businesses. Page 10 is an interesting little example. It's the first successful launch of a Vitesco product for the Schaeffler's independent aftermarket; a pump -- a coolant pump with a smart actuator in it. Certainly something that we'll continue to do, and that will enrich our VLS product portfolios also helping to drive synergies. BIS, a story for 2024, that is, to some extent, disappointing sales decline minus 4.5% and also an unacceptable margin of 4.2%. We are on it. We are about to announce here the internal changes that are necessary, and we'll drive that forward. As you saw from the guidance, we are expecting some recovery but for sure, also the guidance is not the level that I would like to see from that business going forward. If you see 12, the order book industrial, different type of order book for -- then for our automotive. But it's fair to say, Claus, we have here the third in-built hedge, automotive OEM versus aftermarket is one of them, the automotive E-Mob versus PTC is the other one. And now you have the cross-sector hedge with automotive on the one hand and industrial and the other. As I've always said, Schaeffler is more than auto. And we will, in particular, go for further sales opportunities, further growth opportunities in the sectors that are not cars and light commercial vehicles. Today in the press conference, people ask about what are we going to do in defense. We talked about humanoid robots. So there are corners where exactly our positioning across this broad spectrum is right and will give us additional opportunities. On 12, you see that the order book industrial shows a stabilizing trend. This is also supported by our assumption that in 2025, we are expecting some increased industrial production. And if the EUR 500 billion program here in Germany becomes true, I think that should also increase a little bit more confidence into the German economy. I stop here and hand over to Claus for the detailed financial analysis.

