Schaeffler AG (SHA0) Earnings Call Transcript

Dear 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 go ahead.

Thank you, operator. Dear investors, dear analysts, good afternoon. Welcome to the Schaeffler Group Fiscal Year 2020 Earnings Release. Without further ado, I leave the floor to Mr. Rosenfeld, CEO of Schaeffler Group. Klaus, the floor is yours.

Thank you, Renata. Ladies and gentlemen, welcome to our annual analyst and investor conference that we do as in the previous calls in a digital format. You all have the presentation in front of you that we shared with you this morning, I would immediately go to Page #4 where you have the overview with my 6 key messages and the key numbers that you have certainly already digested. The year 2020 was a challenging year. It was a test for the organization to show its intrinsic strength that we can also operate under adverse conditions and do the right things. And I think we have passed that test quite well. Sales are down minus 10.4%, with a strong fourth quarter recovery, 4.6%, driven by all regions. China, again, an outlier with 10.3% in Q4. Certainly something that helped us not only on the Automotive side but also on the Industrial side. Gross margin, and Klaus will all -- will give you all the detail, 23% and an EBIT margin on an adjusted basis, 6.4%, I think, tells you that this is not a normal automotive supplier, but the fact that we are more diversified throughout this year to print these numbers. The sequential development in Q4 points to even higher margin, but we all know that the swings in this -- during this crisis times are, to some extent, exceptional and should not be extrapolated. Automotive Technologies was the key driver for the strong margin print in Q4. And we can say also here that this first quarter looks like that we started into the year well. On a more strategic point, the order intake in Automotive Technologies was clearly below the year before, with EUR 10.2 billion. But we saw strong E-Mobility order intake of EUR 2.7 billion, exceeding our target of EUR 1.5 billion to EUR 2 billion. I think that's a positive message that shows that we are on track to gaining our fair share in this business. I can already say here the quality of the order intake is as strong as the momentum going forward. And we clearly see that the move into e-motors brings us a lot of positive recognition. It's not only gross that clearly played a role in what we did in 2020 and future growth, but the continued cost and capital discipline, functional costs. So what we are now using as a term for overhead, minus 12% year-on-year. Headcount reduced by 5%, now 83,300 end of -- compared to end of the year '19. If you see the numbers later on, that's nearly 9,200 jobs in 2 years, and that does not include the restructuring program we announced in September 2020 with another 4,400 jobs. Capital allocation and CapEx discipline was strong. You saw that we reduced the reinvestment rate significantly below 1. As we promised, all the measures that we started to implement in '18 and '19 start to pay off. And we will share with you later on how we see the year 2021 in that respect. Free cash flow was EUR 539 million in the middle of the range that we shared with you when we updated the guidance in November. So that's a good outcome. And clearly, a point to be explained later by Klaus, how that compares to the EUR 100 million guidance. I also want to emphasize here already at the beginning, we will propose to our Annual General Meeting a dividend for the non-common -- for the common nonvoting shares of EUR 0.25. That is a number that is in line with our overall payout strategy. You remember, 30% to 50% of net income adjusted for one-offs. And if you calculate that through, you end up exactly at this EUR 0.25 for the non-voting common. Last but not least, I don't have to mention how important sustainability gets, not only from a business opportunity point of view, but also from fulfilling the commitments and following the rules. We are quite proud to say that in 2 years, we improved our CDP rating from a D to an A-. That clearly shows progression. And we also know at the same time, how important it is to deliver when it comes to AU taxonomy or when it comes to Scope 3, there is a lot of work to be done. But the organization is 100% determined to make sustainability a top key topic going forward. It is part of what we call the Roadmap '25. That's our plan for the next 5 years that has been agreed and initiated end of last year, was the basis for our Capital Markets Day, and that is now in execution. So a remarkable challenging year. But also a year where we showed that we can cope with such an environment. Next page, please, you see the guidance here. I basically already mentioned the important points, and Klaus will talk later on about the details of outperformance. Automotive Technology, down LVP by 16%. While we made only 11.3% means there is good and solid outperformance in the Automotive Technology area, all the other points, I leave for you. Then the next page, #6, is just a reflection of what we shared with you during the Capital Markets Day on the 18th of November. The strategy stands, and the equity story has been updated. We are clearly committed to accelerate the portfolio shift in E-Mobility. In Aftermarket, we want to maintain a high-margin and open up the business for more third-party repair solutions. And as Stefan explained, further enhance profitability in our industrial business with profitable growth in the core business and entering attractive new growth fields in the