Schaeffler AG (SHA0) Earnings Call Transcript

Dear, ladies and gentlemen, welcome to the CEO conference call of Schaeffler AG. [Operator Instructions] At our research 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 Susanne Sievers, Manager Investor Relations, who will lead you through this conference. Please go ahead.

Thank you very much operator. Dear analysts, dear investors, thank you very much for your time today. Mr. Rosenfeld, CEO of the Schaeffler Group, will lead you through this call. Please take a second to consider our disclaimer. Our forward-looking statements include a number of factors and uncertainties, and there are also some of these which are beyond our control. Without further ado, I leave the floor to Mr. Rosenfeld. Klaus, the floor is yours.

Thank you very much, Susanne. Ladies and gentlemen, thanks for joining this call. We want to be quick today and do all of this in a focused manner and don't waste your time. We have a little presentation for you that was uploaded into the system that we will now run through. Please go to Page 4 immediately, where you have our key messages for today. You will not be surprised that the crisis requires us to recalibrate our priorities. The original timing for this call was designed for a strategy update basically, not possible in this environment. The crisis has accelerated. It's a global crisis impacting all our major economies. We want to talk to you quickly about our crisis management approach and how we deal with this. We also want to focus quickly on how we are preparing the company for adverse conditions, relying on our balance sheet's strength and healthy liquidity situation, and I want to spend one word on the road map that we have finalized and that is ready to go as soon as the situation clears up. You saw just a while ago that we launched an ad hoc statement that we suspended our guidance for 2020. You already know that the AGM 2020 has been postponed and Q1 figures will be presented as planned on May 6. If you please go to Page #5, I -- here, we have tried to summarize very quickly how we are impacted in our 4 regions. Let me stress upfront that we, at Schaeffler, are benefiting from the diversification that stems from our business mix. Clearly, automotive is impacted differently than the variety of industrial sectors. And that is why I've quickly invited my 3 Board colleagues, they will give you a very brief overview on where their businesses are cruising, so that you can hear it directly from the horse's mouth. On the regional setup, very quickly, proactive crisis management in China. You all know this. No one is infected so far and no one infected to be expected. All plants back on track. Capacity utilization is slightly lower than on the 10th of March because we are preparing for a weaker demand in the year to come. And what is very good, the supply chain has been maintained, and we are preparing for a market recovery. In Asia/Pacific, no one infected, strong containment measures in Japan and South Korea. And we are forced to close our 4 plants in India since the beginning of this week. In Europe, we are blessed by the fact that our safety measures have always been strict and with only a very limited number of employees that cannot come to work, and in fact, these are all skiers. The majority are skiers from -- that have been in Austria. The fact that we let no one come back from holidays there helped tremendously to safe for the company. Here in Europe, we have concentrated on a very fast and flexible response in adjusting our operations, both in the plants and outside the plants, and we are seeing first impact from this. Countermeasures have been implemented, and as we have done in the past, we are ready to increase them if necessary. In the Americas, the crisis is increasing. I think you all follow that. We -- the safety measures are implemented. And following our customers, Schaeffler is temporarily closing our automotive OEM plants in the U.S. also in Brazil and in Mexico, while the industrial business is holding up with a solid order intake. So you see here again, the diversification, the fact that we are auto and industrial really helps us in this situation. Please go to the next page, Page #6. Just a quick word on how we have organized our crisis management. We have set up a global task force under my leadership that basically consists of 3 dedicated response teams: Health & Safety; Customers & Suppliers; Finance & Liquidity. You know our key priorities, and I already mentioned that we have been fast and flexible in responding. Let me quickly dwell a little bit on the countermeasures. They are implemented in the way that they are as location-specific as possible. So we have decided not to shutdown the complete number of our plants. You know that we have 74 plants, but some have to go -- have decided to go location by location. What really makes a difference, in particularly in Germany, is the availability of short-time work that the German government has put in place. We are using that as much as we can. And all the divisions, all the functions are asked to put in place additional cost containment measures. We are clearly doing this in a tactical manner. This is not the time for structural changes. This is a time for tactical measures to weather the crisis. And let me stress this also at this point here, the business continuity management is one thing. On the other hand, already executed in China, but also here in Europe, we are thinking through this crisis also with a proactive mindset and have already initiated restart activities and contingency plans for ramping up again when the situation would allow that. So what you can be rest assured, the company is crisis proven, and we are, I think, have become much better in a fast and flexible response also from the experience in the last years. I would now hand over with your permission quickly to my colleagues. I have Matthias, I have Michael, and also Stefan in the room. And -- sorry, Matthias, if you would please start with automotive, a very quick overview where we are in your division.