Yes. Thank you very much, Klaus. Let's look at the numbers. I think I prepared you already in our last quarterly call that the fourth quarter might get a little bit difficult to interpret. Klaus already alluded to it. It's mainly due to the fact that we started fully consolidating the Vitesco legal entities at the beginning of the quarter. So the quarterly numbers for '24 are not comparable to the prior year quarter. I'll try to shed as much light as possible already with stand-alone versus including Vitesco numbers so that you get a feeling how the fourth quarter went, but Klaus also said, we don't have a fully pro forma adjusted number that is comparable for prior year, we will definitely start with the first quarter actually reporting in '25 now with giving you the full transparency in the new structure with the 4 divisions and the numbers will be available to you for further analysis already by the end of March and then with the next call, full comparable transparency in that regard. For this quarter and also in our annual report, as you read, we are still structured in our 3 Schaeffler divisions plus then 1 other division that was not very prominent in the past. But now for the fourth quarter 2024 has the fully consolidated Vitesco numbers in it. So it's mainly the Vitesco numbers for the fourth quarter that you see in the other divisions, if you will. So when we now start out with sales, then you see the first distortion, almost 50% of sales increase over prior year. That's obviously the case only because of the full consolidation of Vitesco shouldn't be a surprise. Vitesco is around half of the size of Schaeffler so a 50% increase is expected. You see at the very bottom on the left side, in parenthesis, a number where I show FX adjusted for Schaeffler's stand-alone net sales growth of 49.2% would be 0.0 that means exactly flat. The explanation is in the key aspects, Automotive Technology was indeed almost flat, a little decrease of 1 percentage point versus the prior year. However, double-digit growth in E-mobility, vehicle Lifetime Solutions, Klaus already said it, tremendous growth, also not growth that is so far impacted by Vitesco, that's organic growth of Schaeffler VLS and Bearing & Industrial Solutions, Klaus said it also already. Maybe interesting is the pie chart about the regional split. The numbers that are not in parentheses are the numbers for the combined group. And you see tremendous numbers due to the first consolidation of Vitesco. But interesting in that regard is that the highest increases are in Americas and Asia Pacific with around 60% in both regions. That means that the Vitesco addition strengthens the footprint in these 2 regions. And with Asia Pacific, it's mainly Korea that is strengthened. So that is the -- maybe the observation out of these numbers. And if you look to the numbers in parenthesis that is now the Schaeffler stand-alone number, then Greater China shows flattish versus prior year, whereas Europe is significantly down, also that shouldn't surprise us too much. But on the light side, on the sunny side of things, Americas is up almost 10% apples-to-apples. If we go to the next slide and again trying to be as transparent as possible. It's the gross profit reconciliation. And on the left side of the waterfall chart, it's the development of Schaeffler stand-alone and then in the [ column] division, others, you see the impact of Vitesco. The gross margin for Schaeffler's stand-alone improved year-over-year by over a percentage point from 19.7% to 20.8%. And it's obvious in the waterfall chart that one of the big drivers for that is the improvement in production cost that also is basis of the cautious optimism going forward that we will continue to optimize our production cost and Klaus alluded already to, the biggest improvement potential that we have in our Bearings & Industrial Solutions divisions. And then with the Vitesco impact on an absolute term, obviously, a significant addition with EUR 177 million but it's also obvious here already on a gross profit line that the full consolidation of Vitesco is margin dilutive and gross profit goes down to 16.9%. That's what I will actually say on this slide, I'm not touching on the table for the divisions. I will do that on the next slide when we talk about EBIT. Left side, same logic as in the slide before. First, a waterfall chart for Schaeffler stand-alone. The news is despite the very weak quarter of Bearings & Industrial Solutions, we are, as a group, almost on the same EBIT level -- EBIT margin level as we have been a year ago which is testimony to the resilience and the risk diversion that we have with our regional but also business sector footprint globally. And then the Vitesco impact with a quarter -- with minus EUR 108 million for the quarter, EBIT contribution that is now -- remember, what I also explained already at the -- at equity consolidation phase in the first 3 quarters of 2024 that has an operational component and also an IFRS conversion component. We completely converted the entire data landscape of Vitesco to the Schaeffler accounting policies. The Schaeffler accounting policies are significantly different in the space of IAS 38 and IFRS 15 as it relates to mainly R&D efforts and R&D reimbursements of customers. And that is about 40% of the EUR 108 million negative is purely IFRS conversion to the Schaeffler accounting standards. Let's look a little bit deeper into the table on the right bottom side. And there you see actually, what I think is a good trend in the highlight of the fourth quarter, the Automotive Technology division of Schaeffler now that is, in the old structure, increased