Schaeffler AG (SHA0) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Schaeffler Group Q3 and 9-month 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Renata Casaro, Head of IR. Please go ahead.

Thank you very much, operator. Dear investors, dear analysts, good morning from Berlin. Today, for the Q3 release of Schaeffler Group, here in Berlin are President, Mr. Klaus Rosenfeld, CEO of Schaeffler Group; Mr. Claus Bauer, CFO of Schaeffler Group, together with the IR team. But without further approve, let's start the call. Klaus, the floor is yours.

Thank you, Renata. Ladies and gentlemen, welcome to our Q3 conference call that I will do for the first time together with our new CFO, Claus Bauer. As you just heard, there are many Klaus'. The CEO and CFO is pretty close, as it should be. So the real distinction is my name starts with a K and his name starts with a C. So Claus with C, would you like to quickly introduce yourself to this round.

Yes. Thank you, Claus. Also welcome from my side. You already stole my entrance here. The most important message on the first slide is that I am written with a C. I guess, in the 60s, there was a lot of Claus' in Germany. And -- but again, my distinction is with a C. I'm very happy to be sitting here with you, Klaus at my first call. Let me introduce myself a little bit. I think you already read it in press releases before or on this slide. I started my professional life in tax consulting and public accounting before I came to Schaeffler in 1998. I started there to create a new tax department and tax function. And afterwards, headed the corporate accounting function, which was also implemented newly at that time, especially to implement the first international accounting for the consolidated group financials. At that time, IFRS was not as developed. So at that time, it was the U.S. GAAP. Since 2002, then I took over as a regional CFO, first, for North America, and then later for North and South America when the 2 regions were merged. After 19 years of doing that, I now finally returned home. As you'll hear with my accent, I'm born and raised in Bavaria, where our headquarters is. So there is still after 19 years, I was told some Franconia accent, but I hope you still understand my English. As I said, I'm very happy to be sitting here, and I'm excited to participate in this first call.