industrial business. Well, you see 3 examples here, the 3 examples don't mean that there are others as well. They are just here to illustrate what I just said. I said it several times now also in the press. We believe that Schaeffler is more than its 3 divisions. We have no plans to split up the company. We rather believe in the synergistic benefit across the divisions. And we want to continue with operational discipline and relentlessly focus on free cash flow and execution. Number 7 is the famous page with the plus and minus, we see highlights and lowlights. I also think in the interest of time, I can cut this rather short. I've already mentioned the main important points. But let me stress again, we are pleased about the substantial performance improvement in H2, mainly in our Automotive Technology division and about the strong discipline. Clearly, we see that there is a way to go to until the crisis clears up. There are headwinds that has also then led to this more cautious guidance. As you saw, high volatility of the end markets and the supply situation speak for themselves. Let me go to Page #9, and also here to leave enough time for the detailed numbers. I would do this rather quickly. On Page 9, you have the highlights and lowlights from the Automotive division. You see the numbers here. I think what stands out is apart from the E-Mobility order intake, the 490 basis points outperformance in the fourth quarter across all regions. You see in the backup page, where you see all the details that is then giving you per region, the respective number, it's on Page 51 of the book that you have in front of you. And Greater China and the Americas have been the main drivers here as in the past. Let me go to E-Mobility because that's, for all of you, clearly, an important topic. And you see on Page #10, what I just said, EUR 2.7 billion order intake. It's above our target of EUR 1.5 billion to EUR 2 billion. You know that we have raised the target going forward at EUR 2 billion to EUR 3 billion. What drives this is a good understanding that we are well into a sustained market position in 3-in-1 systems, with major order intakes last year and good new orders being expected. The number of E-Mobility projects is rising 30% more in 2020 over '19 and an increasing number in 2021. The product portfolio has been expanded. And when I talk about new market segments, I'm referring to the heavy-duty area where electrification and also hybridization will come faster than expected in the last years. We see lots of requirements from that areas and have already won an important order in that respect. And what drives all of this is the e-motor competence where we are very shortly before starting mass production, also now a new plant in Hungary. Page 11 has a chronology here. I'm not going to go through all the details, but you see what I just outlined that there are some good order wins towards the end of the year. In half, a new 3-in-1 hybrid module with an integrated torque converter. It's a premier and European customer in the high-class segment. And then we have dealer nomination for an e-motor, is also a top win. But as you see from this time line, there were also good wins on the battery electric part with the 3-in-1 e-axle, and also nominations for other e-motor and key elements of electrified powertrains. Let me stress here the importance of thermal management. We have not made that a big point in the past, but we see that switching from ICE to E-Mobility and has -- that this product becomes more and more important. One last page on e-mobility, #12, that's the latest wins in the E-Mobility area where we're very proud of. It's a 3-in-1 integrated system with a micro torque converter, improved power density, where we are building on what we invented in the past. And this is probably the most sophisticated model that we have done before. It will be used also to demonstrate our modular strategy, not to reinvent at all the time, new things, but building on what we have done in the past. And that's more efficient and also more interesting from a capital deployment point of view. 13 is Aftermarket. Stable sales development in Q4, as you saw from the gross margin -- from the numbers here, the gross margin is more or less the same. EBIT, slightly down, but with 15.8%, clearly a strong margin, the volatility during the year is well-known to you. What I can say is we are quite proud that the initiatives that Michael put in place have paid off and helped us to also bring the business back in the second half. One of the key initiatives is on Page 14. The Aftermarket is a special business. It's not only an Aftermarket business with replacement products, but it becomes more and more a digital business. Digital competence is the key going forward if we want to win in this. During the pandemic, all digitalization aspects got a boost. And in the aftermarket, it is clearly a driver as well. We have started to implement a state-of-the art integrated ecosystem here, centered around a separate Schaeffler aftermarket cloud that serves as a one platform for online activities and customer services. Mobile apps play a role. What is key to us is its virtual online training. Those of you that have been in Berlin, some years ago and saw how rep expert works. You can imagine that this can make a good difference and a big difference compared to our competitors. Let me go to Page 15. That's Industrial. You all know the wind story, double-digit growth in the sector cluster was clearly a main driver. China at the forefront here. More than 30% growth in this area. It's difficult