Schaeffler AG (SHA0) Earnings Call Transcript

Ladies and gentlemen, welcome to the Schaeffler AG Update Call and Live Webcast. I am Sargen, 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 does not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Heiko Eber, Head of Investor Relations. Please go ahead, sir.

Thank you very much. Ladies and gentlemen, I'm very happy to welcome you to today's Schaeffler update call. And thank you very much for making yourself available on such a short note. Press releases, the following presentation have been published on our Investor Relations on page. And before we move on to the content of today's call, I am as always sure that you have all taken notice of our well-known disclaimer. Hence, for sure, we will provide the recording and the transcript of this webcast after the call. Today, Klaus Rosenfeld, our CEO; Christophe Hannequin, our CFO, have joined the conference call a guides you through key information in our presentation. And afterwards, both transient will be available for our Q&A session. Now let me directly hand over to our CEO, Klaus.

Thank you very much. Hi, ladies and gentlemen, thanks for joining the call. You received this morning the second press release after the 1 yesterday and also our little slide deck. We have basically 4 messages for you. The first 1 is not a message, but just a confirmation that we believe in such an environment that we're all experiencing clear priorities and experience something important. The 3 key messages are we decided, given the weak performance of European OEMs in China that you certainly follow to do another cleanup step in our e-mobility business and have as part of our Q3 results, booked a one-off charge of EUR 220 million that will be complemented in the fourth quarter, up to around EUR 240 million. This is there to proactively reduce risk on the balance sheet. And will result in a 2-digit million relief in our P&L for e-mobility going forward. So a proactive move to tackle the situation we have there. Some of you remember, we did a similar transaction last year in the fourth quarter, given the situation in the Americas. And I think this is the right way to deal with the headwinds that we have. that are not temporary, but probably more a continuous trend that we need to deal with. Let me say already here, this is -- does not mean that we will refocus away from China. The audit is true. We want to continue with our e-mobility strategy that has a strong element of gaining business with Chinese OEMs. And Thomas is very well committed here to improve order books also with Chinese customers. The second thing was part of the press release we did yesterday after also internal communication, 2 key messages on self-help. We have given you a little bit of information how we've finalized our last earnings improvement program or profitability improvement program or such a measures, as we call it, that we announced in November '24. And I'm happy to say that we were able to implement that program faster and also more rigorously than expected. We'll come to the details in a moment. And on top of this, triggered by the discussions in Germany about the pension reform where certain existing partial retirement instruments or tools would fall away. We decided on October -- sorry, on August 5 to offer to our employees in Germany according to the rules of these partial retirement programs the opportunity to sign early retirement contracts, and I'm happy to say that we overachieved our target of 1,300 by nearly 500 contracts. These are not contracts that we want to conclude. These are written contracts properly concluded that we can now execute and will come also back on the financial impact of that element in a moment. And number 3 is -- we decided also to share with you latest news on Humanoids. The new growth area is further improving, and we were able, in the last weeks to improve our order book to EUR 400 million with 2 new Chinese customers placing production orders. And on top of this message #4, we decided to we released our preliminary Q3 numbers for key figures. And I think these are in an environment that is challenging solid figures. In particular, when you look at free cash flow, that came out with EUR 260 million plus in Q3 2026. On that basis, I think you will not be surprised that we confirm guidance and also our midterm targets. Next page is just a repetition of our 3 key priorities: E-Mob recovery, self-help and portfolio optimization and then new growth, in particular, in humanoid but also in defense and other areas. Let me come to the cleanup transaction on the next page. As I said, driven by the market development in China where European OEMs are losing more than expected starting or accelerating in the summer. We took basically 2 sets of measures. We basically addressed overcapacity and a due to the continued volume reductions, SOP shifts and also in some areas, project cancellations. And let's tackle this by a write-off by also looking at capitalized R&D and other elements, and that's the main part of the extra charge that we took. And at the same time, we said there's also a need for -- in some areas for portfolio streamlining. And we decided to exit terminal management system business. That doesn't mean that we exit the complete thermal management systems -- sorry, the thermal management business, the module and components business will stay as it is. But that's another sign that we say where we cannot make money going forward, it's better to exit the business, and that's part of this EUR 240 million one-off charge in 2026 as well. As I said before, the transaction will result in a double-digit euro million positive effect on EBIT in the subsequent years. This is part of our strategy to rightsize e-mobility. We see that there's ample opportunity in Europe at the moment, driven by the higher oil prices and also by the subsidies -- so it's really important here to find the right balance between cleanup and further growth. I can only say here, as you also see from the margins later on, we are committed to bring mobility across the line as we articulated in our revised midterm targets. Page #6 is then priority #2, the so-called self-help measures. Two main messages here. You remember the program that we announced in November '24. After the Vitesco merger was closed, we announced at the time 4,700 gross reductions to be achieved in 2029 at the latest. And what we can say today we are more or less in a position that we can deliver this 1 year earlier. You see in these little green bubbles, what was achieved also in terms of timing you see that the green bars are the ones where people have left us already or exited the company. So of the 3,926 in 2026, 3,715 have