Schaeffler AG (SHA1.VI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Pre-Close Call Q3 2025. I'm Moritz, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [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.

Good morning, ladies and gentlemen. I'm very happy to welcome you to our today's pre-close call on the third quarter of 2025. 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. And please note that this release and all the information herein is still unaudited and that our next quiet period will start today after our call. We are holding this call 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 Q3 results call on November 4. After our short presentation, as always, you will have the opportunity to ask questions. And with this, I would directly jump into the content of today's presentation. So looking at some of the key aspects of the third quarter 2025. On our top line, the sales, we see a slight decrease quarter-on-quarter and year-over-year. I will talk about the reasons for this slight decline once we take a closer look at our 4 divisions. Nevertheless, on the EBIT margin, we see that compared to our last quarter, our EBIT margin is slightly above the midpoint of our full year guidance. So again, a step-up compared to last quarter. Also very important on the free cash flow, after EUR 27 million in Q2 2025, we see another significant step-up quarter-on-quarter. So if we take a look at our 4 divisions and starting on the left side of the slide with E-Mobility. As you all know, the market environment still remains challenging. There are positive triggers that should influence the market in a more positive way in the upcoming quarters, like the recently announced subsidiary program in Germany. Nevertheless, for now, the market is still very volatile. As a result of this and since you all know that our sales is mainly impacted by the various launches that we have in front of us and where we are in the ramp-up phase, the sales quarter-on-quarter is rather flattish, slight upside, of course, but overall, well on track. And as we elaborated during our previous CMD, the main focus for E-Mobility is on a proper project execution since this will be the key not just for now, but also one of the key elements for our journey to reach our breakeven in 2028. On the EBIT margin, we see a further improvement year-over-year and quarter-on-quarter, again, underlining what we presented in detail during our Capital Markets Day. If we look at Powertrain & Chassis, we see a positive development on the top line in Greater China, which partially compensates for a still soft market in Europe. So China rather strong. Europe still soft, but also here, you know the previous announcement of some of the big OEMs in Europe. And of course, this also has an impact on our top line. The overall sales decline quarter-on-quarter and year-over-year is nevertheless, strongly driven by our decreasing phaseout business. And also here, this is in line with what we basically explained during the CMD. This is in line with our strategy to phase out business where we see limited growth opportunities and that are diluting our margin. On the EBIT side, the EBIT margin is higher year-over-year and quarter-on-quarter. And having this said, we are maintaining a double-digit margin hovering around the midpoint of our divisional guidance. Looking at Vehicle Lifetime Solutions, we see that the demand, especially in Americas, Greater China and Asia Pacific continues to be high. Europe, similar to what we have seen on Powertrain & Chassis Europe market rather soft. So as a result, we see a slight sales decrease quarter-on-quarter, but still higher year-over-year. And again, this higher sales compared to last year is mainly driven by the Americas. On the EBIT side, after a softer Q2, our EBIT margin is up quarter-on-quarter and also year-over-year. Last but not least, Bearings & Industrial Solutions. Overall market environment continues to be soft, continues to be volatile. Therefore, we see a slight sales decrease quarter-on-quarter and a rather flattish sales development year-over-year. All in all, this didn't impact us too much on the bottom line. The EBIT margin is higher quarter-on-quarter and also higher year-over-year, and it's in line with our half year 1 performance. So I guess if we look at the overall performance for Bearings & Industrial Solutions compared to last year, we see that our efforts and we summarized it under the umbrella of self-help measures are showing fruits and performance is significantly up compared to last year. Having this said, and looking at Page #5, we can confirm our guidance for all metrics. We will give more details on the remainder of the year during our scheduled Q3 call on November 4. So before we jump into the Q&A session, just one short notice. After this call, we will distribute our consensus sheet. And as always, we would be very grateful for your contribution to our estimates. And as always, we would be very grateful if we could get these estimates rather sooner than later. So having this said, let me now hand over to our operator for the first question.

[Operator Instructions] And the first question comes from Christoph Laskawi from Deutsche Bank.

