Schaeffler AG (SHA0) Earnings Call Transcript

Ladies and gentlemen, welcome to the Schaeffler Group conference call. [Operator Instructions] At our reserved customer's request, this conference will be recorded, and the 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 begin.

Thank you, Mark. Dear investors, dear analysts, welcome to today's conference call. Mr. Rosenfeld, CEO of the Schaeffler Group; Dr. Patzak, CFO of the Schaeffler Group; and the IR team are here in Herzogenaurach. The call will close at 12:30 sharply in order to enable internal cascading calls. [Operator Instructions] Please note our disclaimer regarding forward-looking statements at the end of the presentation deck that you find online and were distributed yesterday afternoon. I leave now the floor to Mr. Klaus Rosenfeld, CEO of the Schaeffler Group. Klaus, the floor is yours.

Renata, ladies and gentlemen, thanks for joining this call. We want to guide you through the deck that we have provided to the market this morning and talk about our restructuring announcement. Let me use the opportunity upfront to say there were some concerns this morning that this is somehow linked to the authorization that we announced on the 20th of August. And let me state here to clear the air, we have no intention to finance restructuring costs by way of a capital increase. The issues are 2 separate issues. The authorization -- and an authorization, ladies and gentlemen, once again, is not an issuance of capital. It's an authorization. It's there to complete our financial toolbox and to create optionality for us. The restructuring is there to further amplify our self-help measures, as we indicated on the 4th of August, and to increase our competitiveness. The fact that the 2 issues coincide on the time line does not mean that they are related. With this introduction, let me quickly go to Page 2. You have on the left-hand side the key milestones. Yes, it's intensive, but it has to be intensive because we think we need to speed up the transformation and also continue with the measures to make Schaeffler more competitive. And that also includes reducing our dependency from the combustion engine. I'm not going to repeat what's on the left-hand side, just a quick word on the current trading. We shared with you the sequential improvement trend at group level in the last call. And I can say that sequential improvement is continuing. Automotive OEM, August, more or less stable versus July. Automotive Aftermarket, sequentially improving. And the Industrial division sales still impacted by an overall market slowdown. Nothing really new on the capacity utilization across the regions. Also here, further stabilized, clearly China ahead and Europe lagging behind. Let me reassure you already here, the fact that we announced today a restructuring program doesn't mean that we will continue forcefully in a very disciplined manner with our temporary measures like short-term work. The liquidity situation is sound and the balance sheet quality is intact. Please go to Page #3. Before we explain the program, let me quickly explain where we're coming from. Just to remind you, we have, in the last 18 months, downsized the company quite a bit, minus 9% in head count or 8,250 jobs. I think that speaks for itself. Several steps. BCT was one of the key milestones to a more stringent digitalization. RACE, FIT and GRIP, you all remember that. And then in addition to that, starting December '19, our additional voluntary severance scheme that we then upsized in the beginning of this year. This new program now comes on top of this, and it's a program with a clear focus on Germany and Europe. And the simple reason is that, so far, our activities in optimizing the German and European footprint were in these other programs somehow underrepresented the 8,250 jobs more or less relate to things in Europe and outside Europe. Only 1,600 where part of this in Germany, and therefore, it's, from my point of view, a very logical step now to approach and address the issues that we have in Europe. And that comes together hand in hand with the crisis and the development there, where we see that our customers more and more ask for localization, where we need to do more to protect our supply chains and where we want to be close to our customers. Let me explain that on Page #4. You all know we're expecting for this year around 20 million less cars than in the previous year. That's a drop. It's stabilizing at the moment, and we all expect that the precrisis level will not fully reach before 2024. That's the auto view from light-vehicle production with the prolonged recovery. And we have to say that also, on the industrial side, that recovery will play a role. Here, our view is that, when you look at industrial production figures, the output levels of 2019 will, at the earliest, be reached in 2022. That means, for us, next to the technological transformation that we are exposed to, we need to optimize the footprint and consolidate the footprint here in Germany and in Europe and reduce capacity. And we -- secondly, we need to address and want to address the overhead. It's obvious with all these downsizing of the past that we need to take a fresh look here to further reduce in our corporate headquarter, but also in the divisional overhead. And that has led to the scope. The scope is Europe, but mainly Germany. 4,400 head count, I think, is a significant number. It equates to 14% of our German workforce. Let me go to Page 5 and quickly go a little deeper into the logic, footprint consolidation and reduction of capacity. Clearly, targeting to improve our competitiveness. With the consolidation, we are addressing a still fragmented footprint, and that means 12 sites in Germany and 14 sites in total for Europe. That does not mean that these sites will disappear, but we will move things together. We will move from one location into the other. And we'll also clearly see what can be saved. But where that's not possible, we will also close sites if necessary. Reducing capacity is, on the one hand, rightsizing certain corporate service functions or that are close to the plants. Our tool manufacturing, a key technology for Schaeffler, will be rightsized. And also, the special machinery building, that is an important element of our company. But even more so, in particular, in those areas where we are talking about the traditional core businesses, capacity will be adjusted to current demand. And on top of this, the third driver is a classical KPI-driven approach with a ratio of direct to indirect employees in their factories needs to be looked at. And we'll use that to further reduce indirect employees in the plants. This is the overall logic for the whole Schaeffler Group. And you see that, that applies in the middle of the page, to all the 3 divisions in a slightly different manner. In Automotive, one of the key focus areas is to strengthen our E-Mobility competence center in Bühl. And so that also pushed forward our activities, at the same time focusing our portfolio in a more active manner in terms of product, strategies and footprint. And I said this upfront, that clearly means we are intending to further reduce the dependency of our ICE products. In Aftermarket, this is part of a longer story. Michael is basically consolidating all smaller offices we have in Germany, Hamburg and Cologne, some other smaller ones, into the headquarter in Langen. That's an obvious step to reduce costs and also optimize efficiency. And also, Stefan Spindler, who you know, is keen to further optimize his efficiency. He does a significant step by consolidating basically 4 German plants into one: Schweinfurt, parts of Höchstadt, parts of -- go together. Also Altman, a smaller plant close to Schweinfurt, will be combined into 1 competence center for the Industrial business. And that will also go hand in hand with expanding our investments in the strategic growth areas. Let me give you an example. Robotics is one of these examples, but also the mechatronic technology that we need for Industrial, and that will all move to Schweinfurt. Second part is the overhead reduction. I think we have done in the last years quite a bit to streamline this, but there is still complexity that needs to be reduced. All functions, all divisions are impacted. We go across the different layers, all the managerial and also nonmanagerial positions. And also here, it's mainly Germany. We have our headquarter in Herzogenaurach, and that's one of the main locations where overhead will be cut. It's there to reduce complexity, delayer the organization, streamline processes. And we'll also take the opportunity to look at the metrics one more time and see how we can make that and remake that in a leaner way to enable faster decision-making and execution. So nothing unusual, something that we have done before, and that now is clearly the basis also for the business case that Klaus is going to explain. Klaus, please go to the next page.

