Schaeffler AG (SHA0) Earnings Call Transcript

Dear, ladies and gentlemen, welcome to the Schaeffler Group conference call. [Operator Instructions] At our customer's 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 who will lead you through this conference? Please go ahead.

Thank you, operator. Dear investors and analysts, thank you for joining this short notice indication to a very short conference call. Mr. Rosenfeld, CEO of the Schaeffler Group; Mr. Patzak, CFO and IR team, are here in half of an hour. After a 5 min short introduction, we will take your questions. Since the call will be only 30-minute long, please ask maximum 2 questions in order to enable also to other participants to intervene. I leave now the floor to Mr. Rosenfeld. Klaus, the floor is yours.

Thank you very much, Renata. And ladies and gentlemen, good morning, everybody, and thanks for joining our short conference call today. As Renata said, I'm here with Klaus, and we have created some news flow this morning. We don't want to make it bigger than it is. But as authorized capital, it's new for Schaeffler AG. Klaus and myself, we thought it's important to be transparent and to convene a short conference call. You all got the IR press release that is very clear. We are convening an EGM for authorized capital, to be in the position to issue up to 200 million new non-voting common shares. And while this EGM does not require the free float investors to vote, we wanted to be open and explain the background for this move. As stated in the press release, the main reason for this is we want to be able through this authorization to enhance our capital base over the next 5 years. To be able to play the transformation of the Schaeffler group, the further transformation in the aftermath of this crisis from a position of strength, taking advantage of opportunities which may arise, while we continue to focus on becoming more efficient in our cost structures, enhance our competitiveness and will, as we promised in our conference call on 4th of August, remain disciplined from a capital allocation point of view. You all me wonder why is that today? And I think you will all concur that while it's absolutely standard for many companies normally conveniently done on the same-day of the regular AGM. These are interesting and challenging items. And therefore, we decided to take the opportunity now and ask for the authorization. We could have done this in the regular AGM back in May. But as all of you know, that was in the middle of the storm in the middle of the crisis. And in April and May, we were clearly engaged with other pressing priorities, business continuity, focusing on the outlooks, business customers and also on our normal problem like paying you a dividend. And therefore, at the time we decided against it. I have now brought this forward and presented it to you. Let me be very clear here to start with, nothing has changed since our Q2 earnings call on August 4. The business trends from July continues. It's a constructive environment. And also August looks promising so far. And also, our plan going forward has not changed. We will, let me make that clear here, evaluate whether to guide in a detailed way for our full year 2020. We are, as we promised currently working on additional structural efficiency measures. And later in the year, in November, we'll have our Q3 earnings and also a capital market update. At the same time, this EGM that is scheduled for the 15th of September is a governance step that we wanted to take sooner rather than later and without waiting for the next AGM in spring '21 as I indicated. This is our thinking behind the authorized Capital Request and let's stress already at this point that this authorize capital does not mean that there is an immediate transaction behind it. Schaeffler has, as you, I think, would share, a comparably robust balance sheet. We consider important to be in the position to improve its strength. So by having this authorized capital, we can also have on 1 day to -- option to reduce our debt positioning further. And to reduce also our leverage ratio. In terms of discipline, you see and saw what we have been doing on CapEx and that you already know that we are also working on the structural self-help measures going forward on top of the temporary initiatives that we have already put in place. For me, it's even more important than to look forward and say, as a company, with this environment, we want to be able to win in this market. We want to be able to take advantage of what the new normal will be, maximizing flexibility from my point of view and from our point of view, in the post COVID area is absolutely a must. We are convinced that COVID will bring these structural changes. And whether this is internal or external growth remains to be seen. In any case, our M&A strategy will not change. We'll follow the course that we've always promised to you. Let me also make clear because there were already questions about this in the past and also now, we are listed. We are committed to stay listed. And we are committed to continue successfully our transformation of Schaeffler Group as an automotive and industrial supplier. And in particular, this mix gives us more opportunities than other companies that are more focused on one sector or on one customer group. And we are here, clearly here, not only to win, but to improve our value creation as we've always said. Let me add, we are convinced that our next steps in our performance improvement journey will be compelling. And as a listed company, we hope that the existing and potential new investors that we may gain from this -- from a potential transaction or a capital increase will want to participate even more in such value creation. At the same time, we are aware that the current level of free flows is not really optimal. Liquidity in the stock is comparatively low if you compare companies of our size with us. And if one day, we could also potentially have a higher free float, this could also help you as our investors in participating in the journey going forward. Let me come to the end here and finish by saying we are a leading player in attractive markets. The crisis offers opportunities. We will continue to shape our portfolio, and we are determined, Klaus and myself, in particular, to make this company not only more competitive, but also future-proof. Our cash situation is healthy. The liquidity situation is strong. And we have only moderate leverage at the moment. This all enables us to think into the future and make Schaeffler even stronger. I stop here. I know that you're all interested in more background, and we are open to your questions. We want to keep this short, but we thought it's better to be available for you than leave too much room for speculation what's behind it. This is an authorization. It's not a transaction. It's not a request for capital immediately, but it will give us optionality and it will give us flexibility also with respect to a potential increase of our free float. Thank you very much, and back to you, Renata.

