Schaeffler AG (SHA0) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Pro Forma Figures 2024 Conference Call and Live Webcast. I am George, the Chorus Call operator. [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, sir.

Thank you, George. Ladies and gentlemen, I'm very happy to welcome you to our today's call on the 2024 pro forma numbers. The following presentation has been published today at 1:00 p.m. CET on our Investor Relations home page. And for sure, after the call, we will provide a recording and a transcript of this webcast on our website. Please note that today's discussion will focus only on the pro forma figures, and we will not make any statements on current trading. As a reminder, we will hold our pre-close call on April 10 and our Q1 call on May 7. Now, before we move on to the content of today's call, I'm sure that you have all taken notice of our well-known disclaimer. Please note that this release and certain information herein is unaudited. Looking at the agenda, Klaus Rosenfeld, our CEO; and Claus Bauer, our CFO, have joined the conference call and will guide you through the key information. Afterwards, both gentlemen will be available for a Q&A session. And now I would like to hand over without further ado to our CEO.

Thank you, Heiko. Ladies and gentlemen, thanks for joining the call. As Heiko said, this is not the normal earnings call. It's us sharing with you our pro forma results for 2024. And when we say it's the normal earnings -- not normal earnings call, that also includes latest development. Let me say upfront, all of us have seen the outcome of the famous Liberation Day. We are still in the process of analyzing what that means, both directly and indirectly. Until further notice and analysis, we stay with what we have said so far. I think that's the prudent way to respond to a potential question on tariffs and Liberation Day. On Page 4, you see the key messages here. We owe you the pro forma results for 2024. They have been produced now and are finalized also with the necessary quality assurance. But there are, ladies and gentlemen, unaudited pro formas that display the new Schaeffler reporting structure with its 4 operating divisions for the full fiscal year 2024 with full consolidation of Vitesco on a pro forma basis as of January 1, 2024. So they should be fully comparable. And you see the key figures here. Sales pro forma for 2024 on that basis, EUR 24.313 billion and EBIT margin before special items, also pro forma of 3.5% and a pro forma free cash flow negative with minus EUR 694 million. Claus will explain the details. I think we can already say here upfront, this minus EUR 694 million includes two major one-off effects that Vitesco brought into the combination. Claus will explain this. If you deduct this, it's also more or less in line with our guidance for '24. The next step, ladies and gentlemen, is our Q1 release on May 7, where you will certainly get our Q1 2025 results. And you will see in the deck, we have included already the quarterly figures for 2024 on a pro forma basis. So that should give you also then a good comparison. You will see in the backup, numbers are following the usual P&L format from sales down to EBIT. That's what we are providing. And let me say here again, this is the set that we have decided. That also means additional numbers will, for the time being, not be provided. Final target, clearly, is to share with you then at our CMD September 17. The midterm targets, we're working on this. And for sure, we understand that the basis for this is a proper, actual pro forma result and our running results for 2025. Page #5 has the new reporting structure. I think I don't have to explain that in more detail. This is what the structure looks like, 4 divisions plus then the 14 business divisions. And you all know about the fifth division, Other, that is not a real division, but more a reporting segment with selected start-up businesses, functional entities with external revenues and some end-of-life businesses. With that, I hand over to Claus for the real interesting part, the numbers.