Yes, hello also from my side. On the savings, what you see here is EUR 250 million to EUR 300 million. This is the full annual run rate of net savings, which we will reach in 2024. This savings number relates to the net number of 4,400 jobs to be cut. Keep in mind there is hardly any net reduction in Europe outside Germany. Therefore, the net number of 4,400 is also the number, more or less, for Germany. With regard to phasing, 90% of the EUR 250 million to EUR 300 million will be reached already in 2023. There will also be a first visible impact in 2022, but no visible impact from today's point of view in 2021. While we have first benefits in 2021, they will be compensated from today's point of view through transformation costs, which will not be accruable. The split is -- into the divisions is, more or less, half Industrial, half Automotive OEM. The impact at Aftermarket will be minor. On the cost side, these costs have been calculated bottom-up with business plans for all sites, which are impacted. These are the material ones, plus 2, which have been mentioned already from Klaus. But obviously, there's been also some smaller sites where we have business plans. So we built that bottom-up, and it relates not to the net number of jobs to be cut, but to the gross number of jobs impacted. And the gross number on a European basis is in the range of 6,100. And the difference between this number and the net number, roughly 1,700, consists of 2 buckets. One is this consolidation within Germany. That would be around about 1/3. And 2/3 is a movement from high-cost Europe to low-cost Europe. On the phasing, I believe that 80% to 90% of that cost will be booked already in 2020, if we progress according to plan. And since the restructuring plans, which have been communicated yesterday, are already quite detailed, which is good, because that, I think, shows that we have made our homework. A significant portion will be already booked in the third quarter. If you look at the overall number of roughly EUR 700 million, more than 90% will be cash-effective. That will lead to a significant burden on the free cash flow in 2021 and 2022, I would say, roughly equal in size. But keep in mind that, in 2021, there is an additional cash-out still for the Jupiter program, which could be a bit more than EUR 100 million. So that needs to be added for the split. On the split of the costs equal to the split of the savings, roughly 50% at Automotive OEM, 50% Industrial, Aftermarket minor, which also translates, obviously, in a higher margin impact for industry versus OEM. So we will keep you updated on our progress, obviously, when we talk about the Q3 numbers. There will be an update what has been already booked and what still is expected to be bookable with regard to the transformation costs in the fourth quarter, and then we basically take it from there and give an update quarterly. Yes. There's one topic on the cost which I also can say. This 700 -- roughly EUR 700 million splits also into roughly 90% personnel-related costs and 10%, which are other costs for moving machinery and closing down factories. And within the personnel-related piece, of the majority, I would say, is related to voluntary redundancies. So with that, I would give it back to you, Klaus.