Okay. Thank you, Claus. I think you will have over the years enough time to also meet investors personally and show your face and your strengths. Let me take over now in the usual sequence. I'll start with the overview. I will then talk about the business development and then hand over back to you on the financials. On Page 5, you have the key messages for today. I think we can say as Schaeffler Group, a solid Q3 2021 in a challenging environment, in particular in the automotive technology business. Here, we clearly were impacted also by the market disruptions. On the other hand, you can clearly see from the numbers, strong growth in automotive aftermarket and double-digit growth in Industrial. As a general statement also here upfront, I think there is no better quarter than this one to demonstrate to the market and to the investors and analysts how much sense it makes to have Automotive Technologies and Industrial together as they both complement each other and as diversification in such an environment really can pay off. As you also see in the margin, Q3 EBIT margin, 8.2%. We did quite a bit to protect our margin effectively in Automotive Technologies despite the lower volumes and had good margin progression in Automotive Aftermarket. And Industrial, and here, again, I would like to praise the performance of the Industrial division. Stefan and his team have done since quarters, since -- I can say since years, the right things to bring this division back on track. 12.4% margin in Q3, I think, speaks for itself. We are already at the low end of our midterm guidance here, and that's clearly a success story. Free cash flow in Q3, EUR 225 million. If you go through the details, we are still seeing that CapEx on average is lower than in previous years, but it has increased in Q3. And we have, and I would like to put emphasis on the world tactically, build some inventories because we are convinced that at some point in time, the disruption, in particular, in the Automotive Technologies side will go away. And then it's good to have invested a little bit into capital for inventories and for delivery performance. The 9 months return on capital employed peak clearly at strong 18%. We are benefiting here from the strong first half, and we know that this will over time then normalize. But I can assure you again that capital management is top on our list, and we want to be very proactive here and manage our capital, but also our cost widely and pay attention to the high need for flexibility. Side #5 and #6 are more forward-looking. And let me first comment on 5. You all remember that our colleague, Matthias Zink, introduced some quarters ago, the concept of mature and new to demonstrate our approach towards E-Mobility and how we cope with that transformation. And I'm now happy to share with you the next step in further sharpening that model and boosting our execution, and that is a second view, where we differentiate our Automotive Technologies business into powertrain specific and powertrain agnostic business. Nothing for the day, but an important step forward to give you also more insight how our transformation is going and how we are coping with the challenges in these different 4 areas. Last but not least, we have already shared with you this morning through our press and IR release that we confirmed our guidance for margin and FCF. The Automotive Technologies' outperformance guidance is also unchanged, good third quarter with above 6%, and we even raised the top line for Industrial. However, the market assumptions for Automotive Technologies have changed, and that clearly means that we will not make the above 11%. That is also shown then later in the charts. All in all, as I said, a solid Q3, demonstrating our strength in particular when it comes to execution. Page 6, highlights and lowlights. I will do that quickly. I mentioned the outperformance in the 9 months, 660 basis points; in Q3, 750 bps. Again, it's a quarter-to-quarter, but the trend is in our favor, and we can show that in all the regions we have in Automotive Technologies, we have been outperforming on the top line despite weaker markets. In Automotive Aftermarket, also good sales development, increasing demand from individual mobility solutions. Industrial, I already said the most important things. We are -- and our growth, in particular, is driven by this brisk economic recovery. We see a broader growth across the sectors. And interestingly enough Wind at the moment is not growing in that quarter and where we still has to catch up. The Automotive, Industrial ecosystem and equation I mentioned before, and you all know strong free cash flow is what we stand for. On the low lights from my CEO perspective, yes, we are still suffering from the semiconductor shortage in Q3 more than in the previous quarters, and that is also a phenomenon that comes across all regions. This semiconductor is just 1 element of general market headwinds that we're dealing with. It's clearly the uncertainty around COVID, the supply chain situation also in other components and semiconductors and the low visibility that situation is persisting, and it requires clearly our full attention. And on top of this, a topic that we will clearly discuss also in your Q&A session, we see increasing cost of raw materials, energy and transportation, as all our competitors do. The question is how does it impact our P&L. And here, we have always indicated that that comes with a time lag. So H2 sees already some impact. Claus will explain that in detail. And this will also -- that's our expectation at the moment, also impacts 2022. Now let me go to Page 8. Here, you have a little bit more on Automotive. And again, I said most of the things. So really keep that slide short in the interest of time. Just to mention the highlights, in the 9 months, 16% growth, very much a function of the first half of the year in the third quarter, minus 12%. The margin stands at 7.4% for the 9-month period and 4.6% for this quarter. That is a good result compared to the strong headwinds we had experienced. On Page 9, you see some of the achievements and why we are confident that we are well positioned to win. Some of you were participating at the IIA, a very successful event. We have opened meanwhile, our new state-of-the-art sustainable E-Mobility plant won the PACE Award for our E-Mobility offerings, and also pursuing on Chassis Mechatronics side, the partnership with Mobileye, clearly a long shot, but autonomous driving and everything that comes with that. Will be an important topic for the next years to come. Aftermarket, very quickly on Page 10, not so much to report. We saw also here in the third quarter, good growth, was 8.7%. Margins slightly down. Don't forget in Q3 2020, there were extraordinary items. So the high comps here should not deviate from the fact that 14.3% or 14.6% is well within the range that we think is a sustainable number for this year. Also here, good progress in terms of our offerings. We are showing you on Page 11 the REPXPERT Remote Support offering. Our continuous efforts to make our services more digital, it pays off. And that is clearly an area where we also think that there is significant growth potential. Industrial, Page #12. You also here saw the numbers already, 9 months 12.1%, 12.4% EBIT margin in Q3, from my point of view, really speaks for itself. Stefan and his team doing a great job here in harvesting all the efforts from the past. There is clearly more to come here because the space program that is now, except for 1 location, Automotive, ready