already left. And the lighter green bars tell you that we still have around 800 to go. This is not something where we need to search for candidates, but the contracts have been signed. So we can say the program is, from our point of view, now finalized and will run off according to plan. The EBIT impact that we promised at the time was EUR 290 million. And I can say we overachieved this by more than 20%, as outlined in the press release. that will come in, in the years to come. So also positive. Why did we overachieve this because the gross reduction number is not far away from what we promised. But the net reduction number is higher, less transfers and more rigorous reduction on the net side, and that increases the number above the EUR 350 million Mark, what is also positive. And clearly, you all perceive these kinds of programs as investments. We announced for this program for the head count reduction part, a provision of EUR 504 million and we are able to deliver what we promised here with EUR 84 million less, and that's a positive as well. So program delivered a little bit earlier than expected with a little bit better impact and also lower one-off charges. And then on top of this, we have this peculiar situation that 1 of the most interesting instruments in Germany to manage transformations and restructurings, the famous partial retirement contracts were discussed in the summer that they will follow in -- the government has not finally decided on this reform. But it can come every minute. And that's why we started already on August 5, this initiative and said let's offer using the terms of the November '24 program let's offer these contracts to our employees and see what they would like to do. And the outcome is on this page here. we were calculating at the time with 20% rate. These programs are only applicable to employees that are older than or that have both rates after 1971. And we calculated 20%, but we came out now with a higher number. This is a staggered approach where someone can sign a contract that is either 1-year active, 1-year passive, 2-year active, 2-year passive, 3 plus 3, 4 plus 4. What you see in the right-hand side of the picture that is a blue bar. The 1,768 is the number of contracts that were concluded per October 5. And of that, 1,569 are so-called 3-plus 3 contracts. That means these people are leaving with active being finalized by end of the year 2029. So you can basically add 1,569 to the 4,804 and you see what the reduction in future will be. The beauty of this instrument is -- it has an impact on cash that is immediate with EUR 50 million in 2027. But the EBIT impact only kicks in, in 2029. And -- it requires a little bit of provisioning because there are some onetime payments included. For these onetime payments, we have booked EUR 70 million provisioning you can basically say we use the EUR 84 million release of provision to build the new ones. So we have built in sort of release of people over time. That makes it plantable, that makes it also very socially responsible to people and using that opportunity before the government closes that window was, from our point of view, the right thing to do. Let me add 1 more thought here on this table on this page to the actual head count development. Because for sure, you can always compensate reductions by new hires. And what you see in this little table there on the right-hand side is that since December 2024, we've reduced head count by 6,143 in the company, all sorts of different sources for sure. This is a global number, but it tells you that we are managing the company in a much leaner way and that we are not rebuilding what we get rid of elsewhere. So I think it's fair to say we have a strong record -- track record of executing structural measures. It's always not easy to do this, but it's a prerequisite for our transformation and for our strategy to become leading motion technology company. Next page is then very briefly on humanoid. This is not a humanoid show today, but we thought we should share at least the latest successes. We have added 2 China-based customers that placed production orders with us, making it 5 customers that now are in serious production with us. We also see that some of the customer sourcing additional products. There's significant activity here. The number of sample orders has increased to 83. What is a significant increase. We also start to count the physical AI humanoid patents and I can say this whole area has in terms of delivering a lot of activity at the moment. For sure, the hype that was there at the beginning is coming down a bit but we see as 1 of the 4 new growth areas that will guide us into the next years and for sure, an order book of EUR 400 million points in the right direction. Let me go to the last page, Page #8, we decided to give you and share with you the indicative numbers for Q3. These are final numbers, but they have not fully gone through the normal process, but they are in terms of quality. Final, and Christoph can talk about this in a moment. What you see on this page is that we are well within our guidance ranges. Q3 with 4.2% margin is what we expected. We always said the second half will be weaker than the first half. For the first 9 months, we are cruising at 4.5%. That is exactly in the middle of the range. You see that E-Mobility has improved from minus 17.6% (sic) [ 17.8% ] in the first quarter to now 13.1%. That's a gradual improvement, certainly not there where it should be. but the 9 months are also inside the guidance range powertrain chassis with a solid 10.2%, 10.8% in the first 9 months, 15.1% in B Lifetime Solutions the Bearings & Industrial Solutions close to 9%. And that's from my point of view, something that we can clearly say is a solid print in a challenging environment. In particular, when you look at free cash flow, yes, over the 9 months, we are not already positive. But the EUR 260 million that you see there is strong number is a good number. And you all know that typically in our fourth quarter, we make the biggest free cash flow contribution. Let's see how this comes. But when you put all of this together, it is obvious that we confirmed our guidance. And on that basis, we also confirm the revised midterm targets. Let me finish my short presentation with the dates -- this is a prerelease, as we said, on the 12th of -- 13th of October, sorry, and November 3 is the Q3 full release with much more detail, they will go on to the usual roadshows. And come back to you then with the Consumer Electronics Show in 2027. I'll leave it here. I thank you for your attention, and we are ready for your questions. Thank you very much.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ross MacDonald from Citi.