to repeat. However, we are optimistic on the wind sector. It continues to grow and will drive our business forward. At the same time, there are first signs of recovery after a negative growth environment in 2020 in 2-wheelers, in off-road and in particular, in industrial automation, that is an area where we see, apart from wind's great opportunities going forward also when it comes to synergistic potential with auto. OPTIME, our little condition monitoring service is very well accepted by the market, and we also launched it now in China. Still, the year 2020 was a year where the utilization of the plant was, let's call it, heterogeneous, with negative production cost impact. And going forward, we all know that there is work to be done to catch up with our main competitors in the bearing space, Timken and SKF. So what is very important in -- for Automotive -- for Industrial, excuse me, is that we get our restructuring and improvement program in execution. I can say already at this juncture, we are in good conversations with our workers' councils. We have announced, as you know, in September, it's now end of February, beginning of March. So more or less 6 months behind us. After the announcement, that's not unusual for German conditions. And I do believe that in the next weeks, we will close these negotiations and can start with the restructuring implementation. Order book, Page 16, recovers. It clearly points to some secular growth in wind, but also as the diversified portfolio provides for balanced growth opportunities. I already mentioned the areas. And I want to stress again the importance of industrial automation, in particular, when we want to make use of the more digitalization environment going forward. You see this on Page 17, a little deep dive here, signs of recovery. And robotics with this specific speed reducer transmission for cobot joints. That is a great opportunity for us. It's interesting to see if you see the order book for industrial automation with a 3-month perspective, minus 30% in January 2020 and now back to plus 3%. One bird doesn't make the summer, but we clearly see that this is going to develop positively in the future. And I already said, this is an area where we can demonstrate technological synergies that make sense to have both Automotive and Industrial under one roof. Page 18 is the one on the cost management. As I said before, 9,200 people down, nearly 10%. You see here the year end and also June saw a good progression. And you all should recognize that this is a function of the restructuring programs of the past. The ones that we announced in September are not part of this. It goes across the organization, but you also see from these numbers that the predominant part is outside Germany. So tackling that area. Now we see additional program is important. And I feel strongly that we are on a very good track to harvest what we planted. Transformation cost. Klaus will give you more detail on this. It was EUR 700 million announced. Clearly, doing a half a year negotiation, certain things changed, but the overall direction is clear. Now let me use this page also to put the restructuring a little bit into context. I mean, you all know that we booked the provisions more or less in 2020 and that the payout is now expected for '21 and the years to come. You see that in the backup when we come to what's expected for '21, that's the number. Somewhere between EUR 300 million and EUR 350 million. That also may help you, and Klaus will give more details to position the free cash flow guidance in the right manner. Just add this back, and you see that, that is a very simple calculation, EUR 100 million plus, let's say, EUR 350 million is EUR 450 million, and that's the number when you go back to years that we always had in terms of a historical free cash flow performance. So while the EUR 100 million as a figure may sound low, it is definitely not comparable with the EUR 539 million. In any case, you need to include and add back the restructuring payout for '21. Now let me go further to Page #19, capital allocation. I think I already mentioned the most important points. EUR 632 million CapEx leads to a CapEx ratio of 5%, 4.2% in the fourth quarter is clearly at the low end. But the reinvestment rate of 0.7% is what we indicated. And we see, as you also see in the backup that the number will rise, but we will manage this very carefully. The CapEx allocation also between the regions is important. And Automotive Technologies will have to demonstrate that we are investing in the right areas. The mature business is well invested. And the investment intensity in E-Mobility is, as you all know, lower than in the traditional business. What is key is the footprint going forward? And footprint is a continuous task for optimization. So I do believe that we can also, next year, very well operate with the EUR 800 million that is indicated. 20 is then my last page before I hand over to Klaus. On sustainability, I already said it. There's much more detail in our sustainability report. We are proud about the progress we made, but we equally accept that this is a big obligation for us. And that we need to deliver on the top goal, carbon-neutral production in 2030. We have added a new goal also to demonstrate that it's not only CO2, but also other areas, 20% reduction of freshwater supply is also key. And I can, once again, assure you that we want to be a good example for a company with a long-term view that takes this very serious and delivers on what is promised. With this, I hand over to Klaus for the financial results.