it's quarterly EBIT from 3.1% to 5.4%. That is obviously a significant. Automotive Technologies and that is also E-mobility, just the Schaeffler part of E-mobility, as you know has had its strongest quarter of 2024 in the 4th quarter. So good news. You see also from a total year, full year standpoint, the margin of Automotive Technologies almost on the prior year level. And if you still remember the midterm targets in this division, 4.6%, even in a year with extremely difficult and challenging market and economic circumstances in the target corridor is not bad. And Vehicle Lifetime Solutions, Klaus said let us talk. You saw that on his slide, I'm not commenting further, but we then total -- full year EBIT of 16.6%, definitely the shining star. Bearings & Industrial Solutions, everything Klaus said already, you see with 1%, 1.0% EBIT in the fourth quarter definitely a disappointment. I also can add that most of that really happened also in December. December was extraordinarily weak from a demand standpoint. I think we have seen many customers who delayed demand, maybe because of the inventory reduction programs into January. January was a strong sales month for Bearings & Industrial Solutions, which is not necessarily driven by improving market demand. But really what we think was a delay of orders from customers from December into January. Let's come to the next slide and go further down the P&L structure to net income. Net income is significantly negative for the quarter. That is, of course, partly driven by the EBIT that I just explained. And then 2 other significant book entries, if you will. One is a significant provision for the structural measures, which we announced in November of 2024 in the amount of almost EUR 500 million. Of course, that takes care from a P&L standpoint of most of the program, but the cash outflow will come over the next 2 to 3 years. And secondly, we have impaired all our deferred tax assets in Germany due to the situation. Profit of the profitability in our German tax group and that amounted in the P&L to another EUR 352 million. Let's now go into the free cash flow metrics, free cash flow, as Klaus said. And I think also we already announced in our ad hoc message mid of January, was strong. And Klaus already said it was also strong because we -- very disciplined work with our working capital. You'll see that in the reconciliation on the upper right, net working capital improved by EUR 365 million, about 2/3 of that is actually inventory reduction. And then you have, as sales went down, especially in Industrial, of course, also a more seasonal impact on accounts receivable. But what I also want to point out in this waterfall chart is indeed the next column, CapEx, minus EUR 311 million. So it is not the case that we saved the free cash flow with a reduction of CapEx that is necessary in our future fields to safeguard our future. So CapEx is still strong and focused, of course, from an allocation -- capital allocation on the topics that will safeguard our future E-mobility for sure. And again, we are still investing there. And that is not the reason for the strong cash flow. If you wonder what the other impact is with plus EUR 460 million, then you actually have to add that back to the starting point EBITDA because, as I just explained, EBITDA was impacted by an accrual of EUR 488 million for the structural measures. And of course, I also explained that's not cash outflow yet. It's an accrual. And therefore, that is obviously added back here. In the table below, that is always our way to explain what is the underlying cash-generating power of this company. So really trying to neutralize with any significant extraordinary impacts, like you see legal cases restructuring and everything. Not going into the depth of each line, but just to the bottom line of it, in the full year of 2023, we had a cash generation power or underlying cash flow or whatever you call it, of EUR 601 million. And this year, despite the fact that we had significant onetime financing charges, especially with the grid financing for the transaction, but also integration efforts that led to cash outflow in the year. We are still close to that number with EUR 569 million. So also something that is the foundation, creates and provides for the basis of successfully investing into our future. And last but not least, a word to the leverage ratio, you understand, I think based on the explanations of the past quarters, that the leverage ratio is one of the main metrics that we are focused at, is distorted as long as we don't fully consolidate 12 months of Vitesco because we divide the net financial debt by the last 12 months EBITDA. As long as you don't fully consolidate something, it's not in your EBITDA. It's just one entry at equity. So therefore, it is technically distorted with 2.5x significantly above our target range of 1.25x to 1.75x. This target range is not changing and we definitely thrive to achieve that in the midterm. It will be slowly worked on now over the next few quarters to bring that down. But I think it will take longer than a few quarters to be back into the target range of under 1.75x. Lastly, just let me remind you or maybe that's new because it's now also a combined number between the available liquidity between Schaeffler and Vitesco that stands now at EUR 4 billion. All that is combined, all the RCFs that we have in committed lines that we have in -- on hand are now combined credit lines and the combined available liquidity is EUR 4 billion still almost 20% of the combined sales. So I think also a solid number. With that, Klaus, I would hand back over to you.