to go, will also roll in. On the other hand, clearly, the headwinds going forward on the steel side, and Claus will also explain what that means in terms of pricing. Here, I would like to mention on Page 3, a business success that we're really proud of because it, on the one hand, shows our strength in Rail, and on the other hand, is a proof point for our commitment to become a player, in particular, when it comes to key sustainability aspects. Here, we have won an award in the category, Climate Change and Circular Economy, the prestigious Railway Supplier Award. And we have used, in particular, the circular economy aspect here to present a offering, a product that is not only reducing CO2, but also allows for a 100% return service, something that we think is not only attractive to customers, but clearly, a step ahead compared to our competitors. Now if you go to 14, back to capital allocation, you see the key numbers here. One of the concerns in the first half was, why is CapEx so low? You see that the CapEx ratio has increased to 6.4%. As we indicated, for the full year, it's still subdued with 4.7%. We think it will continue to increase. But again, 6% this year is probably not achievable. What we are clearly committed to is to steer our CapEx in a differentiated manner by looking at the reinvestment rate by the different categories. Industrial, as Industrial has earned its right to grow, we'll clearly benefit from a higher reinvestment rate in Auto. We will look at the growth areas and clearly spend what needs to be spent on E-Mobility. But in the other areas, we will consistently steer the reinvestment rate below 1, and make sure that the capital is invested. Why so? You'll also see that by regions, and it's one of my key topics to make sure that that capital allocation works. Let me say one word on the dividend. Yes, we are not here today to comment on the final dividend. That's a decision that others have to take. But I think it's fair to emphasize that we are clearly pulling our dividend payout policy with a 30% to 50%. Net income is back on-track, and we all appreciate and know how important dividend for some of you is. It's also something that we will then consider in our decision-making towards the end of the year. And I can say here that we will definitely come with a higher dividend per share than in the last year, certainly a element that we will consider also when it comes to dividend continuity. Now let me quickly go through the 3 strategic issues that I want to mention before I hand over to Claus. First one is a little more insight on this portfolio management aspect. The new logic with the second new powertrain agnostic and powertrain specific that Matthias has designed with us. You remember mature new, where we said engine transmission on the one hand and E-Mobility on the other hand. Now we have to take it one step further and said, one of the core elements in our mature business, that is powertrain agnostic, is our bearing business. And the bearing business is clearly a core business. You see it on the lower left-hand side that is mature because we're doing it for many, many years. But it's also powertrain agnostic, because you need bearings in cars that are driven by combustion engines and you need bearings in cars or in engines that are electrified. And therefore, this business is something that we want to separate in a sense that we put more focus on how can we combine all our know-how, our technologies in the bearing side and from there, consider how to best improve our products, be it for this type of powertrain solution or the other type of powertrain solution. There is clearly growth potential in this. These may not be the most expensive products, but these are the ones where we have expertise that others don't have. And that's why we think that should be a separate business. It should be driven and managed by a person who is very experienced and should not be commingled with the other areas. This having said, we will then do a similar thing on the Chassis System side. So far, our Chassis System. our Chassis business was chassis bearings and systems. And now the bearings will move into the mature powertrain agnostic box, while the Chassis Systems business will be a very new business. It's more mechatronic than the mechanical business, something where we clearly need to grow and also need to invest further to build a proper book of business. We are making good steps here. And I think those of you that participated in the IIA saw that. And if I then look at the powertrain specific parts, this separation gives us an even better view on how to dovetail our offering towards the mature businesses, in particular, ICE versus the new business, where we would have best enhanced. That's the logic. And it clearly helps us if we implement this, this will happen effective 1st of January 2022 onwards to differentiate our steering of resources of allocating capital wisely and also going for the different growth buckets in these areas. And I hope that you will support this. It is a next step to manage the transformation and further gain traction. Second point is synergies. Here, I want to mention one example. The e-motor is clearly something that has a broader application than just cars. Off-road is very important. We have large off-road customers. And the idea of cross-fertilization between Automotive and Industrial clearly comes from combining our product know-how with the customer access. In off-road, we have a sector that is an industrial sector. Stefan has the customer interface and Matthias has the product know-how. And if you combine this wisely, if we make sure that the leverage -- the product know-how we have can be leveraged also towards the Industrial customers, then that can make a big difference. And this example from a customer that I cannot mention here is one of the encouraging examples that there is more synergies to be harvested if the divisions work closely together. Then to Page #17, combine all divisions and all functions and regions is our efforts to become a sustainable company. You saw this end of October, we have, for the first time, outlined and published our long-term sustainability targets. The headline here is we want to be a climate neutral company by 2040. And as this is clearly something that requires a plan, we have articulated this against 4 major milestones, looking at the different scopes. And the key logic here is by 2030, we want to be basically in Scope 1 and 2, or our own production climate neutral. You see minus 90% with an asterisk, and that means we are realistic here and say some of this needs to come from compensation. The bulk needs to come from actual measures to avoid CO2. And then the second element of the chart means, by 2040 we want to be climate neutral when it comes to our own supply chain. And here, the same logic applies, minus 90% and some compensation. The Scope 3 upstream, ladies and gentlemen, for us, is a challenge because you all know steel is important for our business. It's the main material that we source. And here, I can say we announced this morning a significant offtake agreement with the well-known Swedish start-up H2greensteel. And from 2025 onwards, Schaeffler will have the ability to source 100,000 tonnes of green steel, what is a significant part of our overall sourcing volume from that H2greensteel startup. That is 1 of the proof points that sustainability for us is clearly a top priority. And with this, I would like to hand over to you, Claus, for the financial results in more detail.