The first one would be on E-Mobility and the environment there. Obviously, you point to flat sales year-over-year. Could you comment on the SOPs and the ramp-ups? Are you currently witnessing delays or just slower volumes in the ramp-ups that you are working on? And is this changing into Q4 with more SOPs to come or relatively unchanged? And then the second question would be, you already pointed to production shutdowns in Europe. Is there any other changes that you've witnessed Q3 to Q4 now in the current run rate for call-off indications from customers that will point to a weaker Q4 than Q3? And then just technical questions. Any comment on the other line in -- especially on EBIT and on free cash flow, if you want to quantify what does significant mean for you just roughly?

Thanks, Christoph. So let's start with the question on the E-Mob volume development and the launches. So with regards to the volumes, we see a very mixed picture. We have, and I think Thomas mentioned this during the CMD, we have actually projects where the call-offs are higher than the original indicated volumes. This is mainly true for one of our big customers from Korea, where the launch of the EMR4 is very successful, and we are basically working on getting the capacities adjusted to fulfill the demand. So that's on the positive side. We see -- and that's obviously not a surprise, mainly on the North American OEMs and reduced volume compared to the original estimated numbers. And I guess the reason for this is very obvious. So overall, for now, we remain confident that we see a volume step-up in Q4. Whether or not this is fully visible in Q4 or we will see the effects then more towards the beginning of next year. Frankly speaking, too early to say. So far, what we can say is that for the October volumes are in line with our expectations. So no further delays. Overall, this is also true regarding the second part of your question on the overall call-off behavior of our customers. We see that in the overall demand in U.S. is very stable. We see that the China demand is very stable. In China, you always have a little bit fluctuations due to whether or not government subsidies are running out or are being extended. What we, frankly speaking, cannot say whether or not there are any implications from the latest increasing tensions between the U.S. and China. So that's too early to say. For now, volumes, volume call-offs with the already mentioned limited or more limited visibility compared to previous days remain on a comparable level. And last but not least, the question with regards to free cash flow. So significant step-up means that our year-to-date cash flow is now hovering around 0, if this is helpful for you.

Very helpful. And just on the other line on EBIT, any comment there or?

It's a lower range, double-digit million amount. Negative, I have to say, sorry, but I guess that was obvious.

Then the next question comes from Horst Schneider from Bank of America.

Just quickly, first question that I have is what strikes me throughout all segments basically that the revenues were quarter-on-quarter flat or down, but the EBIT margin was up. So I think you mentioned for one of the -- or for some of the divisions, why that was. But in general, is that now a trend that we can extrapolate that basically, I don't know, efficiency is increasing and that the EBIT margin also towards Q4 is trending up? Or what were the reasons specifically in Q3 that we had this picture basically? Was it tariff reimbursements? Or is it different reasons in each segment basically? Maybe you can quickly comment on that. And then I've got a follow-up.

Yes. Thanks, Horst. So let's quickly run through. So on E-Mobility, as I said, it's more or less in line. We -- looking at the -- so sales is more or less in line. Looking at the ramp-up curve that we have envisioned, there is no positive or negative surprise. Nevertheless, especially on E-Mobility, you know that we are working on our operational excellence. We are working on having launches as flawless as possible. So I guess there, the slight positive development on the EBIT side is mainly due to this, let's say, optimized launch activities. On the powertrain side, very frank, the top line decrease is something that is fully in line with our strategy. That is to a big extent, driven by the phaseout of the noncore business. And of course, we would wish ourselves a stronger market in Europe, but it is what it is. And also there, and I think also here, Matthias Zink made it clear during the Capital Markets Day. We are -- and this is true for the entire group. We are not laying back and hoping and praying for volume that will fix all the issues. We are working on productivity programs. We are executing our forward program. We are executing the synergies from the merger. And therefore, we see that the bottom line is stabilizing. And I think the most prominent example for this is Bearings & Industrial Solutions, where we don't anticipate that the market will fix any issues in the near term. So big focus on the already announced self-help measures, and that should help us to stabilize the margin for this year, targeting towards the midpoint of our full year guidance. And then obviously, the next 2.5 years are very much focused on these productivity measures in order to make our promise come true and double our EBIT until 2028.

Excellent. On free cash flow, I'm not sure if you mentioned that, but what were the drivers for free cash flow? What I have got always in mind from the previous years that we are now running into funny Q4 and then there are some impairments and they can destroy everything again. So my understanding is of free cash flow that the inventories are also under control. And maybe I hope that the risk for impairments in Q4 this time is a little bit more reduced. Would you confirm that?

I would confirm that, yes.