Thanks, Klaus. I'll finish quickly with the last page. Just to summarize what we said, this restructuring package is a bold step forward. It's there to amplify our self-help structural measures. It doesn't mean that the temporary measures in place will not be continued. The opposite is true. We will clearly keep going at that front as well. It is clearly there to adapt our structures to a prolonged market recovery in a sustainable manner. The short-term levels will remain in focus, but it's absolutely necessary to accelerate the structural change and the transformation, in particular here in Europe. We will increase our competitiveness parts of the program. It's clearly geared towards investment into future technology, be it hydrogen here in Herzogenaurach or robotics in Schweinfurt or E-Mobility in Bühl. And we know that this is another execution challenge. We think we have shown that we can deliver what we promise and when it comes to downsizing, and that's also what we will do here. The liquidity situation remains robust, and we look forward to our next conversations with you. November 10 is when we will release our 9 months' results. And I can already say that, at that juncture, we will also share with you the guidance for the year 2020. And November 18 will be our first joint Capital Markets Day, for Dr. Patzak and myself. And we'll use that opportunity also to share with you our multiyear targets and the necessary information that you need going forward. With that, I close my remarks and hand back to the operator and to you, Renata, for questions.

Thank you very much, Klaus.

[Operator Instructions] And our first question comes from the line of Henning Cosman of HSBC.

Thank you for clarifying that. There's no direct link between the approved capital and the restructuring. Can you just talk a bit about -- I mean I know today's call is about the restructuring itself, but can you just remind us about the capital allocation priorities then? Because it seems between the EUR 700 million of which most will be cash effective, and the EUR 100 million for the Jupiter program and EUR 300 million-plus dividend per year if you continue to pay at such a level, it appears that consumes most or all of the free cash flow over the next 2 years. So I imagine the potential proceeds would then just be left for deleveraging and M&A? And if you could just reconfirm that you still don't have anything on the radar for that. That's the first question, please. And the second question refers to one sentence in the press release where you said that the freed-up funds from the restructuring will be reallocated to innovation in Germany effectively. So I just wanted to understand what that means. Does that, to an extent, mean that not the full savings will drop through to the bottom line, but they will rather be reattributed to R&D costs otherwise? Or how we should think about that?

Thanks, Henning. I'll start with the last question, and I'll give you an example. I mean this restructuring program, as I said, is about consolidating the footprint. And consolidating the footprint, I used an example out of Schweinfurt. There's a plant that is 35 kilometers away that we will integrate into Schweinfurt. We will end up with a very decent plants and buildings and land that we will sell. The money that we will raise from the sale can then be reinvested into, for example, a hydrogen competence center here in Herzogenaurach. That's what's behind the idea that we are freeing up funds that we'll then use to invest into future technology. That's the logic. And please, for everybody, this is an announcement at the moment. It's a plan. In Germany -- and Klaus said it loud and clear. This is very much geared towards Germany. You have to enter into negotiations with Workers' Council and with the trade unions. That's what we're doing at the moment. We have good experience with them, and we are hopeful that we can finish this quickly. And then it will be necessary to see what are the concrete steps, when can they happen, when can we execute this. We want to execute this as fast as possible, and then we can give you more information about these types of things. But the tendency to say, this is not only just cutting and cutting and cutting, but it's about increasing competitiveness, also means that we need to invest into certain future technologies. And I gave you examples. In terms of capital allocation, yes, Klaus said it. I mean this program costs some money, and it will create some outflow of cash in the next years. He gave you a basic -- some parameters how that could look like. We are in planning phase at the moment. And you all know that we are a cash flow strong company. Klaus will put even more focus on this. And therefore, we'll see that we can finance these outflows primarily out of organic cash generation. And if there need be, we then would rather think about liquidity from elsewhere, but not about a capital increase. And is there anything else in the making, as you asked, again, you know our logic, we only talk about things when we're ready. And now we are just initiating a next restructuring step, that's the main focus. And you can be rest assured that we will have our hands full to get this now done and executed.

Our next question comes from the line of Sascha Gommel at Jefferies.

It's Sascha from Jefferies. My first question would be a bit more strategic. Given that you're now looking to authorize capital on the one side, and then it feels you separate the individual divisions a bit more, should we think about that also as a not a 1- or 2-year product, but a longer-term project that you could transform the Automotive business and separate it completely from Industrial? Or is the strategy Automotive and Industrial still on the cards?