Yes. Thank you. Thank you, Klaus. Let's right jump in into some detail of what we already heard in the highlights section. As you heard, Q3 sales decreased from exchange adjusted by 3%. That has 2 main drivers. We had, obviously, a very strong prior year quarter. That was in reshaped catch up mode after the COVID shutdown in the second quarter of last year. And secondly, obviously, as you heard for many others, but also Klaus already alluded to, the semiconductor shortage, which limited the worldwide car production. Car production, as you know, was down almost 20% quarter-over-quarter. And our Automotive division was down only by 12%, which obviously computes to the outperformance of almost 8% here. You see also already here a little bit what Klaus already mentioned, Automotive Aftermarket and Industrial compensated for the relative weakness in Automotive with a very solid growth in almost all regions. From a regional split, you see on the lower right that we -- the impact mainly in Automotive was felt in all our regions, except Asia Pacific. Jump to the next slide and look at gross profit. Solid gross profit margin, as you see on the lower right side due to the fact that the Industrial division balanced the relative weakness in automotive. And if we now go back to the left side and look at the waterfall chart a little bit more in detail, there is some really interesting aspects that I want to touch it. First, reconciliation item here, price was minus 8%. Price is relatively low negative impact. We would normally see a much bigger year-over-year impact mainly due to contractual pricing and price reductions in Automotive. However, we have some material price classes in North American automotive contracts, which with the escalating steel indices obviously offset some of the normal contractual price reductions. There also Automotive Aftermarket has phased in already some of the recovery actions regarding the steel price inflation and already provide some positive promising impacts here. Next item with volume, plus EUR 38 million. It's a little bit counter intuitive now that we explained to you that volume was down. But on a gross profit level, due to our divisional mix, actually, we see a positive impact with Industrial and also Automotive with relatively stronger sales performances and much higher margins in our Automotive business, providing here a healthy positive volume impact to our gross profit line. And lastly, production costs is minus EUR 26 million. I will talk on the next slide in a little bit more in detail, but let me already say here that, as you all are aware, we are in a, yes, almost dislocated steel price environment right now. That impact is hitting us from a purchasing standpoint as we speak. From a cost standpoint, that's phasing in with some time lag between procurement and consumption of steel. But you see the first impact here in -- in the column of production cost and the other cost. And the other item and driver here obviously is the volume impact in our Automotive plants due to lower production volumes. So let me talk a little bit more in detail about the material price environment. And when I say material, I mean mainly steel. As you see here, steel accounts for about 65% of our production material. Production material is about 2/3 of our overall purchasing volume. The rest almost completely is logistics and energy, as you see below, which also make up for 30% of nonproduction material. All 3 categories are -- and that's not a surprise to you, are a very significant cost driver right now. We have steel areas, cold-rolled steel in the [ flat ] product, for example, where we now are facing price increases of over 100%. And logistics and energy, you have heard from others, I'm pretty sure that container costs doubled what we have seen in the first half of this year. So these impacts, as I said, are now rolling in and phasing in. We are already impacted in Q3 by these effects by around 100 basis points. If I take the baseline of the first half of this year, and we expect that to double actually in Q4. Q4 then would -- based on our prediction of the steel pricing, be close to the peak. We will see some more escalation in Q1 of 2022. And then hopefully, throughout the rest of next year, see some relaxation of mainly the steel price environment. But as of now, we are also expecting around 200 basis points of headwind due to material pricing all of next year, as I explained, a little bit more front loaded, so more challenging in the first half, definitely in the first quarter of next year. We mitigate the situation. As you can imagine, first of all, with some material price classes and contracts, as I already mentioned, in North America, but then really with pricing actions on the sales side in all divisions. As you can imagine, in Industrial, with a little bit more catalog sales or catalog product-related sales. It's a matter of adjusting the price list. And we might see some effectivity in that regard a little bit earlier than in Automotive, where it's really a one-on-one negotiation with each customer. Going to the next slide and look at functional costs. Then you see an increase of 12% quarter last year to quarter this year. However, that is really driven by the low prior year comp. As you might remember, at that time, we still were in -- especially in Germany, Europe in the short term, short time work environment, and that obviously is normalizing now. And you see the different categories. R&D, obviously, is back to prepandemic levels. Selling costs increased a little bit also already with the pricing impact based on the logistics side. And admin, and that's really also important for me as the CFO coming in here, somebody said never waste a good crisis. So I'm really also trying to steer the entire company to be conscious of increasing overhead expenses. And you see in admin, although we are now in a normalized environment, we are still significantly below the pre-pandemic levels if you look at Q1 2020. Jumping to EBIT. Klaus already mentioned it with 8.2%, considering the challenging environment, a very solid performance for the quarter. We have, obviously, the Automotive Technologies. If you look at the table on the lower right, with a significant margin impact, mainly driven by the impact that I already explained, which are the production volumes and fixed cost under-absorption in that regard. And then secondly, the material price inflation that's phasing in. Automotive Aftermarket don't get too set up with the margin development quarter compared to prior year quarter. There was some extraordinary impacts last year. If you look more on the 9 months average and Automotive Aftermarket, you see, we are in the range of 1 percentage point to 1.5 percentage points of profitability here. And that is clearly the phasing in material cost impact in that division. And our shining star, Industrial, with really strong margin, broad cyclical recovery and offsetting most of the negative impacts that I have explained. Looking on the next page, a little bit more into the divisions, next 3 pages here, starting with Automotive Technologies. I already have mentioned it. Klaus has mentioned it in the highlights, very solid outperformance. But we cannot avoid being impacted by the global issue with reduced car production worldwide. You see on the bottom left, we have around 20%, 19.7% reduced volumes versus prior year quarter and our sales performance in that area is 12.2%. You see also the regional split, which is pretty close, China with a smaller outperformance than the other regions for this quarter. But if you look at last year, which is the numbers, which are the numbers in the bottom line here, China clearly outperformed everybody else. And now we have a little bit the reverse impact. And you also might have read and seen that a few of our top customers, global customers, mainly Volkswagen, also