Schaeffler AG (SHA0) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Pre-close Call Q1 2025 conference call and live webcast. I'm Sandra, the Chorus Call operator. [Operator Instructions] And 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, sir.

Thank you, Sandra. Ladies and gentlemen, I'm happy to welcome you to our today's pre-close call on the first quarter 2025. Now before we move to the content of today's call, as always, I am sure that you have taken notice of our disclaimer. Please note that this release and all the information herein is still unaudited and that our next quiet period will start on April 22, 2025. We are holding this call today to remind you of relevant public information previously provided by Schaeffler AG or otherwise available in the market, which may be helpful in assessing the company's financial performance ahead of our Q1 2025 results on May 7. I will guide you through the key messages, give more clarity on our divisions and touch briefly on the latest tariff developments. After our short presentation, you will have the opportunity to ask questions. And with this, I would directly jump into the content of today's presentation. On Page 3, let me start with the latest developments on group level. For your reference, we have added the respective Q1 and Q4 numbers 2024. They are all based on the previously shared pro forma numbers. In general, we can say that we had a very solid start into 2025, and this despite still challenging market environment. Sales in Q1 is expected to be pretty much flat quarter-over-quarter but slightly lower than Q1 2024. I will give you more details when we are looking at our divisions. On EBIT margin, we should arrive at the upper end of our full year guidance, so clearly up versus our last and, I admit, disappointing quarter. For sure, we got support by a certain spillover effects from Q4 2024 as this has been substantially lower than expected. But also, of course, we are improving on our operational performance step by step. On free cash flow on group level, following our typical and I assume well-known seasonal pattern, the cash flow in Q1 should be negative. Nevertheless, we expect a decent improvement compared to quarter 1 last year. So again, a very solid start into the new year. Now on Slide #4. Let's take a look at our 4 divisions, starting with E-Mobility. In a still volatile market, the trend towards electrification remains intact. And I'm sure some of you have also heard today's announcement from BMW, where the share of battery electric vehicles in Q1 was already at 19%. The growth year-over-year is driven by a feelable recovery of the e-mobility market especially in Europe and supported by a number of successful launches in Europe and in Asia Pacific. On the EBIT side, the EBIT is higher year-over-year and on a comparable level like last quarter. So also there, we see that we make the right steps compared to last year, of course, supported by the proper execution of our ramp-ups, but also supported by the increasing volume. On Powertrain & Chassis, there is a market decline for HEVs and ICE, especially in Europe. For sure, this is a counter effect of what we just discussed on the E-Mobility side. We see declining sales, again, mainly in Europe. And in addition, I would like to remind you that Powertrain & Chassis now also includes the so-called strategic phaseout business so businesses where we took the conscious decision to phase it out. This, I guess, you all remember from the Vitesco presentations, where we called this part of our business noncore business. EBIT for Powertrain & Chassis. The EBIT margin remains on prior year's level with a feelable improvement compared to last quarter. And this, ladies and gentlemen, once again underlines the resilience of our Powertrain & Chassis business and for sure is also a proof of our agnostic setup across all powertrain solutions. Taking a look at Vehicle Lifetime Solutions. The market demand fortunately remains on a high level. We still see significant increases on our top line. And despite the fact that we have announced that a double-digit growth rate will not be there forever, at least in the first quarter, we still could maintain double-digit growth. We continue to see strong sales growth year-over-year, in this case, mainly supported by our growth in the Americas. Also on the EBIT margin, the business remains very stable. The margin is on a comparable level year-over-year and, having this said, of course shows an increasement compared to the previous quarter. Last but not least, on Bearings & Industrial Solutions. The market environment unfortunately remains challenging but, and that's at least some positive, we see first signs of improvement in selected sectors. As a consequence, sales, slightly lower year-over-year and this -- and also there not too much new, mainly driven by continued weakness, especially in Europe. Having this said, good news on the EBIT side. The margin is slightly lower year-over-year. But as you remember, our Q1 2024 was the, by far, best quarter in our Bearings & Industrial Solutions division. And therefore, we see of course a clear, clear improvement quarter-on-quarter after the rather disappointing Q4 2024. After what we have seen during the last couple of days, I guess you will not be surprised that I cannot give you a detailed information on the current tariff situation. But there are some comments I would like to make. As many of our peers -- I guess all of our peers also, we aim to pass on the majority of the tariff impact to our customers. And I guess based on the contractual situation and based on the experiences we made over the last couple of years, we are confident that we can be successful. Also important that around 80% of the products that are invoiced by Schaeffler from Canada and Mexico are USMCA-compliant. As a negative, we cannot yet justify or we cannot yet quantify what impact increasing prices might have towards the willingness of the end consumers to buy new cars, especially in the U.S. So this potential collateral damage, of course, cannot be quantified yet. We have -- having all this said, I would like to end my short presentation with one important statement. Based on what we have seen so far, we are able to confirm our guidance for the fiscal year 2025 published in the annual report and our financial presentation on March 5. What we cannot fully quantify now is the potential full year effect on sales, profitability and free cash flow from the announced import tariffs, particularly of course in the U.S. They are still not included in the forecast as the outcome and their interactions cannot be fully assessed at the moment given this very, very volatile situation. But I ask you for your understanding. I guess this is nothing Schaeffler-specific. This is something where basically all companies in the world need to do their homework, on the one hand. But also to be clear, we have to wait and see how the entire situation develops. So before we jump into our Q&A session, just one small notice. After the call, we will distribute our consensus sheet. And as always, it would be -- we would be very grateful for your contribution and your estimates. And also here, as always, if we can get your indication by Monday end of business next week, that would be highly appreciated. And now let me hand over back to the operator for the first question.