Well, Sascha, thanks for the question. Again, we think that the current crisis situation is a good proof point that it makes a lot of sense to be an automotive and industrial supplier. And again, we said this on and on, and I'm happy to repeat it. In our case, we have technological synergies between the different divisions. Producing a bearing for auto is not very different than producing a bearing for industrial. Our core technologies like hardening and whatsoever all apply in a similar manner. So we have no intention to split the company and separate the business. Our intention is to streamline the company, to make it leaner, to see that we can optimize the overhead structures. And that doesn't mean that you can't have a joint core. In terms of managing the plants, and that's where the digitalization started, it has proven to be much more efficient if you allocate the plan one after the other to one division or one business unit. And that's what we have been doing. That doesn't mean that we're going to split the company.

Understood. The second question would be a bit on the cost cutting. So the EUR 250 million to EUR 300 million benefit, how much of that is kind of direct production versus corporate? And what needs to happen to reach the lower versus the higher end?

Klaus?

Yes. First of all, I think if you look at the full run rate savings, I would say that around about 75%, so would relate to the gross margin, right? And then the 1/4 to overhead. So -- and that gives you a hint also what is more kind of production related and more overhead related. So in the end, why do we have a range and not the precise numbers? What we basically give to you, and there's no other possibilities, we give to you what we have internally calculated. But on the other hand, this is an anticipation of a negotiation result, which we currently do not have. There is a negotiation process, which we hope that we can conclude pretty fast, until early next year. So what could be an impact? There are assumptions on how many people are leaving with a voluntary leave agreement? What is reduction in force? For example, how many people leave without specific restructuring money because there is kind of a network location that there could be early retirement topics. So that is all linked into this business plan with certain assumptions, and then you do a kind of scenario analysis. And then that gives you the range and how this -- how we did it.

I see. But that would mean, depending on the outcome of the negotiations, the EUR 700 million is also kind of a rough number and could change a little bit? Is that a fair assumption?

Yes. That -- yes, that's true. That could also change a bit, but I would not expect that we overshoot that number.

Our next question comes from the line of Gabriel Adler at Citi.

My first question is also on capital allocation, but more on how you now prioritize your use of cash in light of the program. So beyond the cash outlay for restructuring, what's the next priority for capital allocation, deleveraging, maintaining the dividend or investing for growth in E-Mobility?

Okay. Let me take that question. We have a dividend policy in place. And as we are progressing through this restructuring, I don't have any reason to believe that, that dividend policy needs to be adjusted. So we need to see how this plays out and how we deal with these one-offs. And let me also stress here, I mean, we have a long-term family shareholder that has always stood behind this company. There's no need to pull out cash from their angle. They've always left cash in the company. The dividend policy was there to find a fair split between the different constituencies, but we need to review that as the year is progressing. We are in a turbulent environment. And therefore, again, for the time being, the dividend policy remains in place. Our leverage situation with the 1.8x is, from my point of view, sound. You saw that cash flow generation in the first quarter -- in first half was negative, as usual. We indicated to you when we talked about the second quarter results that we're expecting for the full year a positive free cash flow, and there's no reason to deviate from that statement. And how that then all ties together remains to be seen. But first, clearly important to put the business into growth mode where necessary. So I would say growth where necessary, but still being very disciplined with the different situations. We are not going to grow in those areas where we need to protect margin. And then a good balance between dividend and repayment. The most important thing is that we look at the portfolio, and I'm very happy that Klaus is here and will drive that process.

And perhaps to add on that, obviously, what we will do is we look deeply into the portfolio. And then there are -- there is a clear kind of distinction already now between the areas which will have a growth trajectory going forward and need investment. Here, we have to kind of find out how fast scale leads to profit and what can we do, for example, modularization and things like that. And there are the other parts of the business which will be driven according to different KPIs, specific KPIs. And here CapEx will be brought down and R&D also, and it will be more focused on cash performance and profitability. So this kind of differentiation, I think, that will be -- will play a big role. And I would guess, but we have not discussed that, this is also something we will then discuss in more detail in the CMD.

Okay. My second question is on the divisional overhead reduction measures specifically. Given that you've had efficiency programs running across all the divisions for some time now, could you just give some specific examples of where you think additional efficiencies can be extracted from the division that weren't included in the original program?

I think you have to look at these divisional programs as something that is a continuous framework, reflecting that we are still in the company in a more divisional manner than in the past. And RACE, FIT and GRIP will continue. We have, as you know, from the full year results 2019, also allocated the impact from EBITDA on a divisional basis and the same will happen here. So they are basically the carrier of all these efficiency measures. And again, I mentioned examples during my little introduction. When you look at Industrial, the fact that Stefan consolidates 4 plants into 1 is clearly part of an efficiency program. The fact that we do something on the Aftermarket side in a similar manner also contributes to the success of what was called GRIP. And in RACE, we have the same example. So it's a continuous improvement step by step. I'm not a big believer into big banks. I rather believe into digestible, well-defined, well-dimensioned programs that can be executed in an appropriate time frame. And we have always said, and this is another proof, if there's need be for more, we'll do more.