experienced relative weakness this quarter from a production and sales volume in China, and that is impacting us as well. From a waterfall chart on the right side, if I bridge EBIT of last year's quarter to this year, in automotive, you obviously see the significant margin drop that we are already -- that we already talked about. Most of that you see is included in the first reconciliation item. It's coming from gross profit, which I already explained. It's really to impacts production costs due to lower fixed cost absorption as well as material price that is starting to impact us. Maybe you see a relatively significant item on the right side here with others. This is the recovery of some indirect taxes in Eastern Europe, which we could successfully complete and had a positive impact in that range. Jumping to Automotive Aftermarket, you see a solid growth here with almost 9%. And you see it then on the left side in the lower area, it's mainly due to the OES business that we covered here. There's also some special impacts in the OES of prior year. And since I am coming from the Americas, I know very well what it is. It's one specific product that had a [indiscernible] in the Americas, and that was driving this very significant change and fluctuation in that specific segment. If we look at the reconciliation item or waterfall chart here. Then I already said, don't get too much distracted by the significant change this year of the margin quarter-over-quarter. Look more on the average 9 months margin, which is in the same range. The spread reduces from this 4% year to around 1%. And you see it clearly in the waterfall, it's also due to higher input cost. But then in the selling expense category, you see also not insignificant cost increase, which is mainly due to our kitting operation that is now ramping up in Haale, in Germany that still requires some parallel operation in the old warehouses while we are ramping up and also the investments that -- and cost coming with it that we put into our digital sales platform in China. And last but not least, in Industrial, next slide, yes, you see the 15.8% sales growth quarter-over-quarter. And you also see on the lower right, actually what Klaus already mentioned, Wind and Rail, a little bit is the sector that is not performing to the other sectors. Ever other sector is close to significantly over 20%. Wind, we see obviously a normalizing demand level, mainly in China in relation to the subsidy policies there. And we then reconcile the EBIT year-over-year, you see a very significant gross profit impact that we already explained. And then some of the cost areas in the selling expenses, the minus EUR 10 million is mainly driven by our project Mountain, that I think you're all aware of, that was the attempt to acquire Dodge in in the U.S. and the cost are now flowing or have been flowing in this last quarter. And on the other side with minus EUR 10 million a year, we have almost completely negative foreign exchange impact from China between the euro and the renminbi. But in total, just to conclude, you see the 12.4% mark. And as Klaus said, we are very well in the direction of our midterm ambition there already. I'll come back a little bit more to the legal side. And you're now looking at the 9 months reported EBIT and net income, then you see, first of all, that our EBIT reported is higher by EUR 27 million than our EBIT before special items. That is a positive impact from a reversal of accruals in relationship to our Roadmap 2025 that we -- because you might remember last year, obviously, that was a special item when we built the accruals. And now the reversal is a special item as well. And so that is explaining the EBIT reported. And then if you follow the waterfall to the net income, there's really nothing that is concerning here. The income tax rate is in the range of our average tax rate, normally here. And the financial result actually is a little bit better than what you would have expected based on our interest-bearing debt due to the fact that we had some interest income from an indirect tax case in Brazil that we won and the interest portion of that because it was a very long-running case is also worked into the financial result. Next slide, please. The net income of EUR 149 million translates to earnings per share of EUR 0.22. It follows exactly what was explained in the prior slides. So nothing really to say on top of it. Klaus already mentioned the strong growth here of 18%. That is mathematically, obviously, driven by very -- 4 very good quarters of the last 12 months, especially the last quarter of last year and the first 2 quarters of this year, with still very, but relatively low capital employed due to our investment activity in the first half. So we would expect that ROCE peaks for the next few quarters at that level. But nevertheless, I don't want to take anything away from the very good result for this 9-month period. Maybe now coming to free cash flow. This is actually something that I think we should go into a little bit more detail. Very strong cash flow in the third quarter, actually our best quarter this year. We see cash flow conversion ratio was close to 1, also good. And that is despite of the fact that we, as Klaus already alluded to, increased CapEx this quarter significantly. If you look at the top right, you see there's a little bit of working capital increase. And I also already mentioned that as well. We are intentionally managing our inventory to not get caught in supply chain disruptions once our customers can build cars again in the Automotive area. And as well, we don't want -- as you can imagine, don't want to jeopardize any sales on the Industrial and Automotive Aftermarket side with shortening inventory there. We are very conscious in maintaining and improving our delivery capabilities in these 2 areas. CapEx, we mentioned with EUR 215 million, a high spending quarter with 6.4% for the single quarter, a little bit above our normal guiding level, offsetting some of the lower CapEx of the prior quarters, where you see we have been below 4%. From an outlook standpoint, I would expect Q4 CapEx a little bit lower, but directionally in the same area. And then taxes, as I already mentioned, in all the levels and the other impacts actually relatively small here, is a net number, but that other column already includes, as you see in the bottom table, EUR 75 million of cash outflow for our various restructuring programs that you are very well aware of. That is also the main reconciling item between our free cash flow before M&A and our free cash flow before M&A and special items. You see here that is even better in the range of EUR 300 million for the quarter. And if you look a little bit right of that, if you look at the 9 months, then you see a total restructuring payout year-to-date of EUR 276 million, which would bring our adjusted free cash flow to almost EUR 750 million, which I think is an exceptional result. If we then go to the next page, you see our net debt. And our leverage ratio is now better than what our normal guiding corridor would be in the range of 1x to 1.2x. There is obviously also a mathematical function of our very strong EBITDA that is based on very strong 4 quarters in the last 12 months. Obviously, that math will normalize a little bit going forward. And the other factor in that calculation, as you all know, is the increasing cash reserves due to our strong cash flow profile. It's worth to mention that, as you are aware, we canceled some of our Schuldschein that we issued last year. They will be paid back in the range of EUR 260 million, actually the day after tomorrow. And with that, we then have no further maturities until March of 2024. The available liquidity, as you can read, is also a very healthy 27% of last 12 months sales. And with that, I am through and would then transfer that to Klaus for the conclusion.