Thank you very much, Klaus. Ladies and gentlemen, welcome also from my side. Page 6, for sure, is the core of this presentation, shows you on one page, really the entire restated numbers. Please be aware, as Klaus already mentioned, that additional backup -- additional details are in the backup. What did we do to come up with these numbers? For sure, you understand that our formal financial statements for 2024 included Vitesco only 3 quarters at equity and in the last quarter at full consolidation. These numbers now simulate the situation as if Vitesco and legal entities would have been consolidated for the entire year fully. The -- as you know from our prior calls, we also have a significant IFRS interpretation changes between the two companies. These numbers now include the full IFRS conversion towards the Schaeffler accounting standards as you have been used to in the past. And last but not least, and that is from a bottom line standpoint, between the divisions and in significant adjustment, we obviously applied a harmonized and consistent model to allocate overhead costs and corporate services and divisional services and regional services on a harmonized allocation model, which I will go into a little bit more detail when I talk about the single divisions. When we look to the left upper corner, we have started out with the group, Klaus already mentioned the main indicators for the full year, EUR 24.3 billion in sales with an EBIT margin of 3.5%. And what is interesting, and that should be in line with our messaging throughout last year, that the second half year, for sure, was more challenging than the first half of the year. And you see it reflected in almost all divisions except E-Mobility, and we will talk about it. But the second half year was significantly lower in sales volume than the first half of the year for the group in total. That's around a sales reduction in the second half of the year, of around 4.5%. Many of the drivers for profitability can be explained with it. We also discussed at length during our year-end closing call the situation in our Bearings & Industrial Solutions division, which comes then on top of the volume challenges. If we now go through the divisions, then I already said, E-Mobility is the exception to what I just said. And you see that best in the bottom line. For sure, 22% negative EBIT for the full year is in line with what we tried to explain with our guidance for 2025. It is -- and we will talk about the comparison to the guidance in one of the future slides, but we will improve that in 2025. But that is the starting point. But interesting also is how it changed throughout the quarters. And if you now not look at every single quarter in detail, but really split it in 2 halves of the year, then you'll see that the first half of the year, with around minus 26% EBIT, improved in the second half of the year to around minus 19% EBIT. So a 7 percentage point improvement. And if you then look at the sales number, it's clearly volume driven, in line and consistent with our messaging around our guidance 2025. Now I would lead your attention to the right side, Vehicle Lifetime Solutions and Bearings & Industrial Solutions. Let's start with the Vehicle Lifetime Solutions. The restatement for last year is 14.8%. That is around 1.5 percentage points lower than what you have been used to from a Schaeffler stand-alone standpoint and also still for the formal year-end closing. That has to do mainly with the allocation logic that we applied now, including Vitesco. Many of the allocations, especially the corporate services, are not sales driven, as it was the case at Vitesco, but really just equally split between the divisions. That means a relatively small division as the Lifetime Solutions would bear 1/4 of the corporate overhead costs, the same as any other division, independent of the size. That shifts a little bit the profitability, of course. And you see the counter effect, most obviously in Bearings & Industrial Solutions because these two divisions are the divisions that are best comparable to our stand-alone numbers. And there you see, with 6.7% from Bearings & Industry Solutions, we have about a 1.5 percentage point improvement versus our formal financial statements for the year, which I already explained when we talked about the guidance during our year-end closing calls. 1 percentage point of that is really due to the fact that we created this Others column, which you see right below. And there, we show a negative EBIT of EUR 67 million. If you think about the 1 percentage point that I just talked as an improvement for Bearings & Industrial Solutions, that's about the same number. And what it really is from a content standpoint, and I explained it already also in the closing call, is our incubator for humanoids and hydrogen, which are not included in the division, but split out in the other division so that we can give it the right start-up mindset, start-up environment and also start-up focus. Last but not least, Powertrain & Chassis. Now back to the left side, bottom -- on the bottom there. Of course, there's a little bit of an impact also from an allocation logic standpoint. But it's, for sure, also because it's the biggest division, not as prominent as with the others and pretty stable with an EBIT pro forma for 2024 of 11.4%. I want to lead your attention also to the quarterly split and especially the difference between the first half year and the second half year. There's significant drop in profitability. And if you look at the sales level, you see immediately that this is also volume driven, I think that will be important. And we discussed in two slides, the comparison to our guidance for 2025. But before we come to the guidance, let me talk on the next slide about the free cash flow. Klaus already mentioned it, EUR 694 million, that is not a normalized free cash flow. There is significant onetime impact net we absorbed with Vitesco inclusion. But before I come to the impacts, you see on the left side also how the free cash flow before M&A would be allocated throughout the 4 quarters. And what we showed here is the calculated free cash flow before M&A and demonstrated the same logic, but excluding the one-off impacts that are explained on the right side, most prominently. And I think you remember and note that from the calls that including the guidance call from Vitesco for 2024, one important driver for the free cash flow for Vitesco stand-alone at the time was that after this spinoff from Continental, there was favorable payment terms agreed upon for some time for a defined time that had a financing impact on the Vitesco side. Now 2024 was the year where these payment terms phase out. We see the phasing out with an impact in Q1 and even more prominently in Q2, EUR 90 million and EUR 337 million, respectively. So that is an impact, onetime financing impact, if you will. It's already shown in the fee -- in the operational free cash flow here because it's through working capital because it was driven by payment terms, but it's a one-off financing impact of minus EUR [ 127 ] million and the other EUR 130 million to a total one-off impact of EUR 557 million that happened in Q3. And you are all aware of that as well because that was also reported by Vitesco, I think, even -- in a talk message that is the allocation of investigation costs with Continental because of the [ diesel ] topic. So therefore, for sure, also something that we will not repeat it. If we correct that, then the real underlying free cash flow before M&A would be more in the range of EUR 137 million, as shown in the chart on the left side. Let me give you a few data points for your modeling on top of that, and I mentioned some of the data already also in our year-end call. But the reinvestment rate for 2024 in the combined company, in the combined entity was very close, almost exactly 1.0. That means we had depreciation and amortization in the amount of EUR 1.5 billion and also a [ CapEx ] of EUR 1.5 billion. And then a last data point, the working capital, it's -- the disclaimer is important. These are unaudited numbers. And this -- you might think it's very easy. It's not so easy to really simulate on that. But the working capital, on a pro forma basis, increased from prior year end of '23 to end of '24 by around EUR 250 million. Now that has, of course, also the impact of the payment terms that I just explained. In it, that is EUR 427 million, as shown here. So without that, we really showed an operational improvement of working capital by EUR 170 million, which is completely in line with our observations and statements during our year-end closing calls. With that, I would come to the next slide and now compare the pro forma statements to our guidance for 2025. And there, you see that from the midpoint standpoint in sales, we would stay relatively flat with some significant mix change in the divisions. E-Mobility significantly increasing, Powertrain & Chassis slightly reducing and the other two divisions at about the same level. But let's go back to the group. Again, the midpoint of our EBIT guidance with 4% is an improvement over our 2024 pro forma performance of 50 basis points. And it would already also compensate for the sales mix impact, especially E-Mobility versus Powertrain & Chassis that I just touched upon. And if you then go to E-Mobility, then we already indicated in our prior call, we see a significant increase in our top line despite the challenging circumstances. I think we will see even an bigger increase in the years thereafter. But let's stay with 2025, a significant volume impact you saw between the half year 1 and half year 2 for 2024, already the volume impact on the profitability, and that is also reflected in our guidance. We would improve between 6% and 7%. If you look at the midpoint, also our EBIT there with further continuation in later years in volume ramps up. Powertrain & Chassis, again, is the opposite, and that's also where our hedge comes into place. And the one division would outperform surprisingly, then it would be most likely at the cost of the other division. Our base scenario is that our sales for Powertrain & Chassis is slightly reduced in 2025. And now my explanation from before that becomes important because you see also the impact on the midpoint 11% is slightly below the EBIT margin for 2024. But if you look now at Slide 6 and look just at the second half of the year, and the volume in 2025 is much more similar to the second half of the year last year than the first half of the year. And you would -- will recognize that the midpoint is also an improvement of around 1 percentage point versus the performance of the second half of 2024, which obviously is our ambition to offset some of the volume impacts with very disciplined cost management and operational excellence. Vehicle Lifetime Solutions. Slide -- on that slide, slightly in absolute terms, but relatively speaking, also has increased, not as dramatic as in 2024 over 2023. I think that was already our indication already during our last call and absolutely stable profitability performance 2024, almost at the midpoint of our guidance for 2025. And last but not least, Bearings & Industrial Solutions. We don't think that volume will be a bit tailwind, again, consistent with our messaging in the past, and the volume will indeed be a little bit more on the levels of the second half year of 2024. And in that regard, what looks here on a total year basis, a slight reduction of EBIT margin is indeed an improvement if you compare it to second half of 2024. For the total year into 2024, and you see that on Slide 6 the quarterly breakdown, we have a very good, also a little bit distorted, the first quarter with onetime effects there. But if you take that out, you have an EBIT performance improvement in Bearings & Industrial Solutions without any tailwind from volume that is in the range of 60 to 70 basis points. Free cash flow, I think I have talked enough about. And last but not least, just quickly, we would have done that in our quarterly calls. But since we are together today, just wanted to update you quickly on our refinancing. I think you read it our refinancing 2025. Although the bond with the main refinancing topic for 2025 will only mature in October, but we are completed with our campaign for 2025 already. We have maintained, and that was one of our targets, a very balanced maturity profile for the next 6 years with a very doable refinancing volume for next year that will open further maturity profile improvements then in the next year. I think we got the timing right one day before U.S. tariff announcements. But I think also in the pricing of our dual tranche is reflected the trust of the debt markets in our performance capabilities and strategic direction. Right now with the payout of these dual tranche bonds, we have now a liquidity position of over EUR 5 billion. This, obviously, is the continuation of our solid and robust financing road map. With that, Klaus.