Thank you. Ladies and gentlemen, before I come to the guidance, probably the page that is most interesting to you. Let me quickly lay out how we have developed our reporting structure going forward. You see on Page 21, our 4 product-oriented divisions, E-mobility, Powertrain & Chassis, Vehicle Lifetime Solutions and Bearing & Industrial Solutions with their respective business divisions, 3 in E-Mob, 3 in Powertrain & Chassis. Vehicle Lifetime will be composed of 4 business divisions certainly all smaller than the first 6 ones. And then in Bearings & Industrial, we have 4 business divisions, the automotive bearings that we see as a core part of our Bearing & Industrial Solutions division other than our main competitor, SKF. Industrial bearings, and we will separate the aerospace bearings. Let me say this year, aerospace is the area where we also do some defense business. And then Linear Motion is a separate smaller business division that also includes the Ewellix activities. Then as already outlined in previous conversations, we have decided to establish an other column in the past that other column or the corporate column was always 0. In the future, that will not be the case. There are 3 activities in there that we will not allocate to the 4 divisions. That's the selected start-up activities. Let me give you the 3 main examples here. One is a small but very interesting battery sell business that we're looking into. It's our hydrogen activities for the electrolyzer part, the fuel cell activities stay with E-Mob. And then also what I indicated, humanoids. Why do we start to separate this into this area because we think that these are high growth areas, where a separate mindset is needed. The typical business division has several business units and product units. And here, you need rather mentality that is driven by cash that is driven by fast execution and growth opportunities. So also from a management point of view, we want to separate this, also separate that in legal entities that allow us to partner if possible. Second category, functional entities with external revenues, what is that? We have, as you know, our own in-house special machinery building, and that group is not only doing business for Schaeffler, but also for other external companies, and we will show the revenues and also the EBIT from these activities that are small, but not -- without any impact, we'll show that also in others. And then you remember when we acquired Vitesco, we acquired not only electrification and powertrain, but also some contract manufacturing, that is a runoff business, and that will also shown in this area. So that is important to understand. We'll show you and certainly then also together with the performance, when they're ready from first of January '25, these activities will not give you all detail on business divisions. But on the 4 divisions, you get the full P&L and also the related cash flow figures. Vitesco activities are fully allocated to the new divisions electric drives, in particular, controls, to some extent, mechatronic modules and then in powertrain a bit and also in Vehicle Lifetime Solutions. On that basis to the guidance on Page 22, I think you have already seen that from the deck that was distributed to you for the annual report. We have -- following the accounting requirements concentrated on the 3 group main KPIs sales growth with margin free cash flow. And for you, we have extended this into a divisional guidance for the 4 business divisions with sales in absolute terms and EBIT margin as a percentage on an adjusted basis, each with ranges a little bit wider in E-mobility because that's where the biggest uncertainty is and for the others with a 2% range. Now let me quickly explain this again. You may ask yourself, why is E-mobility negative and Claus explained that. A significant part here comes from the more conservative accounting standards that we are using now also for the Vitesco business. You all know that this is a ramp-up business and has not reached a situation where the order book is really delivered. It's still in growth mode, and we will see over the next quarters, whether we can deliver on our promises. I would also like to extend before I come to the performance improvement potential, the logic of the structure again, this is product oriented. It doesn't mean that E-Mob is only battery electric. The hybrid part is in there. It also doesn't mean that PTC is a pure sunset business. Some of the components that we use also in electrified vehicles are produced in that area. And we believe that, in particular, this full-fledged approach that Schaeffler is offering from battery electric vehicles and powertrain solutions to ICE gives us a perfect answer to this uncertain development in the powertrain space. I would also like to highlight, you saw on the previous page, Schaeffler is not only automotive and power trains. There is an interesting chassis business that we will continue to grow going forward, in particular, in markets like China and let me say that type of business has an interesting angle also to software-defined vehicles and opportunities in the future. So that's the hedge #1. Schaeffler is a powertrain play with the full-fledged approach. The second hedge is OEM, auto versus VLS. That is, I think, well understood. And then there's a cross-sectorial hedge because in the sectors that we have, and this is not only Bearings & Industrial, we do more than auto. And I, in particular, believe that this new concept of the motion technology company gives us an excellent framework to pursue opportunities outside the car and light commercial vehicle space. Now let's go to Page #23 and put that all a little bit in perspective. This guidance should not be looked as a 1 year and then it's over. We certainly owe you and that will happen in the Capital Markets Day in September, midterm targets, but let's also be very clear -- the year 2025 will still be a year, where this new structure needs to be fully implemented, fully understood, fully embedded. The teams need to concentrate on their numbers and execution. So it's another year of transition. We're also the synergistic potential, also the additional potential from our improvement program will not be fully visible in the P&L. The contrary is true. We will see some cash outs in 2025 for the investments into restructuring and synergies. And that's also the reason why our free cash flow guidance is on the negative side, 0 to minus EUR 200 million. If you add back the restructuring payout for synergies and the performance improvement program of around EUR 350 million, [ Claus ] and add that back to the midpoint of the guidance, you see that after these one-off cash outs the free cash flow will be positive and will also allow again for a decent payment of a dividend. The key message here is not so much the year '25, but the year thereafter. This EUR 850 million stemming from both synergies, Vitesco and performance improvement program we are shooting for and the more we are able to realize this also in the time frame that we are giving you here, the more we will be on the right side. You will ask the question, how much of that is E-mob and I'm happy to say that nearly half of that EUR 815 million is related to E-Mob and that will certainly help to bring the breakeven point closer we have decided to also preempt the question not to give you the breakeven ambition already now. We will do that in the Capital Markets Day, when we have a little bit of a closer grip on how all of that comes together. But what I can say here and what I would like to stress, we are optimistic that this EUR 850 million can be achieved and will be achieved according to the schedule that you see on this page. We'll update you on where we are with that in our next quarterly results and are optimistic that, that will help us to achieve our long-term performance targets. Let me finish with the final page and the financial calendar, seventh of May is our Q1 earnings release. You're all cordially invited to participate in our AGM on the 24th of April, that will be done here in Herzogenaurach. Heiko and his team will be in Hanover for a investor booth tour, we will, after this call, come to London and be available tomorrow. And for sure, after May 7, there are lots of different activities also to prepare you well for the Capital Markets Day. We're excited about that opportunity and are excited to explain more about our long-term vision that is called the leading motion technology company. I stop here. And thank you for your attention. I'm handing back to Heiko for Q&A. Thank you very much.

