Earnings Call: Q3 2022

Nov 8, 2022

Welcome and thank you for joining the Group Q3 9 Months 2022 Earnings Conference Call of Scheffler AG. Due to technical issues, you need to accept security warning first before you can register for the telephone conference. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question and answer session. I would now like to turn the conference over to Renata Casaro, Head of IR. Please go ahead. Thank you very much, Natalie. Dear investors, dear analysts, good morning. Today, for the Q3 release of the Schaeffler Group, Here in Herzogenaurach are present Mr. Claus Rosenfeld, the CEO of Schachter Group and Mr. Claus Bauer, the CFO of Schachter Group, and together with us from the IR team. But without further ado, let's start the call. Claus, the floor is yours. Renato, thank you very much. Ladies and gentlemen, welcome to our Q3 call. I'm happy to Reports a good Q3 2022, as you saw in the documents that were distributed to you. Following your advice that we should be crisper, I will try to be very short at the beginning here And do not repeat what you could already read, but give you some flavor around it. And Claus is going to take over to leave enough Room for your questions. So on Page 4, you have the key parameters that all point in the right direction. 20% growth across all divisions and regions, really positive. Gross margin, More or less on the same level like Q3 2021, clearly room for further improvement. That's also one The reasons why we put in the structural measures in Automotive, EBIT margin really strong in Industrial. We are very happy about that Result, it's clearly benefiting from all the measures that we have put in place in the last years. And clearly also With a positive outlook for the rest of the year and also automotive aftermarket showing strengths in auto technologies, There is more work to be done, and that's why we decided to start this additional program of Structural measures with 1300 jobs to be reduced, overcapacity being reduced in particular where we have still combustion Engine activities and also fixed cost to be brought down. Free cash flow is strongly positive. As expected, euros 240,000,000 It's more or less what you probably expected. And I'm very certain that the above €250,000,000 guidance for the year 2023, 2 will be met. So on guidance, outlook for all metrics confirmed. And I think I can say we are pointing to the upper end of the range for the rest of the year. Now the highlights and lowlights On Page 5, very briefly, positive in Automotive Technologies, double digit growth Across the regions and across the business divisions, strong order intake in e mobility continued €4,700,000,000 Speaks for itself significantly above our 2% to 3%. Automotive aftermarket is benefiting from the Environment, because in this environment also for the year to come, people will rather repair cars and buy new cars, All regions growing and what I just said points to the anti cyclical nature and resilience of our Aftermarket business, so we're expecting also here good forward looking developments. In Industrial, Again, the champion in the portfolio, double digit growth plus improved earnings quality also relative to peers. That's exactly the right direction. Stephan does a Tremendous job here. And it also justifies why we are acquiring and building a pipeline of external growth opportunities. This all together, that's the 4th bullet point, tells you that we are driving our transformation forward. Despite the headwinds that we have, the balanced portfolio pays off and we will continue to harness the mega growth trends Of the future. On the negative side, where am I unhappy? As I said before, Automotive Technology has to do more work. In particular, on gross margin, that's the health indicator of the business. In Industrial and Automotive Aftermarket, that's pointing in the right direction. And we are here in Automotive Technologies sequentially improving. The second bigger concern is Cost inflation, I think we can demonstrate in this quarter that we have achieved what we promised in terms of sales recovery. However, input costs are continued to be increasing high In certain areas stabilizing and other areas increasing, we still need to wait what the labor side is going to look like And therefore, saving, reducing substitution efficiency measures are absolutely necessary going forward. And here, we need to do More. Then last point, what also is the main theme of this presentation in this environment with the macroeconomic and geopolitical headwinds, It's all about efficiency, preparedness for a continuously volatile environment and also strict execution. Next Page 6 just tells you the breakdown of the 20%. It just proves that every Part of our portfolio, both divisionally and regionally, contributed to the strong growth in Q3. That's positive. And then on the next pages, you have the different divisions. I'm not going to read that to you. I already mentioned the most important parts. €4,700,000,000 order intake, let me repeat it. And also in terms of margin, the positive highlight is 4.8 Percent in Q3, that then leads to a 3% margin for the 9 months 2022, clearly above our guidance of 2.5% and above. You see the breakdown of the order intake on Page 9. I leave that to you. And then aftermarket, on the next page, Page 10, Sales growth still rather moderate. You see the gross profit margin more or less capped and an EBIT margin of 13.1 More to come here. Some of this margin is clearly a function of the higher selling expenses and logistics and freight costs. Let's see how that develops. Where we are very happy is the way how the aftermarket develops also for the new world. This example here and some of you saw that when we invited you to Auto Meccanica on Page 11 is the first e axle repair solution. That is the new world. And with our pilot application for our Golf, e Golf of VW, That seems to be a unique selling point here. Certainly, a unique solution in the aftermarket shows our A readiness also for e mobility solutions in that area. And then 12 Industrial, I think it speaks for itself, 14 Percent margin in Q3 should not be extrapolated that easy, but we are positive that the Positive trend as such is going to continue. This clearly shows what I would like to see, 15% growth in terms of sale and also margin improvement. That's definitely the right direction and it comes across the board. So all the efforts from the last years Start to pay off, and it justifies, as I said, also external growth opportunities. As you see on the next Page 13, Evelix is well