Thank you very much. Let's focus on Page 33. Ladies and gentlemen, that's our outlook going forward. As regards to market assumptions, clearly, changes here on the Auto side. You all remember the sharp cut that IHS took. We are now expecting 47.8 million cars being built, what means EUR 18.9 billion in Q4. That is slightly higher than the IHS forecast. We are up to 75.3 million, and we'll see how the year is going to end. Clearly, when you think about where we started, we were cautious when we started. You remember, we talked about around 80 million in cars with a 5 million discount in February '21. It clearly shows how challenging this year was. Let's wait for next year. There are various different views on what could happen next year and how this dislocation will disappear. Aftermarket, the GDP growth and also the Industrial production growth, not much more to say here. On the guidance, [ 34 ]. Again, as we said, we have confirmed the EBIT margin with 8% to 9.5%. We have confirmed our above EUR 400 million free cash flow guidance. And let me emphasis here the word is above EUR 400 million. No one said that it's EUR 400 as a point guidance, that also may tackle one of your questions, whether we assume a negative free cash flow for the first quarter. Then we also confirm the divisional guidance, the above 6%. And also, clearly, one of the most important cornerstones of our guidance and Aftermarket and Industrial. And in Industrial, we even move the top line guidance up, while at the same time, confirming the outperformance guidance, you all know what that is. But the market development, if we added all up in Auto Tech, does not confirm be above 11%, so we have brought it down here to above 7%. And I think that is fair and consequential as our guidance was always market plus outperformance. Let me finish the presentation and before we go into Q&A with the final Page 35, and I'm not going to read that page to you. Let me quickly, again, say, there's a lot of operational challenges, I think, for all companies, not only for ours. And the focus must be on tactical mitigation actions, all hands on deck, with Claus we clearly have someone who know other -- how to -- how important the plans and the management of the plan is to manage our performance. I think we have shown to you over the last quarters that we are clearly dedicated to relentless execution and to delivering a solid operating result and strong free cash flow. We also shared with you the more strategic aspect, sustainability, the whole question of further sharpening our model in Automotive Technologies to manage the transformation and you know that we want to pay a decent dividend, but also stay a strong free cash flow company. What the third quarter clearly demonstrated how positive it is that we have Automotive Tech and Industrial, it starts to really pay off the big investment into the Industrial restructuring and the 12% margin from my point of view at that stage here in this environment is a very solid success, at the end of the day. And I want to extend that to everybody involved in our side is always a function of teamwork. And in this environment, it is a privilege to have a team that works so seamlessly together in divisions, regions and functions, also to the Board colleagues, and I want to really say thank you here to all of you in this environment. That's not easy. It will stay challenging. We are sure that the environment will not clear up on 1st of January. So the dynamic environment that requires all these flexibility will be a challenge going forward. But those that are able to manage that will also be successful going forward. With that, thank you very much. I hand back to Renata, for your Q&A.