Thank you very much, Klaus. Dear, operator, we can open now the Q&A session. 2 questions per person.

[Operator Instructions] And the first question is from Kai Mueller, Bank of America.

The first one, if I think about -- obviously, you mentioned 2 areas. One is for the transformation with second part for the growth. If you think about the capital requirements for both trajectories, how would you split them between each other? And in terms of transformation, do we think about transformation, meaning more spending on potentially R&D on new product areas? Or is it transformation as in restructuring, changing the business around for the new world? The first one. And then the second one, maybe a bit more focused on the M&A side. You say your M&A as the same as before. I understand in the past, you always seem to look at small clips, EUR 100 million, EUR 200 million deals. And now obviously, something like this would give you much more scope. I mean, at the current share price, it's about EUR 1.2 billion in equity. What level of leverage would you be able to put on that in your view? And would you also consider more transformational deal if those opportunities arise?

Thanks, Kai, for the 2 important questions, and thanks for joining. The term transformation is clearly used in a broader sense here. It's something that Klaus and myself, and Klaus would want to comment here after his first 3 weeks, see as a long-term journey to move this portfolio forward to allocate capital wisely and see where -- how we build the company for the next 5 to 10 years. So I wouldn't go into such detail that you request and say, is this now restructuring or internal growth or external growth and how would you allocate it, that's too early. The most important thing here, once again, is to have the optionality. There will be opportunities that we couldn't think about before the crisis, and we want to be ready for these opportunities when they arise. And that goes to the second question as well, then I hand over to Klaus. M&A strategy has always been articulated as smaller transactions, focused on technology and bolt-on acquisitions. The size of this, we always said is a 3-digit number. We never said it's always below EUR 100 million. So let's not speculate too much about the size. You all know that such an authorization doesn't have to be utilized in one go. It can be used in several steps. The most important, again, is optionality. I don't want to fuel any speculation here that this is now the preparation for any mega transaction. That's not the case. We will continue with our focused discipline and also risk conscious strategy in adding to the portfolio and adding to the technology we have, what we need in making this company successful.

Yes. Just to add on that, I fully share the view that there is a benefit of having a complete tool kit available, right? Specifically in the current times. When you asked about transformation. What I believe is important that companies try to define now how they can replace interim measures, interim cost-saving measures with more long-term structural measures. Obviously, gets them a topic of footprint. It's also something for -- with regard to overhead structures. I have the experience that there is quite a room typically in overhead structures, and that is something that I look into right now. And I think that is something which also can make the company not only leaner cost wise, but at the end also fast in decision-making. So we look at structural things here. Obviously, we will grow the business mix. And what that means for me, it's a bit too early to have a final say on that. But in the end, I think we have to differentiate between the different parts of our business. Parts, which are more kind of gearing in the direction of cash generation and cash performance, and other parts where we have to grow. But with a view on profitability improvement over time. And this is how I look at it. Klaus?

Yes. Maybe just one quick follow-up on this. One quick follow-up, when you think on the capital side, let's assume on the current share price is about EUR 1.2 billion. Is that when you do it, also in order to improve your equity ratio, which is obviously with the write-downs you've been taking falling, or would you be able to take that EUR 1.2 billion and actually run a similar debt-to-equity leverage what you currently have and actually have more firepower to do more things?

I think you're asking questions that would relate to a potential transaction. And okay, it's too early to answer that. This is about preparedness in a complex landscape. And let's not speculate what the price would be, what we would do with -- what -- with inflows. I think what you can take away, and we stress it. This is also a strong sign of trust from the family, from the major shareholder who says, we will give you flexibility. This is a capital -- potential capital increase with subscription rights, how that will be utilized also in terms of participation by the IHO remains to be seen. And that's what the press release says. It says it's there to strengthen the base to push forward the transformation. And there's a second last sentence that also says there is a potential for higher free float. And that's a function of the participation of the IHO or not.

The next question is from Henning Cosman, HSBC.

Please, can I just ask about the timing of this? You mentioned that you had decided to not do it at the last regular AGM and now I'm more interested why you think this can't wait until the next regular AGM? So yes, I mean, this was really the first question. If you can just without leading you too much on this. If you could just explain again how you think about this? And then just maybe in the context of both valuation and timing with respect to your Capital Market Day. At a share price of EUR 6 when not too long ago, it was closer to EUR 10. I would think a lot of people hope you wouldn't execute it at such levels. If you could maybe give us an indication how you think about the level at which you think this would be interesting relative to how good an opportunity would have to be to do it at such a level? And then also timing-wise, just before the Capital Market Day, which, of course, you want to do at year-end, and I would suggest there might currently be a misvaluation because of arguably a misconception. For example, your overexposure to internal combustion engine, which I suppose you were hoping to rectify at the Capital Market Day. How you think about, again, in the context of why can't this wait until the next AGM? Why would you want to do it before you have the opportunity to rectify things, given the term guidance at the Capital Market Day allow the share price to go higher? If you could just sort of contextualize that a bit for us.