Thank you very much, Klaus. Thank you very much, Claus. And with this, I would hand back to the operator to take our first question.

[Operator Instructions] The first question comes from Christoph, Deutsche Bank.

The first 1 will be on the E-mobility indication that you gave. Obviously, you are not providing the performance today. But could you just comment a bit more on at midpoint? Do you actually factor in growth for the business? And what sort of growth like double digit? Or any comment there would be appreciated. And is there any indication you could give for just roughly for '24 margins in that division? The second question also on the divisional guides for the Bearings & Industrial. How much of the improvement versus '24 is just regrouping certain activities into the other line? And how much is the organic or restructuring driven with improvement? And then lastly, on free cash flow, when we look at the slide on the cash out for restructuring and integration, it looks like another step-up in '26 for cash outs. At the same time, you have first earnings effect. Should we prepare ourselves for another stated breakeven or negative free cash flow in '26 or would you envision that to be positive already?

Just of all 3 very good questions and highlight that it all leans towards the CFO. So I'm getting some time here. In E-mobility, there is growth factored in, which will be clearer, when we have our solid pro forma base numbers. So I'm a little bit hard pressed to give you now an exact number here, but there is growth, but it will also consider and take into consideration, obviously, the market sentiment that is around us. It will be very differentiated between the different reach areas. And as you can imagine, the most prominent growth in that sector will be in China, and it will be a little bit subdued in Americas and Europe. But in there, we will be growing. As I mentioned also on the Schaeffler side during the financial piece here. We also grew in the environment in '24 significantly on the Schaeffler side, but also Vitesco side. It's not just the increase in volume of existing programs, of course, but also the ramp-up of new platforms. The -- just -- you didn't ask it specifically, but I will nevertheless maybe add a little bit more light or shed light on what Klaus said regarding the accounting impact, if we would and we never did that exercise because that would have distracted us from more important things to do. But if I now see the IFRS conversion impact on '24 on the Vitesco side, and that obviously was done very seriously because that was necessary for our financial statements. And now would extrapolate that on the Schaeffler's E-mobility side, where we, of course, never had the conversion because we applied our policy from the beginning. But if I would add or extrapolate that impact, then we would come in a more R&D accounting logic in a single-digit negative EBIT. So that's -- just the extent in this really tremendous ramp-up phase with a tremendous R&D efforts. That's really the impact or the scope of the impact of our R&D accounting policy. [ NIS ], there is also organic improvement with the formation of the other division where we, for example, now are having the start-up ideas or framework, for example, hydrogen and for example, for robotics and humanoids that is around -- and that's obviously still a more cost-driven and not a revenue-driven field of future growth potential that would improve Bearing & Industrial Solutions in the range of 1 percentage point. So 1 percentage point of the margin that you see in our guidance for Bearings & Industrial Solutions is due to the effect of the other division. And of course, there's more to come at the end of this month also. But just to give you an idea what -- yes. So in the meantime, I also got the exact growth number that is in our E-mobility based on of course, preliminary prior-year pro forma numbers, but it's in the range of 15%. So just -- and last but not least, I mean, you interpreted the slide very well, I would say. You now, of course, have to -- at the EBIT and the onetime cash out here together, which, as you stated, there is already positive synergies and impacts of the performance improvement program. And I am not in a position to give you an exact 2026 forecast for free cash flow, but it will also be far away from the cash generating power that I'm always prominently that is playing here in the range of EUR 600 million to EUR 700 million then you would see in a normal year that's already completely balanced. Of course, with 2027, then that should definitely be behind us because the positive effects of the programs are then higher than the cash outflow. So 2026 will have a negative impact of these programs on our free cash flow. But we definitely would thrive for a significant improvement into the future state, which then, obviously, with EUR 850 million of tailwind from synergies and restructuring then is the midterm target. So there will be a significant step in the right direction in 2026.

Maybe to add, Christoph, to make sure that you understand, we have, on the 1 hand, restructuring provisions from the program we announced in November. What is more like the previous programs, where we released headcount and that requires the payout for that restructuring. The integration costs are not all provisions. They are also going through cash and EBIT at the same time. I think that's something you should have in mind. Because for integration, some of the things cannot be booked as provisions and they will flow through EBIT and P&L and to some extent, then reduce the synergy impact in the year 2025 and '26. Again, give us time until the Capital Market Day to give you a little bit more guidance on how that midterm framework will look like.

The next question comes from the line of Akshat Kacker in JPMorgan.

Akshat from JPMorgan. I have 3 please. The first 1 on Powertrain & Chassis. Again, I understand that you don't have the exact figures. But generally, when you're thinking about the 2025 guide, can you just give us a broad sense of the top-line guidance when you're thinking about EUR 9 billion to EUR 9.5 billion at both those ends, what does that mean in terms of organic growth assumptions? And even when we are thinking about the 10% to 12% range, is it fair to say that in 2024, you were at the midpoint of that range, some more details, that would be helpful. And if you could also remind us on Powertrain & Chassis what is the exposure to China as of today, please? That's the first question. The second question is on VLS. Again, when I look at the guidance, you -- at the top end of the revenue guide, you're almost looking for a 10% organic growth in the business, which is completely understandable given the opportunity with Vitesco as well. But again, you have a cautious guide on margins. So could you just give us more flavor there, please? And the last question that I have is on for Klaus, on humanoid robots and defense. So yes, clearly, from a political perspective, there is a focus to better align industrial assets and footprint toward growth areas in Europe. But when you think about this space, do you expect economic activity and momentum to improve in the coming quarters? Or do you already have sizable orders in this segment? And also when you generally think about precision, motion control or actuators? Are you happy with your capabilities and know-how in this area? Or would you be actively considering M&A to have a broader reach other than obviously Ewellix, which you did in this space?

