Schaeffler AG (SHA0) Earnings Call Transcript

Dear ladies and gentlemen, welcome to the full year 2019 results call of Schaeffler Group. Please note this call is for financial analysis and institutional investors only. [Operator Instructions] At our reserve customers' request, this conference will be recorded, and a replay will be available shortly after the call on the website. May I now hand you over to Renata Casaro, Head of Investor Relations, who will lead you through this conference? Please go ahead, madam.

Thank you very much, operator. Dear analysts, dear investors, thank you very much for your time today. Mr. Rosenfeld, the CEO of the Schaeffler Group; and Mr. Heinrich, CFO, will lead you through the full year 2019 results. Please [indiscernible] to consider our disclaimer because, for sure, our forward-looking statements also includes a number of factors and uncertainties, and they are therefore -- some of this is our -- beyond our control. Without further ado, I leave the floor to Mr. Rosenfeld. Klaus, the floor is yours.

Renata, thank you very much. Ladies and gentlemen, thanks for joining the Schaeffler call this afternoon. I think we've all seen a pretty tough environment over the last couple of days, and the more it's appreciated that you joined us for our presentation of the full year results. You have a presentation in front of you. And as usual, I will split the presentation with Dietmar. Let me start on Page 4 immediately with the key messages. I think we can say as Schaeffler Group, we have in a challenging environment delivered a very acceptable result with stable sales in 2019 on an FX-adjusted basis, a margin slightly above the upper end of our guidance for 2019 with 8.1%. And we are particular confident and happy about the strong free cash flow generation, I think, EUR 473 million is a statement in itself, and it gives us confidence going forward. The growth has been bifurcated between Automotive divisions and Industrial, slight decline in the Automotive divisions, but the solid growth in Industrial shows again how important it is to be an automotive and industrial supplier at this time. On Automotive, that's my second key message. I think we are blessed with a record order intake of EUR 15 billion, what is around 20% increase to the previous year. A book-to-bill ratio of 1.7x after 1x -- 1.4x last year, also, that speaks for itself. Together with the strong outperformance quarter-by-quarter that Dietmar will explain during the call, I think that shows that we have made great progress in particular, in our E-Mobility, but also in the Chassis areas. And apart from the EUR 2 billion order intake for our full hybrid solution from a preferred German customer, I can say we're also happy that this order intake is well balanced across our businesses. We believe that it's not only E-Mobility and the success in that direction that will drive us forward, but our more balanced view on the variety of powertrain solutions will pay off based on our 30-40-30 scenario. Clearly, we've seen that the Automotive divisions are lower in terms of EBIT margin. I think in this difficult environment, we have been able to defend the floor of our guidance for 2019, in particular, in the Automotive OEM division. And when you see later, what happened in the fourth quarter in terms of gross profit, I think you see from that, that our -- all the activities in terms of flexing our cost base have paid off in the fourth quarter. And Industrial with the 10.5% has demonstrated that it's back on track after the many years of restructuring. Let me come to number four. Everyone talks these days about cost discipline and head count reduction. I think you'll see from these numbers that we are not only talking about things, we're executing what we promise. We have around 4,700 people less on board by end of the year 2019 compared to the previous year-end '18. That is a function of the variety and the various efficiency programs we have put in place in the last years. I've always said that I'm not a believer in big bangs, I rather believe in small, well-tuned and well-executed steps, and you now see that this strategy has started to pay off. And I think that will also help us going forward because not all the effects are already in the 2019 numbers. On top of this, we have, as you noted from this release, agreed with our workers' council within the company another voluntary severance scheme in Germany with around 1,300 positions to be reduced. That is also the reason why the one-off effects in the fourth quarter have increased because we have already built the necessary provisions for this program. They also explain -- Dietmar will explain that in more detail the drop of our net income. But this is another sign that continuous improvement is what counts, and we are ready, as we always said, to adjust when necessary. So as I said, in the point 3, ladies and gentlemen, it's not only that flex works, but also self-help started to work, and it immediately leads to the fifth point, strong free cash flow generation. I'm proud to say that the EUR 473 million is a number that is clearly above the guidance, and it's a result of the strict CapEx discipline and also the efficient inventory management that we have shown during the year 2019. And if you look at the free cash flow number, and you all know that Schaeffler is a company that has a rather above-average free cash flow conversion ratio. If you look into our annual report that was published today, you see a free cash flow conversion ratio of 22.4% after 17.4% in the year before. That's a 5% increase, and I think that is a statement in itself also compared to our peers. If you go later on into the pages that Dietmar will explain, you see that this free cash flow number still contains some one-offs that are not adjusted for that come from extraordinary investments like AKO or restructuring payments. It shows that the quality of the free cash flow number is even higher than the EUR 473 million indicates. That's also -- and that goes to point #6, why we decided to pay and propose to the Annual General Meeting in April a dividend of EUR 0.45. That leads to a payout ratio of 43%, that's slightly above what we told you before 30% to 40% as the range. We decided to slightly increase the range to 30% to 50% going forward, and I think that shows that we are consistent with our payout and dividend policy. And we also want to send a signal here of stability and continuity because