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

Heiko, good to see at least that Q1 is looking strong. I have just two questions, both on tariffs. So are you able to provide some kind of like gross exposure numbers, for example, what sort of millions of revenue that crosses the borders between the Mexico to the U.S. and then from the Europe to the U.S. That is first question. And the second one, on the pricing pass-throughs of the tariffs. I think you mentioned something about one thing is the contractual part and one thing is the experience. So I'm just trying to understand, is there some sort of clause in the agreement already which says that, you know what, this is the price and any taxes on the top of that, the customer will have to pay. Or this is going to be a bit more negotiation, again, customer by customer, like what you did for the semiconductors?

Thank you, Sanjay. Yes, let's start with the first one. So we will try to provide some more color, of course, during our Q1 presentation but very, very rough numbers since this is, I guess, publicly known. Last year, our sales in the U.S. was roughly EUR 4 billion, out of which more than 50% has been produced in our North American production sites, so I guess, not being affected. The remaining portion is mainly produced in Mexico, a little bit in Canada or imported from countries outside North America. Having this said, and trying to somehow mix it with your second question, the negotiations with the customers are always then simple, as you rightly said, if there is a contractual basis. For some of our content, we have agreed that the customer is pretty much picking up the products at our production sites in Mexico. So they are responsible to bring the goods into the United States. For this part, frankly speaking, we are rather relaxed since it's, first of all, the challenge for the customer. For all the other products where we are impacted by the tariffs, yes, this will be a customer-by-customer negotiation. But also there, as you can imagine, the discussions are already ongoing. And let's be honest, looking at the last couple of years with corona, with semiconductor crisis, you mentioned it, I would say there is a steady stream of negotiations with most OEMs anyhow ongoing. But as said, more details we would like to share with our Q1 numbers in May.

The next question comes from Akshat Kacker from JPM.

Heiko, three quick questions, please. The first one on VLS. I think you've indicated margins being much better quarter-on-quarter and slightly lower year-over-year. If I'm looking at the right comparable, I think you were around or more than 11% in that business division last year. So could you comment on what's driving the strong margin performance in Q1? Sorry, and the question was on Bearings & Industrial, not on VLS. I meant Bearings & Industrial. That's the first question. The second question is on E-Mobility. Again, in terms of your margin guidance, you're talking about a negative 20% roughly in that ballpark in Q1. That's obviously outside your full year guidance range. So again, assuming no impact from tariffs and we're discussing what was said at the full year results, what gets you within the guidance range? Is it an order backlog-based second half ramp-up? Is it R&D reimbursements? Just interested in your thinking there. And finally, the third one around USMCA. Could you just give us an example of products that are not USMCA-compliant and if you have already received some indications from OEMs where they are willing to compensate you on products where you're facing tariffs.

Thanks, Akshat. So starting with -- maybe if you allow me, starting with the second question on E-Mobility. If you keep in mind the quarterly performance that we have shown for E-Mob for 2024, you see the typical pattern. We see that Q1 normally is rather weak and then we are improving during the year. I know, Akshat, you have followed closely also the Vitesco story so you know that especially in the area of E-Mobility, a number of R&D reimbursements is rather back-end loaded. So we usually expect them in the third or, in even more cases, in the fourth quarter. And that's why I would see it as a positive that already the first quarter is on a comparable base like Q4 2024 because, even so, we are pushing our customers to more evenly spread the reimbursements over the complete year in order to avoid this hockey stick in the fourth quarter. We are not there yet. So also here, we expect that the second half year will be the more profitable one, on the one hand, supported by the reimbursement; on the second hand, of course, also supported by further increasing sales numbers. And I mentioned we had a number of rather relevant ramp-ups last year that are now helping us to further grow our E-Mobility business, and this will also come into full effect in the second half of the year. So that should allow us to finish our full year within our guidance range. On the B&IS side, during our -- or during the presentation when we have shared our pro forma numbers on a quarterly basis, we have, on the one hand, elaborated that we decided to move certain parts of the business in the so-called others division. This is of course reflected in the pro forma numbers as well as in what we just discussed. So that is of course one reason for the improvement compared to what we still have in mind when we think about B&IS and especially the last quarter. The other two drivers that are helping us now in Q1 to get in a direction that is more of what we are used from our Industrial division is, on the one hand, the product mix, which is beneficial in Q1; and the second one, I think Klaus Rosenfeld was very outspoken in the previous calls that we were not really happy with what we have seen in Q4 and that we will take severe measures in order to get this division back on track. This -- some of these measures, of course, will take some time. Others take effect rather sooner than later. And of course, this focus of the management team of Bearings & Industrial Solutions to get the business back on track, that's where we see the first positive impact also in Q1. On the third question on the tariffs, again, I would like to ask for your understanding. I would bundle this tariff topic and we will give you more information beginning of May since, I guess, it makes more sense to have a consolidated view on what the entire situation means for our company and, frankly speaking, for our entire industry.