Maybe actually, if I may, I start with the last one, and that's gives Claus also the opportunity to focus his answers. When I mentioned humanoid and defense, I was talking about these 2 areas more in a strategic point of view. We have today a small defense business that sits in our aerospace area. And I can indicate that we separated this as a business division and could imagine that we call that in future aerospace and defense. You don't go lightheartedly in these kinds of sectors because they have completely different rules. This is more a business to government activity than a business to business. We have also at Vitesco side, some experience with products that were used in military equipment. But again, that's more a topic that where we will decide in the summer, whether from a strategic point, we want to build that going forward. In the defense area, it's more about the classical products that we know. You can think about bearings in all different shapes or forms for this. So there, we definitely feel that we could do that. But again, there are specific requirements for military equipment. In particular, if you broaden this from -- away from planes or helicopters into tanks or other things, then that needs to be very carefully looked at. Vitesco had also in their power electronics business, certain things also there, you have to have enough time to think that through, whether that makes sense. In general, we can say that business is a above-average margin business, if you get it right. And if you qualify for that area, humanoid is different. Humanoid is a new business also for the market. There is tremendous activity in that field, both in the U.S. but also in China. Those of you that followed us in the Consumer Electronics Show in Las Vegas saw that we displayed a humanoid there. We have started to invest in that space also as I -- with a little bit of financial investment because the logic here is this is an innovative area, but it is an area where we can exactly show the cross-selling potential of Schaeffler. If you would be here after an hour, we could show you that if you can do certain actuator things that we're used to from the automotive space, you can use that technology also to do robot joints to think about combining sensors, e-motors and bearings for certain areas. So we are quite advanced in terms of what we could do in terms of prototyping. Do we already have a large order there? The answer is no. Are we seen as someone, who can provide the necessary components and the systems in that space? Absolutely. And we will show more if you are interested in Hannover, but don't expect a record growth already from this in 2025 is more midterm activity. Claus, was that enough space to answer the other one?

Yes, especially because the first question, Akshat, I will make it easy for me. I mean, let's wait until we have robust numbers that are really comparable on pro forma. I mean, it's another 3 weeks, and then we should be able to provide you the answers to the question. Directionally, I can say that our assumptions for the production volume are flat for the 2025 versus 2024 with an increasing portion of E-Mob and battery electric vehicles that should also mean lower volumes for PTC. So I think there -- I know our assumption is not growth in that area. It will also not be as Klaus said, a completely ramp-down business because there's portions in there that are actually also growth areas like Chassis. But it will be flattish to maybe a slight decrease. The -- regarding the EBIT margin, I really would ask for your understanding to wait until we have the robust numbers. Exposure to China and PTC is around the same as our regional sales split for the entire company. It is -- actually you might have seen in my regional pie chart that the Chinese footprint of Vitesco is a little bit under proportional and our relative sales portion in China will decrease a little bit with now the combined entity, but that is not true for PTC. Vitesco is there also very strong in the area of knock sensors, for example. So that might help you in that regard. And to your second question. VLS, strong growth, for sure, strong growth, but not again 17%. So definitely above the GDP growth that is assumed or even the vehicle part globally that we assume. So we want to grow above market. And one of the component you already mentioned, that is the integration in our systems and service business of the Vitesco product. But another growth driver is our platform business. And we touched on that in the last session, I'm sure we have an E platform business and channel, sales channel that is very developed already, since a few years by ourselves in China. And we also acquired a basis for doing a similar thing in India. It's not as advanced yet as in China, but both of these platforms will significantly contribute to the budgeted growth for 2025. And as I explained in the past, these are platform e-commerce business platforms that are open to other suppliers of aftermarket solutions. And there, the margin -- there will be a margin dilution impact by these sales and the growth of these sales. So I would therefore, say the margin guidance there is also from a midpoint standpoint, pretty realistic under these circumstances.

And actually, if I may, let me quickly add 1 more thought or 2 more thoughts on China. I've just been there a week. The China situation is very much a function of how much business you have with the Chinese OEMs and before the merger, you know that from what we explained, Schaeffler stand-alone, the share was more than 50%. Vitesco share with Chinese OEM is lower. So the combinations at the moment below 50%. But we will bring it up and it's important that you also understand that Chinese OEM business is not only battery electric. If you look at BYD, they certainly do also combustion engines. And while they're sort of in-sourcing is higher in terms of the share. There is interesting business with these OEMs, both locally, if you are able to follow the speed that they have there. It's certainly bloody competition, but certain -- in particular, on the component side, we can do a lot and also Vitesco helps us. And now if they all come to Europe, you saw the big sort of equity raise of BYD in Hong Kong, that is an additional opportunity for us just to keep that in mind and to add that to your question.

The next question comes from or Horst Schneider, Bank of America.

It's Horst from Bank of America.

We can hear you well.