Yes. Thank you, Klaus. And we go directly to Page 22 on revenue. I think basically, main things have been already explained. Fourth quarter was a quarter where we have seen growth again, both nominal and also FX-adjusted nominal was 1.2%; FX adjusted, 4.6%. Klaus already mentioned, the strong contribution of China, actually, what you can see on the lower right-hand side is that there was growth in China, fixed adjusted, of 10.3%. Also for the full year, it was 8.7%, and that had to stabilize margins also in Q4, but also in the full year. Next page on gross profit, you see that we have delivered EUR 961 million in gross profit, which translates into a gross margin of 26.5%, 300 basis points up compared to the prior year quarter. You can see the bridge that -- obviously, volume helped, but helped -- the negative mix was quite low. That includes what I mentioned on the region. Production cost was the significant positive here with EUR 150 million benefit, and that is due to specifically the Automotive Technologies division, where we have a combination of a high operating leverage. And that means cost digression. We have in additional effective cost savings in the plants, and still a bit of short term work, while that has come down compared to the third quarter and more significant to the second quarter. And also what contributed to the margin is a significant inventory decline, that means sales from inventories and also still low material prices. Next page on the functional costs, that means R&D and SG&A. For the year, down 11.9%, that means basically in line with the nominal sales decrease of roughly 12%, also fourth quarter, down 7.4%. If you look at the different functions, you see that there has been now an increase in the selling area, both year-over-year, but also specifically compared to the third quarter. That is a reflection of the increase in revenue. And in addition, kind of over proportionally, we also have some kind of special freights in order to get the products out in time to our customers, a topic which will also resume in 2021. The administration expenses decreased. Obviously, that has something to do with lower personnel costs, but also a lower consulting or other kind of purchased costs for 2021. As mentioned also in the CMD, we will have the first impact from the preparation of the S/4HANA switchover. And that will then impact specifically here the admin line. Next page, on EBIT. We -- you see on the left side, the EBIT in the fourth quarter on an adjusted basis was EUR 418 million with an exceptional 11.5%. And on the lower right-hand side, you see that this increase basically -- exclusively comes from Automotive Technologies. Automotive Aftermarket was down a bit when it comes to that data. And the Industrial was also down a bit, but sequentially up because third quarter margin was at 7%. Now if we go to the next page, on Automotive Technologies, you see that E-Mobility, top line wise did quite good with 12.2% FX-adjusted growth. Also, the Transmission business, which is very -- also a good margin business for us, increased by 10.3%. Klaus also mentioned the outperformance, which was for the quarter, 4.9%, but also -- and you can see that on the lower left-hand side, outperformance for the full year was 4.5% and -- 4.5 percentage points and for 2019 in a similar range, and in both years driven from Americas and Greater China. On the right-hand side, the -- on the EBIT bridge, you see gross profit was the main driver of the EBIT improvement due to the tailwinds, as mentioned before. In Automotive Technologies, there were savings in R&D and in administrative expenses. And on the other hand, somewhat higher selling expenses, mainly driven from the higher logistic costs, which I mentioned earlier. On Automotive Aftermarket on the next page, you see the split of the 1.3% FX-adjusted growth, mainly driven from the Americas with close to 10% growth. Channel-wise, the main contributor was the -- from an absolute number point of view was the independent aftermarket, which is, of course, much larger than the OES channel. On the right-hand side, on the EBIT bridge, you see that the gross profit was down EUR 2 million, that includes a negative FX effect of EUR 14 million. Then the R&D expenses and administrative expenses, they were also down, including some FX effects. And then you see the selling expenses, which has increased by EUR 7 million, and that is exclusively due to the higher -- to the AKO spending, the logistic cost from our warehouse consolidation program, which had an expense in the fourth quarter of roughly EUR 8 million. The minus EUR 4 million on others is just a consequence of higher special items in the last fiscal year, in the fourth quarter. Next page, on industry, decline of minus 2.7% FX-adjusted. Again, with a -- despite a strong growth in Greater China, with 12% and in most of the sectors, in the meantime, in China are -- have been positive or have shown positive growth in China in the fiscal year. If you look at the overall worldwide numbers, as explained earlier, winter was growing for all the quarters. Then power transmission for -- in the second half and now, in the fourth quarter, that has been joined by off-road and 2-wheelers. On the EBIT side, you see that the gross profit declined somewhat and that is driven by volume and also from FX. And on the other hand, there have been also volume-related, but also structural savings in the selling area and also savings in the administrative area. And again, the minus EUR 12 million, you see in others, that is the consequence of higher -- special items in the fourth quarter 2019, which are reversed in that column. Next page on the net income and on the special items. If you look at the left-hand side, EBIT, as seen on one of the prior pages was EUR 418 million before special items. In the fourth quarter, we had special items of EUR 148 million. And that is a combination of round about EUR 95 million from the measures which we have communicated in September. Then an additional close to EUR 40 million for another restructuring, which we initiated in South Korea, which is also high cost for us. And also another round about EUR 20 million for legal matter. If you look at the -- so if we stay on the special items for the full year, you see that on the lower right-hand side, EUR 946 million, obviously, that includes also the goodwill impairment of the first quarter. And the yearly restructuring expenses have been EUR 680 million roughly. And then out of that, the big pieces have been EUR 580 million for the program which has communicated in September and the roughly EUR 40 million for South Korea I mentioned earlier. On the financial side, on the left side in the bridge, the EUR 72 million includes roughly EUR 40 million for the refinancing exercise. And thereof, the big portion is the realization of the early redemption option of the high-yield bond. And the income taxes basically are driven from current income taxes, negative ones mainly from U.S. and China, compensated by some deferred taxes to -- in an area of -- in a smaller double-digit number. Next page on -- again, on the profitability here. It's not a lot to add. The adjusted net income was EUR 325 million for the full year. That has been the basis for the proposed dividend and the respective fourth quarter numbers at EUR 209 million, and also up from the prior year quarter. Cash flow on Page 31 was strong with EUR 355 million for the quarter and even up compared to the prior year quarter. And that is basically also driven the EUR 355 million from a release of working capital, a reduction of net working capital, specifically on the inventory side to a level, which is also now too low in order to secure our delivery capabilities that will now reverse going forward. For the full year, free cash flow was EUR 539 million, up EUR 66 million compared to the prior year. Now on my last slide, on net debt, there has been a improvement in the second quarter or the downward, there has been a peak in net debt and leverage in the second quarter and then an improvement in the third quarter. And also in the fourth quarter, we now are EBITDA leverage ratio of 1.3 already in the range of our midterm kind of normal targeted, but in the mid-range of our corridor, which we have explained. And you see also that the -- on the right-hand side, that we have no major kind of maturities, which are not prefunded until March 2024. And the liquidity situation is strong with EUR 1.758 billion in cash and cash equivalents and an available liquidity of 28% of sales. And with that, Klaus, I'll hand it back to you.