of the solid free cash flow development in 2019. And you see from the guidance that we are also clearly committed to deliver a similar number, EUR 300 million to EUR 400 million in the year 2020, despite the cautious guidance and despite the fact that we are dealing with an unprecedented risk like the coronavirus that has clearly put also us in a new situation. Let me quickly comment, before I go through the following pages, on the guidance. If you look in the annual report and go to Page #176, you find a line in the KPMG audit opinion that confirms what I just now explained. We closed the accounts on the 18th of February, but then decided to update our guidance as of the 5th of March. So the guidance that you have, ladies and gentlemen, is the most accurate guidance we can give, incorporating all the foreseeable, and let me stress the foreseeable, impacts from corona. It's cautious, but it's there to frame the year that is in front of us. I can already say, here, we are fully committed to deliver on that guidance rather to the midpoint than to the low end. In these days, it's important that we show, in particular, execution strength and credibility in terms of execution. Let me go from there, from these 6 key messages now to Page #5, that shows the group and divisional guidance for 2019. I think I've already explained that, and these numbers are there for you to digest. Six green arrows show that we are on track in 2019. Page #6, highlights and lowlights. I think I mentioned most of them. On the positive side, nearly 500 basis points or 480 basis points outperformance driven by the Americas and Greater China. A look at the impressive numbers later on that Dietmar's going to explain the fourth quarter. And to add to that, E-Mobility business division growing by more than 35% is also a statement in itself. Second, it's very important going forward, we have, as you know, finalized our divisionalization project. The divisional management teams have received more accountability, accountability across the whole group has further strengthened. And you also see that by the additional efficiency programs, RACE, FIT and GRIP, we have put in place beginning of the year 2019, a bit -- even a little bit earlier, but they are now all incorporated into the divisional steering model. I already talked about self-help. The measures have gained further traction. And the fact that there is an additional voluntary scheme that has been set up by end of November is a positive going forward. It will help us to mitigate the corona impact. And I can already say, by end of February, all schemes are running according to schedule with their adequate provisions being booked already in the 2019. Account group's CapEx to sales down to 7.2%. So historically, now in the midpoint where we have always been, somewhere between 6% and 8%. Together With efficient inventory management, it's another proof that we are on track. Automotive OEM in Europe continues with a weak top line. That is something we need to watch out for. Clearly, we have seen that the industrial sector has started very well into the year, but in the second half, it became a little bit more difficult. Also here, region Europe is the most affected. And we do believe that, that's the third point, that and automotive OEM, we still need to catch up with our gross profit margin, and the fact that the flexing worked well in the European automotive plants gives us some assurance in that respect. All in all, I can say, cost efficiency in Europe needs to be further improved across divisions and functions. And as I said, we are determined to put in additional measures if necessary. Page 7, I think I can cut short. You see here most of the things that I mentioned before and also the numbers. Let me jump immediately to the next page, Page #8. Here, you have the news on the order intake of EUR 15 billion, a strong second half with EUR 7.3 billion order intake. In the second half, a prestigious order in the E-Mobility space in the range of EUR 2.1 billion. We have worked for this order since many, many months. It's a complete powertrain system with 2 Schaeffler e-motors for a -- one of our most important customers in Germany. We displayed this also at the IRR in Frankfurt. And we are very proud that with this order, we can show all our strengths in the E-Mobility area, combining innovation, combining highest quality, combining a strong systems understanding and also our manufacturing excellence. Second, we -- as you know, with the Paravan acquisition of the Paravan technology and with our strength in Chassis, we are building the Chassis mechatronics area. And here, I'm proud to say that we have gained our first order for something that is very innovative, an intelligent rear wheel steering system. So smaller order intake, but a first important order to pave the way for more growth in that area. We promised EUR 1.5 billion to EUR 2 billion order intake under RACE, we delivered EUR 4 billion in 2019, I think that speaks for itself. And I can say, Dietmar, at the moment, we're getting more requests than ever. So we need to be more selective and need to decide what are we going to take on board and what not. I would also like to emphasize that both in the traditional business, in particular, engine, the order intake is strong. So the strategy that I already mentioned with our 30-40-30 scenario pays off. It's good to be balanced and not to put all eggs into one basket. Aftermarket, I think the storyline here is we see 16.1% and 16.9% EBIT margin in the fourth quarter. We are slightly above the guidance. I know that some of you are concerned about our margin guidance for Aftermarket, I will talk about this later on. We are still in the process of digesting the AKO investment. That still continues to be implemented. And we also see some headwinds from the product cost side that also hit our margin in 2020. But we are well on track when it comes to our independent Aftermarket. We also see that there are initial savings of program GRIP that support the earnings quality in the 2-digit area and also inventory management has worked well. However, the market is not easy these days. There is, on the one hand, in the OES channels a level of destocking that we're going to need to digest. And I already mentioned that the product cost increases and also the costs related to tooling need to be digested. E-Mobility. Ladies and gentlemen, please go -- follow me to 10. Page 10 is not only an issue