Thank you, Klaus. Brief update on automotive OEM. As Klaus said, elaborating, we are facing these major shutdowns of our customers of all the relevant OEMs in Europe and Americas since March 16. So meanwhile, nearly each and every OEM, especially in Europe, as well in the U.S. was giving several statements about timing and period from 10 days up to 20 days. That's what we have informed. So we have to see how this is going to continue. What we did is, we very quickly, but as well very seamless shutdown our activities as well to the minimum through the needs. We are expecting our supplies to aftermarket and industrial in addition. Business continuity was said by Klaus. So we continue to work on our big projects. I guess you all -- or most of you remember these successful order intake we had last year. So those projects are going to continue as all these OEMs are challenged to get the transformation into E-Mobility and even autonomous driving plans. We expect for Q1 to outperform the market clearly. So we would, as of now -- without doing that officially, but we would, as of now, give a corridor of 6% to 8%, minus sales development versus a declining market. And for sure, seeing all these shutdowns actually, we expect the major impact or the biggest impact in Q2. But once again, we don't have firm statement of all the OEMS. We are in very close contact to all the major ones, use that in the productive area or in R&D there.

So thank you, Michael. My name -- Thank you, Matthias. Michael on the phone. For the automotive aftermarket, we saw an increasing demand through Q1 until the very day. And if you may recall, last year, we were reporting that many of our customers, both in OES as well as independent aftermarket channel, were destocking, meaning that our sales to our distributors did not clearly rightly reflect the demand on the market. That is no surprise that now distributors are building safety stocks again as they also expect some hiccups in the supply chain going forward. We are thinking in that situation in 3 phases. So there will be ramp-up -- ramp down phase in the aftermarket, there will be a shutdown phase on a country-by-country, city through city, market by market place, but there will also be a ramp-up phase right after, and that is why we decided and that goes in line with the statement of Matthias that the factories will stay open to replenish the aftermarket inventories so that we are best prepared for any given demand whenever it may come. On top of that, politically, we are quite active and advocate on the guidance to define vehicle service and repair as essential service in the industry, which means, even in curfew and shutdown periods, the possible and necessary business is supported. And you see both from the U.S. as well as Europe, lots of activities on federal level to support this. Looking forward, the demand in Q2 then definitely will be negative. We can't tell you when business will pick up again. But one thing is for certain, once it picks up, the individual mobility will be the first one to go. With that, I hand over to Stefan.

Michael, thank you very much. Let's come to the Industrial division. The global demand on the industrial side is still on a solid level. We definitely do see an impact in respect to postponements, not cancellations but postponements. And of course, we also see that some customers have challenges, both on their demand side and also on the supply chain side. But the majority of our customers tell us that they want to maintain their operations because they obviously, also on their customer side, they have an ongoing demand. Q1 sales is expected to be without a major impact from the crisis. And of course, we are watching what happens very carefully. We never know what will be in 2 or 3 or 4 weeks. Therefore, short and midterm developments is carefully watched and managed. As we have told you, we have set up a performance program FIT, and we definitely carry on to work on FIT, meaning productivity improvements, cost reduction and cash generation are key. But of course, we also want to be ready for the point in time when the market comes back. We want to have the right inventories same as in automotive aftermarket and be prepared for the time after the crisis. Thank you very much. Klaus?