Thank you very much, Klaus. Let me finish our presentation with the last 3 pages. And we have -- given the environment that we are experiencing, extended a little bit on our outlook going forward. That's on Page 34. I think the most important part of this trip, as shown is, on the left-hand side, you see what we assume for light vehicle production growth in 2021. We all know that the February IHS figures give us an estimate of 84.6. And we have discounted this number to come to a solid base by 5 million cars. That equals then 7% year-on-year market growth. That's, at the moment, our baseline. And clearly, this is a cautious estimate due to the remaining corona crisis uncertainties, the risks of supply chain disruptions, but also the global volatility that we all experience. So that's our baseline. Then in Automotive Aftermarket and Industrial, you can't use such a figure. We have -- as you saw from the midterm targets, used proxies here. One is the GDP number. And one is the industrial production number by way of a basket that is relevant then for us. And that has given us then the basis for Automotive Aftermarket and Industrial. Also here, I think we are well advised to be rather on the cautious side, and we have used a midpoint, as you see on the next Page 35, for the 2 divisions. The key numbers have been absorbed above 7% growth. Sales growth is a function of the number for auto technologies with an outperformance assumption of 200 to 500 basis points, in sync with the midterm targets, 5% to 7% for Automotive Aftermarket and 4% to 6% for Industrial gives you the above 7%. On the margin side, we have decided to give you floors. These floors are absolutely there to be defended, whatever it takes, 4.5%, 11.5% and 8.5%. We all know that we can do more, and we will do our best to overachieve that, that at the moment, then altogether, leads to a margin range for the year of 6% to 8%. And free cash flow has already been mentioned, is around EUR 100 million. So that's the guidance. Let me stress again, it's based on cautious market assumptions, but we are confident that we can overachieve these floors. Last page with the summary, I'm not going to repeat everything that we said before. But let me stress again our performance orientation is clearly 100% committed. We saw that the organization is able to absorb environments like the one we saw in 2020. The intrinsic strength of the company is its management team and the ability to manage through something like this with a clear contingency -- sorry, with a clear ability to manage contingency on the one hand. And on the other hand, setting the course for the future, we will remain focused on execution. We know that a reliable track record counts, in particular in these days, and there is clearly value to be unlocked if we stay the course. And if we focus on solid operating performance and cash generation. The Roadmap '25 is a framework for this. And we will demonstrate to you that we will be able to leverage synergies between the Automotive and Industrial divisions going forward in all these areas like clean mobility or clean energy. This is the way to go. And we now come to an end and look forward to your questions.