If I can ask -- yes. No, that's very helpful and I understand that. One very quick follow-up on the Industrial business. Could you just pinpoint a few sectors where you're seeing early green shoots or early signs of a recovery? And if you could talk also about the sentiment in China around renewables and if you have seen further pressure from pricing on the wind side.

Yes. No, sure. So there are sectors where we have already seen a positive development last year. And I think we highlighted this, this was mainly aerospace and rail. So there, the good news is this trend is unbroken. So especially in aerospace, we still have the situation that the demand is higher than our capacity. And of course, now you're trying to shift capacities accordingly in order to benefit even more from this very strong market demand. On these sectors where last year we did not yet see signs of recovery, I think the most important one is our industrial automation, where again I try to be careful because there are first signs of an improvement. It's not yet that the order book, and also here we will of course share the latest status of our order book beginning of May, that everything is back to normal and we see a huge spike. But the trend is at least promising. And last but not least on the renewables in China, there the answer is relatively simple. Yes, there is still enormous price pressure. But -- and also there, I'd like to reference to what Klaus Rosenfeld said in one of the earlier calls. We, for us, have decided that we have lowered the prices on a level where we still feel comfortable, even though it was painful coming from a significantly higher level, but we are not willing to further lower the prices to regain market share. Good news is it seems that we can maintain our business without further lowering prices. So that means indication we have reached the trough in that business. And now, of course, we have to see how we can get the margin up in the right direction again and what this would mean for our engagement in renewables in China.

[Operator Instructions] The next question comes from Horst Schneider from Bank of America.

Heiko, I have got a first question that I have is regarding any exceptionals maybe in Q1. I think there shouldn't be many, but just want to confirm that there are not any other restructuring provisions we need to consider. The other one is about the seasonality of the business. I just want to get a feeling for that also under the new structure. So I think in Industrial, still the situation is Q1 is always a quarter fairly clean, no value adjustments. So it tends to be also a little bit stronger for that reason. And we do not yet know a lot about the seasonality of Powertrain & Chassis. But could it be also there that Q1 is, for seasonal reasons, always a little bit stronger? And then for some reasons, then towards end of the year it gets a little more difficult? Is that the right way of reading or is it wrong?

Very good question, Horst. So on the first one, no, we have no further restructuring provisions or comparable instruments that will impact us in Q1. So if you want, so this was a fairly normal quarter, what we had. And I hope I got this across, yes, we had this very weak Q4 and there were certain spillover effects that were -- that are supporting our first quarter a little bit, but I would not put this too much into the focus. On the seasonality of the business. For Bearings & Industrial Solutions, I guess I would not foresee a comparable seasonality like last year where we, after a very strong first quarter, we saw the significant drop in the second quarter and then a rather disappointing fourth quarter. So I wouldn't expect the same magnitude of ups and downs. But in general, and that's why I mentioned that we still confirm our guidance, you remember, we didn't guide for double-digit margins for B&IS. And that's for a good reason. So we are happy about the way Q1 looks like, and we would be very satisfied if we get our business for the full year into our guidance range. On the other two divisions, E-Mobility, I mentioned before. That is normally a little bit back-end loaded. So we should see a stronger second half compared to the first half, always under the disclaimer of a normal way of doing business without too big external disturbance. But as said, we have -- the way the reimbursements are running in and, of course, E-Mob is still very much depending on volume. So we expect volume in the second half of the year to be higher compared to the first half, and that should help us to, also here, get into our guidance range. So there, it's more about a steady improvement quarter-by-quarter. And on Powertrain & Chassis, that business is pretty much stable. So there are no significant peaks to be expected. You have typically the third quarter that is a little bit weaker. But that's, frankly speaking, in automotive industry due to the summer vacation of our customers, and it's a volume-driven business.

So the only thing that could have been -- this time in Powertrain & Chassis, we heard that from all the carmakers that they were trying to increase inventories also in the U.S. market, tariff-related. In April, we get some production cuts probably. But you have not seen anything of that? Or it's maybe not the right call to discuss that now? I don't know.

No. I mean simple answer, no. We have not seen these kind of effects.

Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the conference back over to Heiko Eber for any closing remarks.

Very good. So with this, I would like to thank you for your time, for your interest. As always, a big thank you to my team for the excellent preparation. If you have further questions, please reach out to any one of us. And if this is not the case, then I am very much looking forward to talk to you latest on May 7 during our Q1 call. Thank you very much, and have a nice rest of the day.

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