underway. It's the right acquisition. And you also saw that we put in place the financing that is necessary here. Claus and his team have done an excellent job here in Excellent job here in this environment to pull off a €2,500,000,000 refinancing, not an easy task, but very well Executed and exactly right on time. So we are also happy here about the financial flexibility. And let me reiterate here for all of you that look Scheffler as an automotive supplier, if you just look at the sales, you see 25% share of Industrial. But if you look at the EBIT, you see that 50% is coming from that area, and that tells you that Schaeffler is More than just an automotive supplier. We are an automotive and industrial supplier, and we will continue on that path Because exactly that diversification gives us the resilience that is needed for the next years. Capital allocation, Nothing important to report here. Page 14, reinvestment rate at 0.8, €550,000,000 CapEx for the 1st 9 months. We are careful with our investments and follow the strict capital allocation logic. And I think what we said around €750,000,000 for the rest of the year seems to be a very good indicator. Now let's go to 15 and spend a minute here before I hand over to Claus. This is the summary of our structural measures That we put under the motto, we drive our transformation, in particular in Automotive Technologies. What's happening here is, We have we are seeing and perceiving an acceleration in terms of the portfolio adjustments, mature business, In particular also outside Europe, going down faster than expected, at the same time new business growing And accelerating, that's why we decided that we also need to further adjust in our overhead cost and also in terms of the footprint. What's happening here is we are releasing 1300 jobs, 1,000 in Germany, 300 outside Germany. In Germany, it's basically 3 main locations, Hamburg, Buhl and Herzog Auer, plus 2 smaller locations where we will start A dialogue with our workers' council about the future of these smaller locations. And then in green on the page, An important third element of the program is Gunzenhausen. Gunzenhausen is a smaller plant that Today already manufactures parts for the automotive aftermarket business. We all believe that The aftermarket and the combustion engine components in the aftermarket will live longer than the OEM business. And therefore, it's important that we have there the right production concept. You can imagine that a serious production of 1,000,000 parts for The carmaker for OEM is something different than lower lot sizes for aftermarket and therefore Readjusting the production concept in a plant like Gunzenhausen is of the essence and that's what we're doing here. It's to some extent the first automotive aftermarket plant will come in effect 2024. But clearly, Point tells you about the way how we think about this transformation in the most efficient way. Numbers are clear. Potential savings, €100,000,000 you saw that. We need 1.3x or €130,000,000 one off transformation costs. That's all well In line with what we did in the past, and we think we can achieve more or less 100% of the savings by end of 'twenty six. So that's the program. It is, from my point of view, a necessary step. We are starting negotiations with Workers' Council now. We have long experience with them. It was And very friendly when we prepared for this, and we hope that we get this done in a very efficient manner. With that, I hand over to Claus and for the financial results. Thank you very much. Yes. Thank you, Claus. Let me now give you a little bit more flavor On the numbers, Q3 was, in many aspects, the robust quarter that we anticipated when we also last Talk to you versus the first half of twenty twenty two, we definitely benefited from stronger volumes, So continuing price recovery, also retroactive lump sum price recoveries in automotive. And As I said, stronger sales volumes also supported by our tactical inventory increases that we explained in the past. All divisions you have seen are achieving all time high quarterly sales. And you see on the bottom right here also all regions contributed, as Claus already said. As it relates to gross profit, on the next slide, I already mentioned there was a retroactive price increase For automotive that we anticipated and also explained to you also for the half year results, you see on the bottom right That the 9 months margin development for Automotive, Aftermarket and Industrial are in line. What might raise some questions is the minus 4 percentage points Change in the Automotive Technology margin versus the 9 months of prior year. Remember, the first Half of twenty twenty one was still under the recovery of the COVID lockdowns, price And volume and especially overhead cost ratios were still distorted by the savings And special programs at that time. So that's about half of this split. And then you have, as we Plained in the past, production inefficiencies, sickness rates are higher asymptism due to COVID And the call of volatility that really makes it more difficult to PS, the absolute efficient lot sizes for especially for automotive. That's around Half a percentage point that explains the deviation, and the rest of that is the net price impact That we bear so far ourselves When we talk about that and when we talk about the 9 months, I explained to you the first half of the year. We still had some Negotiation is ongoing with customers. You also remember we started these negotiations at the end of last year, But these were very tedious, sometimes on a part number level, discussions and negotiations. And there was some retroactive payment that really concerned the first half of the year in the third quarter. But if you now look at the 9 months in total, you see actually a pretty realistic underlying picture also So for Automotive Technologies, and as Claus already alluded to, it's definitely one of the areas that we have to continue our very disciplined work to improve profitability. Next slide talks about overhead expenses. I won't We spent a lot of time here. You see from an absolute level, absolutely unspecular, You see the ratio of 14.8% markdown at the left The chart, this is not you, as you see, due to the absolute spending, but rather the high sales volume In the Q3, selling expenses might stand out as higher sequentially higher as you see here. I think I explained it already the last time. There's obviously also a price impact in the selling expenses for increased logistics cost. But also, as you can imagine, there's a lot of outgoing freight and