[Operator Instructions] The first question is coming from Akshat Kacker from JPMorgan.

Akshat from JPMorgan. Two from my side, please. The first one on your free cash flow guidance and the low conversion ratio on EBIT of close to 10%. So when I look at the details on your slides, you have a lower reinvestment rate of around EUR 200 million, the delta between CapEx and D&A. And I understand that there are restructuring cash outflows of EUR 315 million but that still leaves me close to EUR 500 million in free cash flow without any working capital outflows. So I'm just trying to understand how you're thinking about the EUR 100 million guidance in some more detail. That's the first one. And the second one is on E-Mobility and Automotive gross margin. E-Mobility sales were somewhat lower year-on-year in FY 2020, despite a close to 45% growth in electrified sales volumes across your key markets. Can you just shed some more light on that division? And if you have any sales target for us for the E-Mobility division in 2021 and 2022, like you used to give in 2019. And the last linked question to that is gross margin. And as you start delivering these higher E-Mobility orders in 2021, 2022, should we expect any significant start-up costs or margin dilution?

Klaus, would you do the first one?

Of course, yes. On the free cash flow side, but I would look at that is -- and you also started, I think, on the -- with the EUR 539 million free cash flow, which we have delivered in the last fiscal year, right? So obviously, we expect that we have an increase in top line, and you saw the guidance of above 7%. But please consider that there is a negative impact. So from FX, that means the overall top line will be -- growth will be somewhat slower. But whatever it is, in the end, it will be a significant figure. And then if you basically want to come from this additional top line, then you -- we -- I would then start to use a drop-through rate of around about 30% to 35%, which brings you to the EBIT. And then in the CMD, we guided for a free cash flow conversion of 0.3 to 0.5. And please keep in mind that free cash flow for us is after tax amount, right? So that gives you, obviously, as a starting point, an additional free cash flow. But then I hinted on the topic of working capital, and we have a -- specifically on the inventory side, we have a very low starting point, and there needs to be some kind of refilling there, which I would say should be round about EUR 100 million on top of what is already kind of calculated within this free cash flow conversion ratio. And then there is -- then I would assume, and so you have also the numbers in the deck that there is higher restructuring cash out than what we had in 2020. There will be a number of EUR 150 million to EUR 200 million. And then there is a CapEx increase of, I would say, EUR 170 million to EUR 200 million. So -- and if you calculate that, then you come close to the round about EUR 100 million. So to sum that up, on the one hand, obviously, there is a drop-through on the -- aftertax reported free cash flow. But on the other hand, there are negative impacts from a inventory normalization, higher CapEx, still below the previous numbers from '18 and '19. And then there is this higher restructuring cash out. And with that, I would give it to you, Klaus, on the E-Mobility top line. Or should I say something about on the automotive tech cost side as well?

If you want to understand on the gross margin.

On the gross margin -- right, indeed, in the Automotive Technology side, there is an ongoing dilution from the growth -- in profitability from the E-Mobility business, right? That is there. We have basically included that in our midterm targets already. And also, that -- obviously, that is included also in our guidance for this year. So it's nothing special to be expected there. There will be sequential progress on the -- on E-Mobility and the traditional business, specifically with the increasing volume will be able to kind of compensate for that. And therefore, we said that the EBIT margin of overall Automotive Technology will increase compared to what we had in 2020. Well -- and I think on your first question -- on the second part of your question, I'm not 100% sure whether I understood correctly what you are referring to. I think the gross margin was answered, but can you repeat the second part of your question in terms of -- I think it was gross, but I didn't get it 100% here.

Sure. Yes, I was talking about the E-Mobility revenues growth in 2020. So overall, sales were flattish despite market volume -- the key markets being up 45%. I'm just asking if you have -- going forward, if you have a sales target for us for the division in 2021 or 2022.

Again, we have not given any targets for E-Mobility growth as part of the midterm targets. You always have to understand this E-Mobility composition is not only e-access and hybrid. There are some also existing products in that. I think the latest what I can refer to is we said sometime in the past that the CAGR in this business can be somewhere around 15%. That was a UBS event, if I'm not mistaken, sometime September. But again, there's no growth target as an absolute number for the E-Mobility thing. What we're giving you is the outperform -- sorry, the target for order intake, and that has been increased. So that's what I can say at the moment here.

If I can follow-up on gross margin question. Just one follow-up. Klaus, you mentioned that traditional business with increasing volumes will be able to compensate the margin dilution from the E-Mobility business. How confident are you on that front that we won't see more margin pressure on the traditional business lines, engine and transmission?

Maybe I can say 1 sentence and then Klaus can add from the numbers side. I mean, we are seeing, at the moment, an interesting situation. All the OEMs are articulating their electrification strategies going forward. And more or less everyone says, he wants to re-do the product portfolio and everything becomes electric, whether it's full electric or hybrid included. At the same time, we're seeing a situation, short-term, where people are buying cars, and there are not enough battery electric cars available. So that gives us an interesting situation because they come to us and also ordering in some areas even more than we expected for traditional cars. And that gives us, to some extent, also an edge because I'm not saying that our pricing power will completely reverse, but there is a situation where we can also argue with customers and say, on the one hand, you want us to transform to E-Mobility. On the other hand, you want us to keep the capacity open for all the traditional stuff, and that comes at a price. So the situation slightly changes with OEMs becoming so articulated on their electrification strategies. And we have always said, last, in the Capital Markets Day, that our mature business, or we call it our foundation business. It's not just a run-off business. It has a lot of technological things that we can use for E-Mobility as well. And it's definitely something that we will harvest. So we are -- and Matthias and his team is focused on the one hand, growing the E-Mobility at good gross margins. On the other hand, to harvest and use the cash that sits in the existing business as wisely as possible.

The next question is coming from Gabriel Adler from Citigroup.

Gabriel from Citi. 2 questions from me, please. The first is on the market outlook and your assumption of plus 7%, which I understand the rationale for being cautious here. But my question is more whether there's anything that you're seeing maybe in the current trading in February? Or with regards to conversations you're having with customers around perhaps shutdowns relating to chip shortages. Just forming your view here. Or is it just a prudent and cautious take on an outlook that is clearly volatile and uncertain, look at the shortages and the strength of recovery? And then my second question is on the Industrial margin. Can you just help us understand what really is holding back a recovery in the Industrial margin in 2021 because revenues are growing, the order book is recovering, headcount's pooling and then you're guiding to a margin flow of 8.5%, which is only modestly better than what you achieved this year. And because it's some way off the 12% to 14% target you set out at the CMD. So any color you can provide about whether you're not expecting a stronger margin recovery in industrial in '21 will also be helpful.