in the original equipment manufacturing part of our business, but also growing of growing importance in the Aftermarket. I just want to show you on this page, without too much detail, a new and innovative E-Mobility repair solution. We are the first supplier in the aftermarket that offers a repair solution for a front-end auxillary drive called FEAD for hybrid vehicles is 48-volt. It is a solution that is available in 2 cars from a French OEM, the Renault Scenic and Megane. And the main components here includes parts as well as the necessary accessories. This type of concept that is a typical Schaeffler kit will, during the course of the year, rolled out for other vehicle applications. And we are quite confident that we have a competitive edge with this solution in the growing E-Mobility aftermarket space. Let's go to 11. Also here, I think I already mentioned some of the messages. Certainly a better first half than the second half in Industrial. And also a mix in terms of the sector, some of the more cyclical sectors declining, while some of the sectors that we are very good at are growing stronger than expected. Very strong growth in the sector cluster Wind mainly driven by demand from China in offshore, but also in railway, raw materials and aerospace, good growth. So I think we are very well positioned for these opportunities. Gross margin in Q4, a little lower than we wanted. There's a one-off warranty case in there and some smaller write-offs as a result of our capital discipline projects for machinery and inventories, some of which are adjusted at EBIT level. But clearly, an ongoing commitment to drive forward and further improve our profitability. Dietmar's going to talk about this. In particular, when it comes to pricing, we have seen some good positive development in the year 2019. 12 gives you a little bit a sense of what's going on. I already explained the business highlights. Without going into much more detail, let me say that also the innovation in the industrial area will play an important role going forward. Unfortunately, the Hannover fair has been canceled, but we'll find other ways to show the innovative products, in particular robotics, but also in the whole services area at another occasion. In terms of order book, yes, the order book is slightly weaker, and the -- was slightly weaker at the end of the year than at the beginning of the year. So far, we have not seen any bigger order withdrawals. So let's see how this turns around. Then when the order book curve cuts the sales from the low end, that's normally a good indicator when our business turns around. Let me go to Page 13, and that's one of my favorite pages, that's on the capital discipline. I already said that our goal of a CapEx ratio below 8% is overachieved. The 7.2% for the year is a good average. And if you look at Q4 of '19, you see even a more comfortable number with 6.2%. I don't have to say more. I think all of this shows that we have been successful in avoiding a hockey stick. And clearly, the special target imposed on the management team helped here to drive the organization into that direction. Let me also highlight one other observation on this page. If you compare the numbers for investment or additions to intangible assets, property, plant and equipment for the full year 2019, you see for Schaeffler Group EUR 933 million after EUR 1.275 billion in 2018. And the CapEx numbers, and these are the numbers that are related to cash flow, are showing a delta of more than EUR 100 million for 2019. In the one direction, in the -- a slight delta in 2018. In the other direction, what this tells you is that we are, at the moment, getting less additions to our balance sheet than in the previous year, and we're still walking through the CapEx spend that was triggered in the past. So the EUR 933 million, Dietmar, gives us a little bit of additional comfort that the cash payout in the year 2020 will even come down further. The CapEx is balanced, as you know. And while we all are very concerned about coronavirus, I can say that in some of our factories in China, people are pressing for more investment, in particular when it comes to the large Wind demand that we are seeing even despite the crisis. So what can be rest assured here, we will continue to be very committed to capital discipline. For 2020, CapEx should be somewhere around EUR 1 billion, maybe even a little bit lower, implying a CapEx ratio of less than 7%. And you all remember from our Capital Markets Day last year that we are steering towards a reinvestment ratio that is below 1 and to rebalance the overspend in the last years. Without starving, EUR 1 billion investment is still a lot. If you spend it wisely, it can make a big difference. Let me go to the second part of the equation, cost discipline, Page 14, before I hand over to Dietmar. I already mentioned the key headline numbers. 5% head count reduction versus 2018, I think it's a good achievement. It comes out of the various efficiency programs and also the divestments of plants. I'm proud to say that it's not only the U.K. plants, but 3 plants in Germany that we have now divested through intelligent transactions, either selling to the management team who are selling to a partner. So you can do these kinds of things without extra stress with employee representative if you do it in a consistent and fair and equal manner. What is also important here in terms of head count, not only the reduction, but also the fact that we have increased and used increasingly flexibility measures, short-term work, the adjustment of 40-hour contracts to 35 hours. Also not easy, but all of that will help us also to master the challenges ahead of us when it comes to the corona crisis. And last but not least, I mentioned the voluntary severance scheme. Let me also point out here very clearly that the cash out impact from the provisions that we have built is fully reflected in our 2020 free cash flow guidance, and we are seeing at the moment that the program is well accepted and running according to schedule. So it will help us in terms of profitability, with the cash flow effects being included in the guidance. I think, once again, all of this tells you, 2019 has been a year of execution. It has been extremely hard work for the management team, and I think we are, with this experience, very well prepared now for the challenges ahead of us. With that, I hand over to Dietmar. And already, thank you here for your attention.