Stefan, thank you. We continue with Page 8. That's probably the most interesting page for you because it has some numbers for end of February. Our balance sheet is robust. You all know that we have only limited goodwill due to the fact that we always followed a very focused M&A strategy, that's a good thing. As per end of February 2020, net financial debt stood at EUR 2.4 billion, and the leverage ratio that is always the last 12 months, leverage ratio has slightly decreased to 1.1. The Schaeffler AG is rated by all 3 rating agencies on an investment-grade level, as you see from the table, with 2 negative outlooks from S&P and Fitch. The fact that Fitch confirmed the investment-grade rating yesterday, which is negative outlook, we regard as something positive. More interestingly, on the liquidity side, I think you all know from the past that we have tools in place that allow us to look at our -- and manage our daily liquidity balances on a global basis. The cash balance for Schaeffler Group as per end of February 2020 stood at EUR 684 million, that is EUR 16 million more than year-end 2019. And if you just think that through, that tells you that the free cash flow has developed positively in the first 2 months. We have, as of end of February, unused committed credit lines of EUR 2 billion and an available liquidity of 15% of net sales 2019, I think that tells you that our liquidity position is strong. On top of this, as you see from the little table there, the debt maturity profile is robust. We have no redemptions in the next 24 months except for a little bit of commercial paper that will run off. So I think the company financially and from a balance sheet point of view is in a very robust stage. And the fact that we have done all the things that we did last year, with a strong focus on cash flow and a proven cash flow management clearly helped us in this situation. Page 9, very quickly only 30 seconds. Our Roadmap 2024 has been finalized and is ready to go. It has 3 main building blocks: strategy; execution program; and midterm targets. I think you all agree that it would be not appropriate to talk about midterm targets at the moment. We first need to review and see what the more challenging environment will bring. But what I would like to leave you with, all the work has been finalized, we would be ready to go. It's a strong team result with a much more articulated strategy. Focus areas, growth initiatives and clearly leveraging the synergies across the whole value chain between auto and industrial with a new claim that is up for launch, "We pioneer motion. Together" also reflects that. Let me come to the end here and reiterate the 4 -- 5 key messages that we shared at the beginning. And I'm not going to read them again, but what I would like to emphasize, the company is in a good fighting mode. We are crisis proven. We have shown that some years ago. We are used to acting forcefully, fast and flexible. That is key not only for ramping down but also for ramping up. We are looking into the next time to come with a rather optimistic and fighting spirit mode, so that's where we are. You have the last page, on Page 11, with some key dates. The next date, when we will report is the 6th of May. And we will go for a new AGM date probably thereafter, it's possibly online. And ideally, the market has then cleared up, and we can again then call for a Capital Market Strategy Update, where we would launch the road map. With this, I thank you for your attention and hand back to the operator for your questions. Thank you very much.

[Operator Instructions] And we've received the first question, that is from Sascha Gommel of Jefferies.

I appreciate that you had enough time to talk to us today. I think my first question is on your dividend portfolio. Do you still think you will go ahead with the proposal? Or in light of what's happening now have you -- will actually reduce or cut the dividend?

We have no plans to change our dividend proposal.

Okay, understood, very clear. And then my second question is on working capital. It's obviously very difficult to get an understanding what's happening with capital because almost 0 production on your -- [ industrial ] in Europe and North America is new. So I was wondering if you can talk a little bit of how you see this trends and how is the working capital evolving over the course of the second quarter?

Okay. If I understood your question, Sascha correctly, you are asking about some hint on the cash flow development in the next quarters and...

More specifically, working capital actually.

Yes, and working capital. Again, this is not a very easy answer. At this moment in time, I think what you can say is, we will first focus on the tactical measures to compensate or mitigate the operating leverage impact and for that, it's absolutely critical that you bring down your operations where you have to bring them down as soon as possible, every day counts. On the contrary, you have to maintain the business that you have because it's foolish to cut business away that still brings positive results. That's the operational challenge. And I think our colleagues here, in particular Matthias, Stefan, together with Andreas, are very experienced in doing that. So we are trying to maintain the profitability as much as we can. That's the main driver. And having said this, it then becomes a supply chain game because we need to, on the one hand, make sure that we're not just building inventory for the sake of inventory. And that's clearly a part of this very consistent and well-managed run down. On the other hand, you have to be able to deliver when it all comes back. And again, I can't give you a calculation how to best do this, but it's done location by location and business by business. And the fact that we are a management team that is very operational helps us here. The fact that we are a team that has now met every day on this at 1 o'clock for an hour and been very, numbers focused also helps. So that's what I can say there. If you then go to working capital, you have to separate the inventory side from the financial supply chain. The financial supply chain so far is well intact because we don't see any bigger concerns at the moment with overdues or anyone not paying, that, I think, is a positive thing. And on the payable side, so far, we have not been asked in a undue manner to extend payment terms there as well. So the financial supply chain that Dietmar handles, from my point of view, is something that we can also adjust to very quickly. And then it comes to the fact how much of -- how agile is the sort of operating supply chain in terms of inventory management. Here, you do certain things on purpose, Michael said it, he wants to be ready with his own inventory when the demand comes back. So you can accept -- you can expect that the working capital ratio goes up a little bit. But again, it should not overshoot in a way that we now sit on lots of inventories that we don't need. And the compensating factor in that is then CapEx because it's obvious at the moment that we are going through all the projects, not only in -- just in the business side, but also with real estate, we're stopping things where we can stop. So what I would say is, yes, there will be an hit in terms of EBITDA, sort of capital -- sorry, free cash flow from operations that the working capital ratio will go up slightly. And that we try to compensate this in the next quarters by an adjustment in CapEx where possible.