So let me start with the first one. And I think you all will agree that we are at the -- hopefully, at the end of an unexpected and unprecedented crisis where no one of us has a crystal ball and can say how this unfolds. We think it's starting to clear up, but we're now seeing this chip shortage that has only indirectly to do with the crisis, that is something where Schaeffler is such is not that impacted compared to others, but it will impact demand going forward. We don't know how much and how strong that will be. We also see the uncertainties from other elements in the supply chain. And therefore, I think it's more than prudent not to go with an overly optimistic perspective now into the new year. Yes, we see that at the moment, there is a positive development in January and February, but the year is not over. Growth rate is as such, it have to be looked against the deep dives in the second quarter 2020, for sure. But again, I can only say at the moment, from our point of view, it's prudent to be rather on the cautious side. We have explained to you the logic with this discount. Others have done something similar. And I think that's the right way to start and to see how we move forward. As I said, this is about agility. It's about having the right information available and draw the right conclusions where necessary. I can say for us, as a management team, we are optimistic for the year. We are not saying that this will be another chaotic year like 2020, but it's better to be careful than overly optimistic.

Yes. On the -- on your question on Industrial and the margin. So first of all, I think that we have to just be clear that we do not expect the same overall top line compared to like in 2019. So there was a decline in 2020 of minus 9%. But remember that FX-adjusted, and we also guided for growth in line with the industrial market, but also here, we expect a negative FX impact. That means there will be -- there might be a difference of, whatever, EUR 300 million, EUR 400 million in top line versus 2019. So first topic. Second topic. I think also, we made it always clear that in the end, there needs to be structural improvement. Specifically also in Germany on the production side because there is a very large production base in Germany. We have addressed that with the measures, which have been communicated in September. And at that point in time, we already said that the payback from these measures will not be effective in 2021. They will start to be effective in 2022. And then basically, in 2023, we said we will have around about 90% of the savings, which we have -- which we expect from the whole program. And therefore, it's basically a combination of working on the structures and improvements will come there. And then it will also take time in the industrial space until the pre-crisis level will be reached.

Maybe I add one sentence. You see the gap from today to the 12% to 14% in 2025, that's the journey that we have in front of us. And when you think about the measures that we implemented, then they will significantly contribute to that journey, but not in '21, as Klaus said. It's a progression. And therefore, it's for us, of utmost importance that we get these negotiations, our workers' council settled. They are on a good way. We have, as you know, goods and courier relationships with them. And I think that this will pave the way for this execution path.

The next question is coming in from Sascha Gommel from Jefferies.

Unfortunately, I have a follow-up on the guidance as well, just that I understand correctly. If we assume kind of the low end of your top line guidance for each of the division, and that's when you think you will reach the stated margin kind of the bottom end. Is that the correct reading of the guidance?

That is -- no, say it again, please, Sascha. I don't want to say something wrong.

Yes. No. So for Industrial and Aftermarket, you gave a range. And then similarly, for Automotive in the sense, if you assume 7% market and 200 basis points of outperformance. That's when we should assume kind of 4.5%, 11.5% and 8.5%?

Correct.

Okay. Perfect. And then my question, a bit of a follow-up as well. I mean, if I assume Aftermarket or Industrial, at the low end, it would basically imply that EBIT is unchanged for Industrial despite higher top line, even at the lower end. And for Aftermarket, it's down EUR 40 million or so, which basically also means if the AKO headwind falls completely through and there's no offset from your incremental top line, just trying to understand why this is the case, given you have so much restructuring in place.

Yes. Let me first come back to your starting question. I think principally that's true. The -- our guidance of above 7% top line, that is based on the conservative market view on Automotive Technology. Some outperformance in the range we gave, which is then -- but also not more on the lower side and then also considering a conservative market view on Industrial and Automotive Aftermarket. So that, I can confirm. So then the other topic I understood as a question, but is on the Automotive Aftermarket, specifically, why we are improving, not -- why are we declining in margins so strongly? And indeed, there are positive volume effects on the gross margin, but they are more than compensated by mainly 3 factors. First topic is higher production costs, including higher production costs, mainly from our internal supply from Automotive Technology. And the second one is that we will have in the -- as communicated earlier in -- for the AKO, we will have an impact, which is in the range of EUR 32 million in 2021. That is significantly more than what we have in the year 2020. Here, I can give you a number of roughly EUR 12 million. The majority of that was in the fourth quarter. So if you take this logistic topic, together with further investments in digitalization, as mentioned and explained from Klaus, that is good for roughly 2 percentage points. So roughly 2 percentage points for higher production costs or costs for goods, 2 percentage points for AKO and digitalization. And then we also plan with another negative FX effect, which might be in the range of 1.5% for Automotive Aftermarket. And together with -- if you take it together, that explains you the drop in profitability. Keep also in mind, the 11.5 percentage we put as a guidance, that is a floor again, right? For example, that also considers that there is potentially a faster increase in revenue on the Automotive Technology side, which would, in the end, potentially limit the growth in the Automotive Aftermarket business because they would then not have enough goods to ship. So it's really something which, again, as Klaus Rosenfeld said, this is what we think would even be defendable in such a scenario.