Okay. So thank you very much, and welcome also to everybody from my side. I would like to skip Page #15 and go directly to Page #16 to provide you some more insight in regard to the sales development. As you can see on the lower left side, in Q4, we realized a growth of 0.6 percentage points, FX-adjusted rate. And when we look to the right side, you could see that especially the region Greater China with a growth of 25% contributed. And this being supported on one side, Automotive OEM, but also from the Industrial side. On the negative side, we had a sales decline of 7.5% in Europe being caused, basically, almost equally by Automotive OEM and Industrial, in a similar way, between 9% and 10% decline. When we then move on to Page #17, you can see what Klaus already indicated that our profit development in fourth quarter was also in a good range. You can see that the gross profit development especially improved with a level of 23.5% slightly compared to the fourth quarter of last year. And main driver on the negative side was price and mix. And on the other side, positive impact being generated by the fact that we gained significantly momentum with what we introduced during the Capital Markets Day, by flexing the cost in the factories and this worked especially well in the automotive sectors in the fourth quarter. So overall, we had a compensation, a very positive impact coming from improvement in production costs. And that's also what we see on the right side, the lower part of the chart that actually Automotive OEM improved their gross profit by 1.3 percentage points. And at the same time, Industrial could not yet manage to get up to this level of efficiency in adjusting to the fluctuating volumes. So we had a decline, actually, I do recall by 1.4 percentage points on the Industrial side. Then moving then to Page #18, and we are actually going then to the EBIT margin. We can see that it this also reflected, finally, not only in gross profit, but on the EBIT margin as well. We see a margin of 7.8% versus 6.5% in the previous year. But we can see that on an EBIT level, basically, all divisions, all 3 divisions had improvement, with the biggest improvement actually being realized by Automotive OEM. And this being supported on one side by the strong growth in China as well as with the flexing of costs that worked very well in the factories. Then I would like to move over to Page #19, going more into the details of Automotive OEM. Klaus also already mentioned the outperformance for the whole year. And you can see here the outperformance for Q4, especially being supported by Americas with an outperformance of 12 percentage points, in Greater China of 21 percentage points. So that overall, despite a decline in not achieving outperformance in Europe and only slight outperformance in AP, overall, we have realized an outperformance of 5.6 percentage points. When you then look to the upper part of the left side of the chart, you can see that E-Mobility, on one side, contributed in a strong way, but also on the other side, the internal combustion engine-driven components being supplied by engine systems contributed to this. And on the right side, you can see the bridge, and you can see, in addition to the positive gross profit impact that I basically already indicated, then also improvement in selling expense being caused by less special freights that helped then to lift the EBIT in Q4 from last year's 3.6% to 5.3%. And on Page 20, you can see the Automotive Aftermarket development. You can see the mixed picture with Americas and AP contributing in a strong growth rate. But on the other side, the European market, which is the biggest portion actually of our Automotive, Aftermarket sales continued to be weak. But you can also see on the lower left side, Industrial Aftermarket was -- saw a good development in the fourth quarter, and OES also recovered after having been on a low level than during the course -- during the first 3 quarters of the year. Overall, then EBIT at a level of 16.9%. And you can see that here, contribution actually was being done by a reduction of selling expenses and also adjustments in the other areas, where actually the negative impacts have been recorded on the gross profit side, and in line with the restructuring, where I will go back to in a few seconds, and the adjustments have been recorded in others. With this, then moving to Page 21. On the Industrial side, here, as already said, Europe declined by minus 10%; Greater China, plus 31%. And you can see that 2 sector clusters, wind and railway, continue to contribute in a strong way then to the growth. But also on the other side, the more cyclical sectors like industrial automation, off-road and also power transmission actually recorded declines in growth. Nevertheless, overall, the negative impact that we discussed about in gross profit side could be compensated on the EBIT level. So that finally, in Q4, in industry, an EBIT level of 9.4% was achieved, being supported by improvement in selling expenses and also adjustments where the original charges have been recorded on the gross profit side. Then moving on to Page 22, you can see the reconciliation of the EBIT before special items. You can see on the left side, then debt for restructuring, we posted EUR 384 million. We have a positive impact coming from a legal cost or a matter where actually, we finally have been repaid then the money, so that overall, the net impact was EUR 372 million. And in regard to net income after tax, that would be an impact of EUR 258 million. On the right side, you can see the allocation of this restructuring expense to the 3 divisions. And you can see the direct allocation, with Automotive OEM EUR 204 million for the program RACE; for FIT in industry, EUR 137 million; and for GRIP Automotive Aftermarket, EUR 15 million. The difference to the table on the lower right side is we have some allocations from [indiscernible] Automotive OEM and Industrial. With this then, moving on to net income on Page 23. First of all, it's a significant drop from the last year's level of net income now to EUR 428 million. But please keep in mind what I already mentioned that this includes a charge or a negative impact of EUR 258 million being caused by the restructuring expense that I just explained. So overall, the earnings per share retained at a level of EUR 0.65 per share. And then moving on to the free cash flow development on Page 24. We continued the strong development that we already recorded in Q3, and we have seen an almost a similar level in Q4 with EUR 340 million. Overall with EUR 473 million, a strong outperformance of the guidance, being caused on one side by further improvement on the inventory optimization, but also on the continuation of the strict CapEx discipline that you could see actually that in Q3, Q3 -- Q2, Q3 and Q4, we have been at a level of 6-point something in regard to CapEx. So this worked very well during this quarter. Then we are almost through with the working capital. We have a slight increase in regard to working capital this year at the end of the year, but we have to keep in mind that the sharp drop in working capital in the fourth quarter of 2018 was caused by the sharp sales drop, especially in December. So there is actually nothing to concern. It's even good that we realized further inventory reduction in there. And CapEx, I already explained, so I don't need to go into this. But just concluding that we manage now very well not to finally show again hockey sticks in the fourth quarter. Moving to Page 26. You can see the net debt development. From my point of view, all fine there, a slight decrease of the net debt. Net leverage ratio at 1.2%. And actually, with this being said, Klaus, I would like to hand back to you.