Then the next question comes from Vanessa Jeffriess from Jefferies.

I was wondering, first, can you elaborate on what's driving the more positive China performance in PT&C? And was this anything unexpected? And then one on Bearings & Industrials. Is there anything to be aware of in the fourth quarter in terms of margin? Just otherwise, it seems like the guidance range is a bit low.

Yes. Thanks, Vanessa. No, in China, we basically see that especially the business with commercial vehicles has somehow improved again. That was giving us a bit of a headache over the last quarter. So not yet where it was, not yet where we wanted to be, but stabilizing. And therefore, also on the margin side, we see that our Powertrain & Chassis is back to where we and obviously, you expect this business to be. On the Bearings & Industrial Solutions, I was wondering that it takes 3 analysts until we come up with this question. You're right. Our guidance for this year was 5% to 7%. With what I just indicated, it is obvious that after 3 quarters, we are on the upper end or slightly above our full year guidance. At the moment, we don't see that there are any unexpected negative developments. But since we are talking about preliminary numbers here and since we have our Q3 call coming up in 2 weeks' time, I ask you for a little bit of patience. But we will not experience another Q4 for Bearings & Industrial Solutions like we have seen in 2024.

Then the next question comes from Ross MacDonald from Citi.

Lots of good questions there. I've almost exhausted my question bank. Just to circle back on the free cash flow comments. If I understood correctly, for the 9 months to date, you're tracking close to flat or breakeven on free cash flow with the third quarter. So I mean, obviously, with the guidance being where it is, can you maybe just remind us what the messaging is for the fourth quarter free cash flow, whether there's some room here for a beat on the current guidance or if that could be in scope for a revision also? On Q4, I think Christoph asked it already, but can you maybe just touch on where we're tracking? I know it's early in the quarter, but where we're tracking at this point on the Q4 group EBIT margins and whether you agree that upper half of the range looks like a sensible assumption here in the fourth quarter also? And then final one, just some investor interest on this fire at a U.S. aluminum supplier. Just keen to understand if the group has any exposure to that event. I think it's Ford specifically impacted, but if you're seeing a deterioration in the take rates in the U.S. in Q4, specifically on the back of that fire would be very helpful.

Thanks, Ross. So on the free cash flow, and that's a little bit in line with what I just said about bearings. Yes, we are after 9 months now hovering around the breakeven. We are a little bit back-end loaded with our investments. And there, it is very much depending when these orders are finally being placed with the payment terms that we have with our suppliers. It is, honestly speaking, hard to say which of these necessary capacity increases will still have a cash impact in 2025 and which we will see in 2026. So there is a little bit of uncertainty. We will, for sure, clarify this uncertainty until our Q3 call. But for now, I would say that having 9 months behind us, I can clearly say that we have made significant progress on our inventory management compared to last year. The CapEx is well controlled, and I think it's one of the key focus areas of Klaus Rosenfeld and the management team to have a clever managed CapEx policy. So for now, no worries that we will see a significant revision of this trend in the Q4. Same is true for EBIT. We have this uncertainty, unfortunately, in our markets lately. Whenever we believe that things are getting stabilized, we realize that there are new uncertainties coming up. Normally, the root cause of this uncertainty is always based in Washington, D.C. What we can say at the moment, what we see at the moment, looking at the call-off behavior, looking at the execution of our tariff refunds, I have no reason not to believe that the midpoint of our guidance is a good indicator for this year. And to your last question, yes, very, very unfortunate what we have seen there. I mean it's -- as far as we understand, it's the sole supplier for critical aluminum parts for the F-150 platform. Yes, F-150 is one of the platforms where we have a significant content per vehicle. At the moment, we have intense discussions with our customer. We know that they are desperately working on backup solutions to at least partially compensate. They are optimizing their capacity that they have for other platforms that are maybe less important also for Ford. I mean it's a very open secret that the F-150 is the most critical platform for Ford. Therefore, we are aware of the situation. We haven't seen any change in call-offs, whether this is a bank built on the Ford side in order to be ready once they find an alternative solution, too early to say. What we hear is that the problem at the supplier will be around until beginning of next year. So for sure, too long for our customer to remain on the sideline and just watch.

Then the next question comes from Jose Asumendi from JPMorgan.