I have 3 questions, if I may. First 1 is just, I guess, for my own understanding, maybe to help investors as well. Obviously, there's a small myth on the Q3, and it sounds like you're bang in the middle of the guidance, as you said, close. Just can you help us understand why a pre-release is necessary because the deviation versus the consensus doesn't seem to material. So just keen to understand what exactly led to the pre-lease because it sounds like there's some operationally good things happening. And obviously, there's some market weakness in Q3, but nothing really that would suggest you don't have confidence in the full year or the long-term messaging? That's my first question. The second one, kind of linked to that, just on fourth quarter, you are basically saying in and in line on full year revenues, if I assume no growth in Q4. 1 margins kind of bang in line year-to-date on 4.5%. So can you maybe help us -- you said the second half would be weaker, but can you really help us with the puts and takes on the fourth quarter. I know there's a lot of talk around reimbursements in Q4, and maybe help us understand where the group margin can track into Q4? And then final question just on the assumptions around the China business? How important is it for the German OEMs to recover in China. Is that a reasonable assumption? And what would it do to the 28 targets if the Germans keep losing share in China as they are that's clear.

Well, maybe, Christoph, I would take the first 1 and the third one, and you could take the second one. Why did we decide to prelease -- we had a situation here that the Three elements that I just mentioned came together, and we were ready to go with our preliminary figures, and we decided to say, why don't we share that with the market, there's a lot of uncertainty at the moment. This is definitely not a profit warning. It's also a hawk statement. But we thought it rounds up the whole presentation if we give you an indication where Q3 is going to land. . So it was more of this type of pragmatic thing if we go out with something on the cleanup of e-mobility on the structural things and we decided then to add a little bit on humanoid and the final numbers that were ready, and that's the reason why we did this. So it was more driven by what does it make sense for you guys to get before we have a call on Wednesday, where you get ranges, give you the right numbers up from at least for the headline figures. China business I don't have a crystal ball to be honest. What I can say that the trend is there in some years that the European OEMs started with the U.S. But then also, clearly, in fact, the European OEMs that they are reducing in China. Being long in the industries, it's never something that cannot be reversed. I'm sure that the big German OEMs, be it BW or BMW or Mercedes and others will think hard what they need to do there. For us, the trend as such became more obvious and also stronger during the summer break. I mean you all know the numbers and that's why we decided to do this cleanup thing. If it reverses fine, I will go further down, Ross, to be honest, I can't give you a prediction here, but I think it's good to be risk averse. It's good to take off risk from the balance sheet and focus on what needs to happen in the future. And for us, it's obvious that we need to not only support our European customers as good as we can, but also focus on the growing Chinese OEMs also when we think about export to Europe and to Germany. First off, the second 1 for you.

Sure. I'm hoping I understood the question correctly, but give you a bit of flavor on Q4. We are being cautious to be transparent, given the ones that we saw during the end of Q3, what we're seeing in -- sorry, the end of Q2, what we see in Q3, but I tried to give you a bit of flavor, CLS, mobility should be on the right trend. The NIS and PTC also a good trend, but there's always a little bit of a seasonal component for these 2 activities, especially on the BI side. Nothing unusual, nothing that should be a point of concern as for your concerns. . We used to have a problem or a complicated Q4. We again shown that we fixed that more or less last year. So we entering Q4 with a cautiously optimistic approach confirming the guidance. A little bit of noise also around inflation on some raw materials. You've heard about secret boards and on the price pressure that we have there. And to touch on the reimbursement that have on Q4, you're correct in the sense that Q4 is typically a quarter where we intend to wrap up negotiations with customers, especially on the mobility side, which tends to populate the bottom line. It's a clear seasonality on the mobility side. visit the rest.

The next question comes from Vanessa Jeffries from Jefferies.

Just firstly, on the third quarter numbers. As Ross said, small miss, but I think it's interesting that if you look at it versus consensus, it can actually kind of be explained by the higher loss in the other line. So I think as we think about the human SOPs you're seeing, maybe you can help us out with the positive impact you'll see from those and then the offset from end-of-life activities and investment, and how should we think about the other line? Because you obviously don't guide for it. But if we say minus 50 is the quarterly run rate, it obviously has an impact.

we have not presented here the full set of numbers. And would it be fair to pause that question and answer it on the third of November, that would be easier, but maybe Christophe, if you want to add some color here. Your observation is in principle correct. But you remember that there is not just new growth. There are also other elements in there. For example, parts of our special machinery building. So it's a little bit difficult to predict that number. if we shed more light on this on the third. But at the moment, I would be a little bit helper than to put out a number here. Christa, maybe you the same way.

This is a more structured explanation, which we should be able to give to you on the communication on the third.