Thank you, Dietmar. Let me finish the last 2 pages. Ladies and gentlemen, you have heard all -- a lot about the coronavirus, and let me quickly share our experience in the last couple of weeks with you. As most of you know, we were one of the first companies that already started in mid-January with a travel ban from and to China. The colleagues in China have been successful in fighting this crisis. To date, all our plants are back in operation. They started in February 17. Currently, they're operating at capacity levels of around 80%. 95% of our people are back, no one has been infected, what is clearly a blessing. More importantly, our supply chain has not been interrupted in China. We have been very quick and agile in assessing the supplier risk, and 90% of our suppliers have low or no risk. We are -- since years, a company that is not betting on single sourcing, that has clearly helped us in this situation. The guys have also been creative here in finding new ways to solve the problem, shifting delivery from ship to rail and sure to help from delivery. Just an example, ship to China takes us normally 6 weeks, rail takes 3 weeks. We're one of the first ones who could make use of this opportunity. And therefore, I'm proud to say there were no supply chain disruptions so far. In terms of sales, clearly, the auto sales in Greater China have dropped dramatically in February. For us, it's not the sales line, but the production levels. We are seeing that they are improving in March and, hopefully, also in April. I do expect that the Chinese government will continue to support the economy. And therefore, the sales reduction in Greater China in the month of February of EUR 60 million will hopefully be compensated by a better second half. So we remain confident that the guidance that you will see in the next page will be made and achieved even with the situation that we have seen there. Some of you thought at the beginning that the fact that China is important for Schaeffler, in that respect, is a difficult one. I think today, we can turn this around and say what we learned in China is very helpful when we now need to tackle the situation in Europe. In particular, when it comes to crisis management, the guys over there have done an excellent job, and we are learning from that experience in terms of our health protection measures. Just to give you an example to make this a little bit more transparent, we had holidays in Germany in February, and when people came back, 5,000 people came back from holiday in Germany, everyone who reentered the plant or an operation of Schaeffler was had to go through a questionnaire. So so far, we are in a solid situation here, with only one Schaeffler employee that hasn't been to work for 11 days, has proven to be infected. So I think the situation is under control. Business continuity, risk management and also clearly, leadership counts. We are doing the utmost possible here on our side to protect the health of our employees, to protect the supply chain and also minimize the impact on our customers. That's, ladies and gentlemen, what counts at the end of the day. And the fact that this organization is clearly an organization that has proven its ability to work through difficult times is something that we count on. Let me finish with Page 28, you see the guidance that I already explained before. It's the most accurate guidance I can give you. As of March, the Board approved this guidance. Let me also say these days, it's about defending the bottom line. I think here, I will go as far as to say that we want to achieve the midpoint of the guidance. That's what we think is definitely doable. And we are fully committed to put in the necessary measures where necessary, both on EBIT margin, but clearly also on free cash flow. And we already indicated here that the first 2 months, we don't have the full numbers for February but we have a good indication, show that our current trading clearly supports these numbers in the right direction. So let me summarize here. It's a more cautious guidance due to the coronavirus. We strive to deliver at the midpoint of the margin guidance for group and divisions. And we are confident that with everything we have shown in the year 2019, we are well positioned and a stronger company than before. 29, once again, lists all the conclusions. In the interest of time, I would just summarize this by saying it is all about execution, it's about agility, it's about working together as a strong team with a clear direction in a more complex environment. We have, as you know, not only today, the 10th of March, a earnings release, but also in the next days a Capital Markets Day in Herzogenaurach, that now is a digital capital Market Day, to update you on our strategy, to show you how the next chapter in terms of transformation will look like and also what we think are achievable midterm targets for 2024. We all invite you to this event. Even if it's a digital event, it's the second step in a program that will bring this company to where it belongs and make sure that the value that is in this company is fully reflected and supported and generated. Thank you very much. Back to the operator.