Just a question on -- when you look back at your budget and assumptions for the year and the transition into the fourth quarter, are you seeing any major one-offs, negative one-offs when you look at Powertrain and E-Mobility? Or were you originally assuming sequential improvement also in Q4 versus Q3?

Yes. Yes. I mean on Powertrain, to be perfectly honest, on Powertrain, we were hoping for a more positive top line for 2025. As you could already see in the first half year, we are more at the lower end of our guidance range with regards to top line development on the PTC side. Main reason, again, is, unfortunately, Europe. And within Europe, it is the ongoing weakness of 2 big customers, namely Stellantis and Volkswagen that has an impact on the top line. That's why I'm really happy and glad that the team around Matthias Zink is doing an amazing job to compensate these shortfalls with productivity measures and keeping the margin in this double-digit range. On E-Mobility, it is -- as I said at the beginning, it's a little bit of a mixed picture. We see customers where, obviously, we are fully on track with regards to our planning assumptions. The shortfalls are, again, mostly in the North American area, the volume assumptions that still at the beginning of the year, we had for GM and Ford, for example, are not being met. But -- and this is maybe a slight positive one. We see that especially those customers are very, very focused on bringing models with range extenders into the market. And as we elaborated during the CMD, this is also a very positive opportunity for us going forward.

And we do have one follow-up question from Horst Schneider from Bank of America.

Yes. One question came into my mind, more housekeeping questions. On special items, I don't know, any indication would be grateful. We do not talk about significant numbers, I know, but just to make the forecast accurate, that would be great.

Honestly, Horst, at the moment, there is really no bigger item in the making. So we expect the rest of the year to be relatively unaffected from onetime effects. We have this big topic of tariffs. We talked about it. It is by now more a rolling event. We saw the negative impact in Q2. Now Q3, we received the compensation for Q2. Q4, we should receive the compensation for Q3. This is always subject to long-lasting negotiations on part number level. That is a little bit painful. But unfortunately, I have to say we are by now well trained in how to play this game with our customers.

No, I was more referring to restructuring charges, but you say also there were no restructuring charges anymore in Q3.

No, no, no, no. We have the restructuring outflow evenly spread over the year. So there is no one quarter that has a significant peak. I think we have laid out what to expect with regards to restructuring one-offs for the full year. But if you mean whether we are planning to announce additional measures in Q4, that would be a no.

Yes, yes. No, what I just see, I mean, in Q1, we had special items of EUR 14 million. In Q2, it was EUR 39 million. And I think the current consensus also implies that there's more to be booked in H2 '25. So that was more the background of my question, if there are any restructuring charges. But as far as I get you now, there are no restructuring charges. It's more about the outflow of the restructuring that has been initiated before.

Exactly, yes.

Then the next question comes from Sanjay Bhagwani from Citi.

Also just two more left for me. The first one is on the Q4 margins. In the past, Vitesco used to have the margins properly geared to the Q4 because of the reimbursements on the R&D. Can this be significant at the Schaeffler level as well? That's the first question. And the second one is a bit more housekeeping question. Could you please remind us your exposure to Ford, generally, how big this is?

Thanks, Sanjay. So obviously, whatever we do, it's never good enough for the capital markets. During the Vitesco times, you always told us that we should make sure that the reimbursements are more evenly spread over the year, not to have this peak in Q4. That's what we are doing. So I mean, there are still projects that have due dates at the end of the year, which will then contribute with a slightly higher level of reimbursements. But overall, to be honest, we have taken significant efforts with our customers to make sure that the reimbursements are more evenly spread over the full year to avoid these peaks. So I would expect Q4 will be a relatively normal quarter with regards to reimbursements. And on Ford, I mean, we don't disclose the relative share of our OEMs. Needless to say, I mean, Ford is a significant OEM. Ford is big when it comes to pickup trucks, which is an important segment for us. So we have an exposure with Ford, but Ford is not within the top 3 of our customers.

So there are no further questions at this time. So I would like to turn the conference back over to Heiko Eber for any closing remarks.

Thank you very much. So I hope you found this call helpful. Thanks for your time. Thanks for your interest. As always, thanks to the team for preparing the documents. And please keep in mind, November 4, 10:00 CET, our Q3 call. Please keep in mind, we are very, very grateful for your feedback on our consensus. Have a good rest of the day and talk to you soon. Thank you very much.

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