Perfect. That's very clear. My second question would be on the EV order intake, which obviously came with quite a bit of momentum. I was just wondering if you can just logically speak about the -- do you think kind of that pace of order intake is enough midterm to offset kind of some ramp down in your legacy portfolio? Or do you think kind of mid-decade, you really need to step up and kind of go above the EUR 3 billion level in order to offset your -- some of your legacy products that might fade down a bit faster than initially expected?

Well, that's actually a good question. But for the time being, the range has been increased to 2% to 3%, not because of any offset ideas, but simply because the number of requests increasing the number of projects we are running is increasing. And we need to just be clear that we want to be selective in our approach. And we want to be modular in leveraging what we have done in the past. So this is not just getting on board whatever we want and whatever may look interesting, it's a selective approach to build a portfolio in those areas where we can make a difference. And it's not only quantity, it's quality of the order intake, and it's the ability to leverage the core competencies across the spectrum.

Understood. My last one is kind of a related question. If we listen to the OEM presentations over the last 6 months or so, everyone is talking about in-sourcing more of the EV powertrain in different areas. But overall, the tone is more towards in-sourcing. How are your discussions in that sense? Do you feel the OEMs go more to like a component relationship that they want more components and less systems? Or is that a misperception? And you still kind of have a lot of systems that go into the OEMs on the EV side?

No, that's actually is a fair question. And I would be foolish to say that this is not a critical issue. We have seen large projects that we wanted to win that went away and were done in-house. It's a relevant point that we need to deal with. The answer to this is from our point of view, that you need to be good with the 3 in 1s, and we see more system-like offering, but also be able to offer the components because certain components are difficult to do in house. And if you then think about the margin profile, if there are parts, and it could even be an e-motor. There are companies that said we want to do, with Schaeffler, the e-motor because they can do it better than we can. And don't forget, an e-motor, a rotor and a stator is nothing else than high-precision metal sheet forming and packaging, and that requires investment, if someone wants to do this in a high-efficient manner. So the answer is not black and white. There is this extra competition from the OEMs themselves. It doesn't sort of allow us to do anything, but it's something that we need to take serious. And our answer is, again, a modular approach, but also approach that does not neglect a component into something bigger. And so far, that has gone well. I think the best proof is here, this e-motor strategy, where a very prominent OEM where I can't mention the name, already a year ago, gave us this large order and said we want you to build that for us. And when I look at the number of projects that we are dealing with at the moment, then this becomes a theme going forward. I also mentioned that this morning in the press, there are products that we have built a certain competence for in the ICE space that will be used much more in the battery electric area. Thermal management is a good example. I think some of the analyst studies already talked about this. So there's spillover effect that you also use. And so it's still a race for sure, but we are in a much better position than we have been 2 years ago.

The next question is coming from Victoria Greer from Morgan Stanley.

The first thing I wanted to ask was around relationships with all of the various start-ups that we're seeing in the EV space. Could you talk about what is your conversation like with them, both in terms of E-Mobility products, but also elsewhere in auto OEM? And then just a couple of housekeeping ones, please, on the -- your expectations for the net interest cost and the tax rate for 2021.

Okay. The startup question is an interesting one. There are all sorts of start-up experience from the past. And we have -- I think the -- if I may call this a start-up, at least some years ago, it was a start-up. The only one that has really made it so far is Tesla. And Tesla is a very specific approach to things, you know this better than I do. All the other ones from the past have not really succeeded. I'm not saying that this is -- will be the case going forward. That would be wrong. We are approached by -- always by these companies. And in particular, when it comes to the luxury space, where the profit pool is larger than in the low end of the spectrum. And we always sort of like to talk to new companies, understand what they want. But for us, we build our business around the idea that scale matters. So it becomes then a discussion about where can we add value. And where does it make sense to design something that is completely new, in particular, if you want to leverage that experience. There is a whole range of newcomers in China. Our Chinese organization is engaged with most of them. But again, you have to be selective in saying, where do you really want to talk and where do you really want to put money at work. So again, it's a selective approach while looking carefully, there are no miracles. What we are seeing at the moment from Tesla in China is an aggressive approach, quite impressive, but they're obviously putting their price strategy at work with their great reputation to build inroads into the E-Mobility space there with raising the bars also for service. So that's quite interesting to follow. But again, on the more unknown companies we talked, but we are selective in terms of putting real money at work.

Yes. That's really interesting. And actually, I wanted to also pick up on -- before the more boring questions. To your point about scale, in E-Mobility, are there a lot more components in your E-Mobility product portfolio where they're much more standardized basically than you would have for ICE? Is that something also that you think about in product development and in how you sign contracts?