[Operator Instructions] And the first question is from Tim Rokossa for Deutsche Bank.

Tim Rokossa, Deutsche Bank. I would have 2 questions, please. Mr. Rosenfeld, the first one is, we all know that circumstances are quite difficult for the sector. Now you managed to show a very good outperformance. The cash flow focus is very clear, and I think very much appreciated by a lot of your investors and also potential investors. Now the issue that I faced in many discussions with investors this morning is that your free float weighted market cap is so low that a lot of investors can simply not invest in your stock any longer. I appreciate that you are not the one that takes the ultimate decision on increasing this, but you are always very interested in capital market perception. Have you made it clear to the family that this is an issue? And is this something that is debated and discussed a lot? I will come back with my second question afterwards, if that's okay.

Well, Tim, it's certainly a strategic issue. And as you all know, I'm in frequent conversation with Mr. Schaeffler and his esteemed mother on many issues. At the moment, we clearly are focused on how to manage the environment at the moment, but I'm happy to take that point up and share it with him. We always regard the capital market as a dialogue partner. And again, I take it up, and I'm happy to come back to you on that point.

And then one remark and a question together. The 2 of us had quite a few discussions in the past also on this call about how you see the market and how quickly you develop 2 things. And I think when we compare your reaction now to corona and also what has happened in China in Q4 versus what has happened at many other guys I must say that your reactions have certainly improved substantially. That's very, very good to see. Now when I look at the outperformance, and that's the question part of this, obviously, it was really strong in Q4. Now you're guiding for something that is pretty much what you told us you can probably do in the midterm to 300 to -- 200 to 300 basis points. When you look at these SOPs of your customer, are they slowing down? Or is there a chance that you may also overachieve this 200 to 300 basis points, regardless of what the market does, going forward a little bit longer?