Thank you very much, Claus. I will just remind that we have some road shows coming up, and you have the financial calendar. That's over Page 36. And now, for sure, let's hand over to the operator for the Q&A.

[Operator Instructions] First question is from the line of Gabriel Adler from Citi.

It's Gabriel from Citi. My first is on semiconductors. Can you comment, please, on what you're seeing that gives you confidence, also production could be 0.5 million units higher than IHS expect in Q4? Do you have any view at this point on how you expect auto production to develop into 2022? And if you think IHS estimates also look a little cautious to next year? And then my second question is on the automotive price recovery. Can you update us on any progress that's been made already with the one-to-one customer negotiations that you referenced in the presentation around price recovery for the Auto business? And are there any examples you can provide where you've successfully achieved meaningful price recovery from your Auto customers in the past? Because generally, investors we speak to are quite skeptical of how successful auto suppliers can be in these discussions. So any update on this topic as well would be really helpful.

Let me take on the first one, and then I will share the second one with Claus. The 500,000 more cars is at the moment, our best estimate is slightly more positive than IHS. But that should not say that we think the crisis on the semiconductor side is over. We are rather conservative when we look into the next year. We have the privilege to assemble all sorts of data points from various customers. And what we are seeing at the moment of October sounds a little bit like we are through the worst. But it doesn't mean that the picture clears up dramatically and very quickly. But don't put too much weight on this 500,000 more cars. The EUR 75 million is more or less also what IHS says. So that's the answer here. On Auto Tech price recovery, clearly one of the most difficult topics. You will understand that we cannot share with you customer names. What I can share and what I can stress is that our business getters, our sales teams on Auto Tech are clearly not only us, but also driven and move forward into going into these hard negotiations. That is customer name by customer name a discussion. It depends on the contractual relation. It depends on the negotiation power we have in certain areas that is different by nature. If you have a broad customer portfolio, like we have, to some extent, it's easier. You can imagine that a very large customer, where you're competing with on new business, they hedge differently than another situation. The fact that we have new and mature may help us here in that respect. And maybe Claus can say something on the -- one example where in -- not in Europe, but also in Europe, we have contractual relationships where that works quite different than you would assume here in Europe. Again, we cannot mention the name, but maybe you want to say something as a positive how that could be structured or how it is handled in the U.S.

Yes. And before I come to that, maybe because you also asked fantastic experience and obviously, my prior function at that time as the regional CFO for North America, I still remember the last deal price inflation. That, by the way, was nothing as we are seeing right now. Nothing was seen like that dislocation of steel prices that we are seeing currently. Nevertheless, in 2006, 2007, we had the last steel price inflation. And it was exactly as Klaus described. I mean, it was customer by customer, sometimes customer cross-product or product line, depending on where the negotiation leverage and power laid. And then it was an assessment what can be achieved. And not the most important point in that is, I think that I am -- my function as the CFO will provide the transparency what the impacts are on the cost side and then also provide the transparency and reasonable targets for the recovery. And so now coming to what Klaus indicated in North America. And I said it in my part of the presentation, we were successful, and that's actually also going back to 2006 and '07 that we have been successful in implementing and sustaining some material price causing some material price classes in our contracts with our customers. So the pricing is automatically bound by indices. And there's also a significant portion of our business that we entered into a so-called steel buy program, where actually, the risk of the steel price is completely transferred to the OEM and we are actually freed of any impact in fluctuation. Also not -- obviously, you're also giving up opportunities in that regard. But it's a risk mitigation. And that is not insignificant. I mean, it's a model that may be the current situation that Auto OEMs think about it. We see Auto OEMs increasing their prices or at least not offering to the end consumer price reductions. That's obviously not just owed to the material price environment, but also to the dislocation of the demand versus the supply due to the chip shortage and car production. But anyways, we see pricing action in the market along the supply chain, and we will and have to try to recover as much as possible.

That's great. Congratulations on the strong set of results.

Next question is from the line of Christoph Laskawi from Deutsche Bank.