That's very clear. And then my very last question, just to confirm, my understanding was that aftermarket and industrial, although that might be down, is still doing a decent level of business unlike the OE part. Is that the correct understanding? Also for the second quarter at this point, obviously?

No, I think that's very correct. And maybe I can just give you an indication here by the number of plants and how we are adjusting. We have 75 plants, as you know, 2 plants have left -- have been sold by the end of the year. Of these 75 plants, we have 52 automotive plants and 23 industrial plants. Of the 52 automotive plants, 10 plants have been shutdown and 42 are running from -- at lower capacity, but they're still running. And this number will increase in the next week because we are shutting down, as I just indicated, our American plants, that's a forced shutdown, and Mexico and Brazil as well. From the industrial side, only 2 plants cannot operate at the moment, and that's a forced shutdown in India, where basically the government has said we need to bring down all the plants. So you can clearly say, as in this week, of the 75 plants, still 63 are operating. And next week, the number will decrease a little bit, but the impact at the moment, operationally, is clearly on the automotive side. And Michael said that he is still, at the moment, cruising, but there will be shutdowns and logistics as well. So I don't want to make this to -- saying too rosy. But I think we are following this very, very carefully and maintaining business continuity as we can.

And Sascha, perhaps, with regard to the aftermarket, the question is not only how much inventory do I have, but where does it sit? And we are preparing ourselves in a way that we expect that the quite a few modes will be done on a very local level, which means it may happen that we can't supply our customers out of a regular warehouse, which is why we bypass and try to set up most flexible grip of possible supply chain.

The next question is from Victoria Greer of Morgan Stanley.

Yes, thank you also for the update. It's very helpful to get a bit of insight into how you're managing this very unusual situation. I wanted to ask, please, how you are dealing with employees where you have got plant closures? In Germany, I guess, you've got the option of the [curtail] right, which is somewhat helpful. But as you say, you want to be ready to ramp back up again. So yes, could you talk us through how you were dealing with paying employees and the relationship with employees while the plants are closed?

Sure. Victoria, thanks for asking the question. And again, I would like to distinguish between Germany where we have the special tools that are not available across the globe. And let me also say here, China is not an issue at the moment and also Asia/Pacific, except for India, is not an issue. In Germany, we're using as much as we can. There are the tools that have been provided, but also all the other flexibility instruments that were used also end of last year, like specific closure days, we have the flex time that we can use. We will ask people to spend holidays or take their holidays now in the Easter period. And clearly, the short-term work is something that we will apply. And not only in the production areas, but also in the white-collar areas where that is possible, so that helps a lot here in Germany to mitigate the operating leverage impact and flex the cost base. In the U.S., and that's probably where you are asking for, people don't have this type of social net that we have in Germany or in Europe. And here, we will -- we are, at the moment, together with our regional CEO, Marc McGrath, were thinking about what we can do to support our workers. Plants have been shutdown. That also means that they cannot come to work, but there are ways, and we've done this in 2008 and 2009 as well to support them. That's something that has not been finalized, but it's a critical part of being a family-owned and family culture-driven business. And as part of this ramp-up deliberation, we don't want to use our best people now for a crisis that could be over, hopefully, soon.

That's great. And just thinking about CapEx and then, I guess, also the proportion of R&D that, I guess, is more R than D for developing future products, how much flexibility do you have there in terms of delaying things? How much CapEx and R&D change do you think is realistic in the current scenario? I know that will change a lot, right? That's a very -- it's very difficult to say. But I guess, for the, say, a 1-month or a 6 weeks shutdown, how much is realistic?

Well, I mean, that's not an easy answer to the CapEx side. But I think what I'd say is -- what I can say is, the payments that are triggered and that are agreed will not be impacted. We're not going to stop now payments for CapEx that has already been initiated. That would be wrong from my point of view. But when I look at our plan and what I -- what we indicated in the 6% to 8% range clearly geared towards the low end. If you see what we published for the 10th of March, there is still also below the 6% some maneuver room. So again, I can't give you a number at the moment, but clearly, you can, at the moment, also extend certain things, you can postpone certain things, and that will give us some flexibility, not down to 0. But clearly, for the year, there's potential to bring it down compared to our plan in a, I wouldn't say, significant, but a solid number that would help us to support the cash flow prognosis that we are envisaging. And in terms of R&D, also here, Matthias said it, we're not going to stop the big development projects. And even if the large OEMs have shutdown production, they have not shutdown their development work. And therefore, it's critical that we continue there. We have had big successes, as you all know, last year in E-Mobility, and we're not going to jeopardize that now on the virtue of such a crisis.

The next question is from Tim Rokossa of Deutsche Bank.