Well, Tim, it's a question that we will clearly also answer at our strategy Capital Market Day, but it's more a strategic question again. I think the outperformance in 2019 gives us credit and, to some extent, assurance that it can be even above 400 basis points. But again, the outperformance and what's happening with product ramp-ups is clearly something where we need to be clearly receptive of the fact that this is a function of the demand of our customers. There is uncertainty of which programs will run well and which programs will not run so well. We are playing again with 30-40-30, and therefore, I think for the time being, the 300 to 400 is a number that is, on the midterm, not for a quarter and also a year, a good solid floor. If we can overachieve it, the better, but that's, for the time being, what I can say is part of our view. With this switch to more content per vehicle products, that may change, but we first need to gain the necessary experience and see how all of these programs develop over time.

And the next question is from Gabriel Adler, Citigroup.

I'd just like to get a little bit more color on the customer discussions you're having, particularly with European and U.S. customers currently in light of the coronavirus and the impact that's had on volumes. Are you having discussions around customers potentially scaling down production in anticipation of an impact from coronavirus in these regions? And also, what sort of visibility do you have currently from your customers in Europe and the U.S.?

Look, I can say we are, like probably every one of our peers, in very close contact with our major customers. Again, it starts with visits being canceled, conferences being canceled. So far, I think customers are not reacting in an ecstatic way -- erratic way. There is good conversation, and we're seeing clearly signs of weakness in some of the programs. I mentioned that the February sales number in China is down 80%. You cannot expect that a customer then doesn't start to adjust its demand. However, I think what is different in this situation than maybe in the year 2019, most customers, I think, believe that this is a temporary situation that will be overcome. No one has so far indicates that this is the beginning of a worldwide recession. So our customer conversations across the globe, whether it's a Chinese or a German or a European or a U.S. customer, indicate that people want to be sure that when this catches up, and that can be -- at least in some areas can be a challenge that we have the relevant parts available. So at the moment, it's more a supply chain security and being ready to deliver than the fact that we are adjusting already production. Clearly, we will see what's happening around us. And as I said, we are very close to the operations, and we'll react and make sure that we're not just producing into stock. But maybe that's a more balanced view than just saying everyone is already cutting demand.

Yes, absolutely. That's reassuring and helpful. And I if I can...

On the, industrial side, it's slightly different because the cyclicality is a different one. And I think on that front, it started already in the fourth quarter that the demand is getting a lot weaker. Also here, I mean, there are some sectors that are clearly exposed, think about the aerospace business. But I can say there is no radical cut at the moment in orders, and we need to see how this develops. If it comes, we are ready to respond.

Okay. Can I follow-up with a question on M&A, please? I wanted to ask whether you believe in the current market environment, which, as we've already discussed, is clearly very challenging, whether consolidation of powertrain businesses, like we've seen between some of your competitors in the U.S., becomes more likely and is something that Schaeffler as a company is considering?

Thanks for the question. Let me answer it this way. We have been blessed by a, I would say, conservative and cautious M&A strategy that was articulated in 2016. In this environment, the least you want is something where you buy a lot of goodwill and then sit on an impairment risk. Our acquisitions have been smaller. Our acquisitions have been in areas where it's a technological add-on. So I feel quite well with that M&A strategy. On top of this, ladies and gentlemen, let's be very clear, I don't believe that size is the ultimate driver of success. I believe that it was -- in particular important is not size, but innovation, agility and efficiency, and that's what we are trying to follow. So this whole mantra of powertrain can only be resolved by mergers is, from my point of view, a concept, but it's not our concept. And the fact that a Schaeffler Group that doesn't own all the necessary elements, but that is able to excel by its mechanical competence and by its competence in e-motors together with the sophisticated systems understanding and with the ability to source from different sources electronics, is a very good proof that size is not the ultimate driver of success. Maybe I add to that, just to make sure that you don't get this wrong. Portfolio management in this situation where transformation is ongoing, from my point of view, is clearly what it's all about. And portfolio management also means defining and executing on the things that you want and need, whether through external growth or through organic growth, but also thinking about what do you need to deprioritize. And our capital allocation mechanism that we have put in place and explained to you at the last Capital Markets Day is showing and giving you the framework how we think about that.

And the next question is from Ashik Kurian of Exane BNP Paribas.