Chris Laskawi from Deutsche. The first one would be a bit of a follow-up to Gabriel, just on the Industrials business. Can you remind us of the structure there and how easy you can do price measures? It feels like it might be a better situation even then for the Auto Technologies business, which seems to be managed fairly robust in the sense that you just elaborated on? And then the second question will be even -- it might be a bit too early to ask on the split that you've shown for the Auto Technologies business. If you could comment just roughly on the size of the bearings and the chassis systems and revenue share or absolute revenues? And the last one also on Auto Technologies. You highlighted tactical cost savings that helps you showing the solid margins in Q3. Should we expect part of those costs that you took out in Q3 to come back in Q4 and early 2022? Or would those measures be sticky for longer term?

Well, let's maybe start with the Industrial question first, and Claus, if you want to add to this, and I have more strategic point again. The customer negotiation power in Automotive Tech is by the nature of the business, where you have all the global customers where the top-10 customers make around 60% of revenues is quite different than if you operate in an environment with 8 different sectors with different dynamics. So here, also the product is quite different. It's less development driven, and some of our products just come through a catalog. So by the nature of that business, we have a completely different ability to recover higher cost or increased prices. We're doing that on a regular basis. And certainly, you also have here in that development businesses. But I would say, also in that respect, the Industrial part, and I would also include the Automotive Aftermarket part. It helps us to get through this challenging situation. Again, here, diversification counts. So I'm not sure whether you want to add a little bit of flavor to the Industrial side in terms of what we do in terms of price increases, but it's a more regular thing than a one to one customer based price increase.

Yes. I mean it's maybe worth to mention that 1/3 of our Industrial business is industrial distribution through the distribution channels. And that's a price list catalog program-based activity. And I don't want to say it's easy, but you adjust your price list. And then the typical question is how effective is your price increase in the price list? Because normally, you're not impacting existing orders and protect -- and give the customer price protection in that regard. So it takes some time until price increases phase in. But I think in the in this -- and I would also include Automotive Aftermarket in our price list, oriented business models. There's no question that this is a normal exercise. The extent to which it might be necessary now with 100% more expensive steel might be a little bit extraordinary, but it's actually a pretty normal activity per se.

And then Chris, I think your third question, what was the other question? One was on the measures, whether they are sticky or not. I mean, let me answer there also a little bit broader. On the one hand, we have done our strategic homework with the large restructuring programs. And you see from the -- also the restructuring payout that this is going well, but it will roll in over the year 2022, 2023. And we have always said, we want to finish one program before we start a new one. And with the existing program, we feel quite good about this. In terms of the tactical measures, the tactical measures have to do with how to react on lower volume, in particular, in the plants. And if volume increases again, if we see significant capacity needs, then we will -- we act accordingly. So that flexibility, again, has to be valued. And I feel strongly that we have shown in the past that we can operate in this environment. In terms of restating numbers, and I think that was, if I remember correctly, your third question on chassis mechatronics and chassis and how much bearings is in there. Please, again, understand we have highlighted today the logic of this, highlighted why we want these 4 buckets, and I want to stress again sometimes reception, the market that Schaeffler is only a combustion engine driven company that has no future is, from my point of view, not only conceptually wrong, but it's also not differentiated enough view on our portfolio. Because the bearing business is powertrain agnostic, and that's what we wanted to bring across. We don't have the numbers right yet. We won't come up in the new year and give you information about how these 4 buckets look like. We have done this in the past for the top line, and I think that's also expected going forward. So please understand, I cannot disclose something now. It will be premature. But in March, we'll come back to you on that.

Understood. Just 1 follow-up, if I may.

Sure. Please.

On the comments that you made on the tactical cost savings and the volumes. So in Q4, when volumes pick up again, we should just see the regular operating leverage on that and the cost coming back that you took up because of the low volumes, but nothing extraordinary on top end volumes would be more flattish also, so rather the usual in the near term?

I would not expect. I mean, if there is a steel price impact, that's what Claus described, that clearly has an impact. But I can't see anything that would dramatically change the picture if now there's a big volume increase. Let me say one more work here. You heard this loud and clear, we have invested in working capital. And we feel that our free cash flow allows for this. So that can make a difference, because delivery reliability, in particular, in Industrial and in Automotive Aftermarket, but also, to some extent, in the Auto Tech business is critical.

I mean let me add that was actually what I wanted to add before. Our profitability is not just a function of effective cost management. I think we are doing that. There's no question about it. But as I tried to explain, it's really also a function of what Klaus just explained, the positive margin mix in our volume. The volume in total is reduced, but the margin mix is better because the relative weight of Industrial and Automotive Aftermarket is higher. And therefore, obviously, mathematically, you also come to a higher profitability number. So it's really both. And that actually is, I think, another demonstration of our resilience due to our multidivisional setup.