All right. Great. And hello again. I tried again to get more details on this E-mob business, but then also on the powertrain business. On the E-Mob business, maybe can you share now what are your thoughts on market growth? I know that the market, in general, I think, is growing something like 20% with, of course, huge regional differences this year, maybe Europe is growing more, maybe not. But is it fair to assume also in your view that the general underlying market growth is something like 20%? Or would you say it's lower than that? Then within E-mob, what is now the share between PHEV and BEV business. On powertrain, the question would be when you say that the powertrain revenue should decline from here. How should we forecast that? I can imagine that we'll be debated also at the Capital Markets Day in more detail. But if we now make a forecast for Powertrain & Chassis, specifically for '25, that your revenue guidance implies basically what level of underperformance, I guess it's an underperformance versus LVP or is it this year still an outperformance? And is a new assumption as well for E-mob and for powertrain already this change in CO2 rules? Is that already included?

Well, all these questions are absolutely relevant. But we are, at the moment, not in a position, where we can give you answers to this. The Capital Markets Day in September will hopefully give you more. So kindly ask for a little bit of patience before we put these numbers and this -- but let me respond somehow more strategically to this. We need to be careful, and you need to be careful to associate E-Mob with everything that is electrified in PTC only ICE. That's not the case. And don't forget, there is also the automotive bearing business in the bearing side. So we are preparing at the moment is that you get for our sector cars and light commercial vehicles that is spreading, if I take VLS out across 3 different divisions. You get a metrics, where you can see how much of that is bat in a sense, pure battery electric? How much of that is half and how much of that is ICE. That's similar to what Vitesco did in the past. So that you can separate the way how we put something in our segment reporting that is product-oriented. And certainly, the hybrid is more in E-Mob than in PTC, but it doesn't mean that PTC does not produce certain parts that end up in an electric or in a hybrid car. Same is true for the bearings. In the bearings, you have wheel bearings that have -- there are sort of powertrain agnostic, but we have also bearings that go into an e-motor solution or an e-solution and that go in an ICE solution. So we need to give you more insight there. And that's also then the basis for saying where are we outperforming? Are we outperforming on the pure battery electric side or on the hybrid side? I can tell you today that we have adjusted our scenario. You remember the famous 40-30-30, 40% BEV, 30% HEV, 30% ICE for 2030. For our strategic discussions in a way that it's now 35%, 35%, 30%. That means the electrified share of our business will remain at 70% and we believe that, in particular, on the hybrid side, we'll see more growth at the moment and a little bit lower growth on the E-Mob side. You can now split this out by regions. That's probably the appropriate way to look at that because China will be different than the U.S., in particular, now with President Trump and his team in place. But that's how we look at this at the moment. So give us a little bit more time to prepare this. I fully understand what you need, but it is not sort of the right way to say, E-Mob equals BEV and HEV, PTC is ICE. You need to somehow look at this in a metric and say this is a segment reporting, including the automotive bearings and then take it over the different powertrain solutions, knowing that also PTC has all the Chassis business. And the Chassis business is separate is powertrain agnostic, but in particular in China, a significant growth opportunity. Does that make sense?

Makes a lot of sense. A lot of questions, of course, remain. But let me ask maybe 1 follow-up. And just more related basically to net debt to EBITDA leverage. If you were meeting the midpoint of your guidance, what would be the net debt-to-EBITDA ratio be at the end of 2025?

Claus, do you want to take that?

Yes. I mean we would not see a huge relaxation versus the current levels.

What is your -- as a follow-up...

We would move towards the 2.0, but not very significantly.

Okay. As a follow-up to that, do you have any sort of minimum gross liquidity target for the group, you say at the moment, EUR 4 billion? Do you have a minimum number you want to be at or you need to be at?

So there's no minimum number that we have to be at, but we would feel comfortable if that liquidity is in the range of 15-plus percent of sales.

Let me add this. If you compare us to companies like the French. We have financed all of this in a much more cash conscious and liquidity conscious manner. We have not acquired Vitesco sort of with full. And we have used, as you know, a specific transaction structure to do it as consciously as possible. I'm not concerned about our liquidity at all. We are not [ SETF ]. We are no one of the others who have to adjust large acquisitions with high debt mountains. We can carry the 2.5x and we will reduce it over time back to the level. That's not going to happen in 2025, for sure not. But that doesn't mean that we are constrained in sort of following our plan. Is there ample room for further M&A? Certainly, the answer is no. We're not going to, at the moment, focus on external growth. We need to focus on execution. That is, in particular, executing this large and huge order book, that's all where the risk is because we need to get that really understood project by project, development by development, customer by customer. That's the focus. But I don't foresee any M&A transaction, except for maybe some smaller things that could come along the way. So the focus clearly in 2025 is getting the operational stuff under control, making sure that we deliver on guidance, getting all the things that we need to deliver on the order books on the customer side, right? But liquidity and leverage is not a concern to me.