Sure. Absolutely. I mean, once again, this is not a transaction, and this is not a capital increase. This is an authorization. And the authorization is about having optionality, and it's good to have optionality sooner than later. Why should -- I don't really understand by the point, why should I wait now, it has nothing to do with the share price. It's an authorization, and it's a governance and more technical point, in particular, in our situation, with the capital structure we have. So you can say why you missed it in the first ordinary one this year, that's a fair point. But there -- I mean, you all know how unusual this crisis was and how much we had to cope with dividend payments and getting the company on track. But I can tell you, this is a part of a plan that was discussed for quite some weeks and months with the family to do the right thing. And it's now from our point, exactly the time to get this through, to get the authorization, have it in place and have the optionality. Why wait with optionality in particular if a crisis starts to become -- a slowdown a little bit and the optionality may come sooner. But again, you should not read anything like into this that this is a transaction, it's an authorization with a tenor of 5 years. It's significant numbers of shares. And I think it's good for us because it prepares us for steps sooner than later. But the steps are not up for debate today. And if there's anything and if we come with something, we'll let you know. But you can be rest assured that we're not going to buy or sell any shares. That's definitely not what the family is interested in.

So nothing imminent, more or less than it would have been the case at the Q2 stage, yes?

Correct. That's what I said. And if you read the steps and you try to find a logic in this, we were the first ones who'd addressed balance sheet risk impairments, Q1. Everyone wondered what is that? Now, we then said we come out of this crisis a little bit stronger than others because the portfolio is diversified. It's not only automotive supply. It's also an industrial. We are there with a strong liquidity position and not because we raised debt somewhere and put it on the cash balance so that now we have a great liquidity position. We have been very modest with any type of debt, and I think it's right at the moment. Why should I raise all this debt to bolster my liquidity position then to have to repay it? So it's not necessary. Balance sheet is not really strong. It's comparatively, the equity ratio, which is 15%. Is that really sort of very strong? No, it's not. So increasing that a little bit could help, but that's not the driver of this. The driver of this is being prepared for the transformation to come, as Klaus said. And I think this is nothing now to interpret and read anything into it, there's tomorrow a transaction. That's not the case.

The next question is from Victoria Greer, Morgan Stanley.

Just a couple, please. I guess, I'm totally understanding that you don't want to comment about the potential share price this could be executed at. But if we just take, I guess, today's share price as a starting point, let's say, about EUR 1.2 billion, this could theoretically authorize you for. Historically, that in better years, not talking about 2020, but that's a couple of years of free cash flow. So historically, you have generated pretty good free cash flow. Should we think of future free cash flow as at least partly burdened by ongoing restructuring? And therefore, incremental growth needs to be funded externally? Is that the right way to think about it? And secondly, thinking about your discussions with OEMs for new contracts, do you think that this greater flexibility in your ability to fund growth will help in winning contract? Has that come up in existing discussions?

No. Victoria, thank you very much, much appreciate it. I believe this is a once in a lifetime crisis, and it will shake the industry. There will be winners and losers, and there will be strong companies, and there will be weaker companies. And if you want to win, and I start with your second question, at the customer front. Our business, in particular, automotive OEM is a long-term business where you need to be a partner that the OEM can rely on. And therefore, strengthening the capital base is not only financial metrics. It is something to -- and that's in our specific situation with a strong family ownership, that's an important sign to the employees, but also to our business partners to say, we will stand behind this company. No one says, and that's your first part, that we will utilize anything like this in one go. You are calculating, rightfully so, the maximum possible. But it doesn't say that. It says up to 200. So don't read from this, oh, they can't fund their future growth. We will, as I said, in my little introductory speech, be very consequent and disciplined, in particular also with Klaus' help now, on cash generation. And this is not a sign that we think we will lose our cash generation power in the future, and therefore, now need something for internal growth. We will continue to be disciplined. But we also want to be in a position that we can say, we came out of this crisis with the right flexibility, with the right backing and with optionality that others may not have, that have today leverage ratios that are increasing and increasing. Klaus, on the cash conversion, something on the cash focus?

Well, I think cash performance, obviously, is something which is in my heart. I believe that still, there is room for improvement here in the company. If I compare it to other companies, I believe, in the end, also in performance management. We made already in this -- just now a couple of divisions, Klaus and myself, how we can focus the company more on cash conversion rate, CapEx ratios and things like that. Also differentiating again, differentiating between the different parts of the business, differentiating in the period for amortization. We are now in [indiscernible]. So as I said, we still have room to improve. And on top of this topics, I believe there is an opportunity on the overhead side, which can also, obviously, there would be then a cash impact from improving the structure, but that would come with a significant payback and could also help us to fund growth out of that.