Thank you, Claus. Let me reiterate one more time, the finance team has done an excellent job to place these bonds at very attractive terms. So we're really happy that, that went well. Page 10 is nothing more than just the calendar again, all the dates are mentioned. I would cut it short here and stop here. Heiko, hand back to you for potential Q&A.

Thank you very much, gentlemen. So with this, I would hand back to the operator in case there are any questions.

[Operator Instructions] Our first question comes from Sanjay Bhagwani with Citi.

And I understand you may not want to talk about deliberation and the implications right now. So apart from that, I just have one question left. Just on the refinancing of this EUR 1.15 billion dual tranche, could you please remind us which bonds you would like -- in terms of coming due, you would like to redeem first? If you can provide some color on like for the EUR 1.15 billion, where the allocation of the funds is?

I mean, you see that actually on Page 9, and it's a little bit grayed out. It's the financing for -- that matures in 2025, is EUR 750 million bond that matures in October. And then there's another EUR 167 million in [ Schuldscheindarlehn ] loans that will now mature over the next 2, 3 months. All the details are also provided in the backup..

[Operator Instructions] We have no more questions at this time. I hand back over to Heiko Eber for any closing remarks.

Thank you very much, and I'm glad that obviously, the information we provided was here. So there are no further questions. I thank you all for your interest and your participation today. As always, if there are questions coming up, feel free to contact our IR department afterwards. And with this, thank you very much. Have a good rest of the day and enjoy working yourselves to the tariff jungle today. Thank you.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.