The next question comes from Sanjay Bhagwani from Citi.

I've got 3. My first 1 is a follow-up on E-mobility. Sorry, I didn't catch if I understand you are not providing the pro forma for e-mobility. But as a general, on the margin side, are you expecting this to be improving in '25 versus '24? And on that, I understand electronic cost inflation was 1 of the biggest challenges that at least Vitesco had seen for like '22 and '23. So are you starting to see some of these already relaxing? And do you already model that in your guidance? Or this is something that could be an upside optionality should the semiconductor electronic costs go down, then there is some lever to go towards the upper end of the guidance range. That is my first question. And I'll just follow-up with the next 1 after this, if that is okay.

Yes. So let's start with the attempt to now provide pro forma numbers already today. I can only repeat myself -- let's wait another 3 weeks, and then we have solid robust numbers. And then we can see that -- what I can say in regard to improvement of margin, and that's not necessarily true for 2025. Let's wait and see for the numbers. But directionally, for the next few years is that with the accounting policy of Schaeffler that recognizes a bigger portion of the R&D expenses already in the year of cash outflow and does not have a negative impact on the future P&L. The margin improvement curve once we are beyond the significant ramp-up phase and go into a more stable sales volume where a new acquisition of orders is more equal to the delivered sales of a year is much steeper than with the Vitesco's accounting policy in the past, where you would protect the present time, but then impact negatively with amortization than the future. So I would expect, especially in the midterm, and that is then I'm pretty sure part of our Capital Markets Day discussion, a much steeper margin improvement curve with the accounting policy of Schaeffler. Electronics cost inflation, I mean that is really a very difficult 1 to answer. We did not budget for a big improvement in the cost structure there. And actually, right now, you see already, after some relaxation a little bit more of dark clouds on the sky going forward again. So I think the -- if it's coming better, then there might be upside potential, but the logic has to be we have go to the customer and push whatever the price levels are on to the customer.

That is very, very helpful. So the second 1 is on the Industrials & Bearings division, are you able to share anything because Q4 was unusually below expectations. I think you already alluded that January was better sequentially? Are you able to provide any color on how the Q1 trend has been and if this has already sequentially been better than Q4 last year?

Yes. I cannot. And I think -- what I can say is that January is much better than December. But I also try to be a little careful in assessing the January and if you remember, I said we don't see that yet based on market condition is improving. It's more a shift of customer -- short-term customer demand and orders from December into January. And you also understand that our fixed cost sensitivity and elasticity of volume is enormous also in industrial. So therefore, this volume impact that we saw a negative -- very negative in December was somewhat calibrated -- recalibrated then in January. I don't want to now look in my glass ball already to tell you what Q1 looks like. All I can tell you is that we are in a very disciplined way executing our performance improvement program that is heavily also focused on Europe as you know, structural adjustments in the European workforce, especially in Germany are not from 1 day to the next, but we will continue and grind away in a very disciplined way.

That's very helpful as well. And the final 1 is on the dividend. I think you already alluded that because underlying free cash flow for '25 still will be positive. The negative is because of the one-off restructuring. I think you alluded to the dividend payment likely in '26. Are you able to provide some color that if you see, let's say, the dividends of EUR 0.25 more or less a low point and then you gradually start to increase it. Or you would rather see this more steady going into '26 or maybe just too early to comment now?

No, it's certainly early to comment. We don't give dividend guidance. What we have always said is that the payout ratio for Schaeffler as a group, and that also applies after acquisition of Vitesco should be 40% to 60% of adjusted net income. That's the guidance that we give here. And if you just take what we said before, the minus EUR 200 million to EUR 100 million, take the midpoint minus EUR 100 million, add back the one-off cash out for restructuring and integration, what is also in the deck in the backup, then you end up with EUR 250 million as an underlying free cash flow without M&A. So if you just think about what we're paying today, that would be inside that number. But again, it's premature to talk about this. We'll come back to you when we are closer to the year-end 2025 and see what's coming in 2026.

Ladies and gentlemen, that was the last question for today's call. I would now like to turn the conference back over to Heiko Eber, Head of Investor Relations. Please go ahead.

Thank you very much. So all I want to do is thank you all for your interest and valuable questions. Of course, if there are more questions coming up afterwards, feel free to reach out to our IR team anytime. Having said that, I would like to thank our CEO and our CFO for being here with us today. And of course, I would like to thank the entire team for making this event happen. Have a good day, and talk to you soon. Goodbye.

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