The first one is just on your CapEx versus the order intake. Your order intake has shown a significant increase. Are you still guiding for CapEx to be at or below EUR 1 billion for 2020? Is EUR 1 billion a sufficient level for you to sustain the current level of order intake or even higher at some point? Does the CapEx need to increase?

The answer to this is yes, at least according to what we see at the moment. If there is more years like this, we need to see how the -- this develops. It's not only a question of CapEx, it's also then the question of how much additional cost you need, how much R&D you need. So what is important going forward with our plan is that we become very selective and very cash flow-focused in what we can absorb in additional growth in E-Mobility, but also in other areas. So once again, it's about cash flow management, portfolio management. We feel good about our -- the fact that we have shown and demonstrated our competence in E-Mobility, but we're also very clear that we cannot continue with an even stronger pace here. It's important that we are able to finance all of this and maintain our strong balance sheet. Dietmar explained that a strong and robust balance sheet with acceptable leverage ratios and good gearing ratios is critical these days.

Just a second question, just on the -- struggling to really [ square ] the guidance for free cash flow for 2020. Because at the midpoint of your guidance, you probably get to EUR 100 million to EUR 150 million drop in EBITDA. CapEx is expected to be flat to flat to down. I get that you have EUR 90 million more restructuring cash out in 2020. But then from your slides, you had plenty of one-offs in 2019 as well. Just wondering, I mean, are you factoring in another year of EUR 200 million or so of negative working capital? Or how do we get to the EUR 300 million to EUR 400 million free cash flow? It seems to be much, much higher, so...

Well, again, you -- I think you mentioned most of the drivers. I do believe, if you go to the table that Dietmar explained on Page 24, you can say that the underlying free cash flow, not only in 2019, if I deduct for the nonrecurring items and I deduct for the investments that were related to major strategic projects like the Agenda 4 Plus 1 or the AKO or EDC or focus our real estate project, you see that the underlying free cash flow is even higher than reported, before M&A, EUR 539 million in 2018, in 2019, EUR 649 million. Even if I deduct a little bit more cautious EBIT numbers and add a little bit for the ones that you mentioned, I think you see from that by simple calculation that the EUR 300 million to EUR 400 million is definitely achievable. What I can say -- what also gives me comfort is the current trading in January and February, we see here compared to the last year's first positive signs of all the measures we have taken. So I'm confident with the EUR 300 million to EUR 400 million, if not more.

So can you just clarify, I mean, what is the working capital assumption for 2020? It -- should it be a lower headwind to your free cash flow than it has been for 2019?

Well, if the ratio is again somewhere around 17% to 7.5%, I think that's what Dietmar said, that's not a bad indicator.

Last question. Of the EUR 370 million-odd provisions that you've taken in 2019, how much of it is cash charges, I see EUR 90 million of that is coming in 2020. But what's the timeline for the other cash charges basically at?

While Dietmar comes back with the numbers, in the programs that we have done so far in terms of releasing head count, it's typically 3 years until 100% completion. So I think this will be '20, '21, '22. Again, the program is, at the moment still, in the implementation phase. So maybe that helps you to map out the impact. And the total number for provisions for this program is EUR 200 million.

EUR 210 million.

Yes. So it's about a little bit more than EUR 210 million, EUR 220 million.

So there will be another EUR 90 million in 2021, and part of this already was paid out in 2019.

And the next question is from Sascha Gommel, Jefferies.

First one is actually a follow-up on Gabriel's question on M&A. Is my understanding right that you think you don't need electronics in-house and think that kind of knowing the system and integrating and sourcing it from someone else is enough?

Well, I mean, that's -- you phrased it slightly differently. I think what we need is we need to understand electronics, and we need to be able to work with software. And it's clearly good to have some in-house, but you can be successful in the mechatronic space without owning everything yourself, and that's what I said. And that, clearly, in this space, that means that you have to be able to in-source certain of these components and elements. And as this is a competitive area, you can also make use of the price competition on that. So that's what we see. And so the competence as such is important. If you want to be able to design something that needs this in terms of understanding, but you don't necessarily need to build and produce all these components and parts yourself, you can in-source it.

Okay. Understood. My second question would be on the Aftermarket margin guidance. Maybe you can put a few numbers around the, let's call it, 300 basis points deterioration at midpoint. How much of that is really the incremental cost from the new distribution center and how much is the rest? Just to get an understanding of what is the magnitude of the moving parts and what can recover in the years beyond 2020.