logistics, especially from our industrial and automotive The market divisions that have significant volume growth here. And last but not least, Also, our efforts in regard to marketing activities have normalized And now at the level at the pre COVID level, if you will. EBIT also here, EBIT is just following what I already Explained in gross margin and especially overhead, you see with 8.4%, definitely a highlight. Maybe also interesting, If you now compare that to the second half year of 'twenty one, as I said, the first half of the year, especially Q1 of 21 was still impacted by distorted cost ratios due to COVID savings. But if you compare it to Q2 Following of the last year, then we are at the same range as we have achieved Last year and obviously then dealing very well with the increased inflationary cost pressure that we have addressed since then and updated you on a regular basis. Let me say the 8.4% has, if I now calculate the Onetime lump sum impact from the retroactive price adjustment in Automotive Technologies. If I normalize for that, then I had to shift around 60 basis points from Q3 into the first half of the year Just to give you an idea how much that is on a group level, but I mean The math we walked through last time when we talked about Q2 and our anticipation of this lump sum Payment then in Q3. Next page, now talking a little bit more about Automotive Technologies, I think Claus already mentioned in his overview, the most important points, maybe new On this slide and also definitely interesting is the outperformance calculation on the bottom left. You see here the picture for Europe with an outperformance of 10 percentage points. That is as we anticipated. Actually, we told you that we I think our performance, especially in Europe, will be above also our target range. That also is testimony, obviously, of our Successful price recovery actions again. Now if you look at the 9 months, That's why we also pulled up the 9 months view here and not the quarterly view. The The distortion of the onetime lump sum payment in Q3 is normalized, so that is a fair comparison. On the other side, you see a significant underperformance in China, and that There's really two reasons. First, in a volatile environment, and we definitely had that in China with the COVID lockdowns in Q3, then recovery strong recovery in Q2, then strong recovery in Q3. The correlation between car production volumes and our sales is also distorted, At least on a quarterly basis, so very difficult to draw conclusions. But maybe even more importantly, Because it's more systemic is the fact, and you are all aware of that the eMobility segment in China, especially with the domestic OEMs, Increased over proportionally, which means the traditional mature business obviously then decreased or Increased under proportionately, but in relative terms decreased. And as you are aware, we are not really We presented in the 1st generation domestic e mobility players in China that will, over time, correct itself Because we now are much stronger, and I would also say proportionately, we present it in the next generation, but That will take some time until that is washed out. You see then, coming to the right side, I'm only Talking about the EBIT margin 4.8 percent, I already told you around 60 basis points is the impact for the total group. You can do the math. Around 100 basis points is the impact of the onetime The onetime impact of the retroactive lump sum adjustment that really concerned half year 2 Half year 1, sorry, and on a 9 month basis, we are now pretty balanced and have every price Negotiated and in place. On the next page, we talk about automotive Yes. Aftermarket, I think Claus already alluded to a pretty straightforward and very solid quarter, not the most Dynamic from a sales growth but also from an EBIT contribution, very stable. The You see, nevertheless, that we have a quarter by quarter, year over year reduction of the EBIT margin from 14.3 percent to 13.1 percent, and you see clearly the reason in the selling Spences here on the bridge on the right side. Included in there is obviously Some volume impact, higher volume also increases logistics cost. There is a significant price impact, as I already explained. And also here, we have normalized The marketing activities that are now higher than prior year but shouldn't increase really from that point On the next slide, we then go to industrial. Industrial, I think Claus, again, said the main parameters here already. On the bottom left, you see some more detail in regard where Sales growth really took place. And you see that we really have strong growth In all regions and especially in all market sectors, if you remember prior calls, we always had In renewables, maybe a little bit yes, Strangely, not that strong growth number, but I also explained The reason for that was mainly the subsidy timing in China. Subsidies ran out about a year ago, and then some of The demand was pulled ahead, and then we fell in a hole. But that is normalized now. And you see we are Completely now in the normalized growth range as all other market clusters as well in renewables. And let me also make one more comment on the right side. You see The strong margin EBIT margin was 14.1%. You see a similar impact in SG and A expenses that you would expect, as I just For automotive aftermarket, same reasons, higher volume, price impacts and increased marketing activity, but With the positive volume dynamics and therefore fixed cost absorption also in our production facilities, Industrial was able to overcompensate for that impact. Net income follows completely the EBIT. So I would save some time for Q and As And just leave that slide to your own studies. On the next slide, free cash flow. That was a slide, as you remember, that we spent some time last in our last call. And you see clearly, based on the quarterly distribution, why we were still Negative year to date in the first half of the year, but we already anticipated and told you And explained also why we definitely are confident to meet our full year guidance And why Q3 will be the inflection point, and you see that clearly with our positive A free cash flow before M and A of EUR 240,000,000. Clearly, the strong profitability was one contributor. And the other one, And I already explained that last time to you was that we tactically increased our inventory in the first 6 months continuously. I think we also showed the benefit of this inventory, especially in automotive aftermarket And industrial with strong very strong sales development, but I also Already anticipated and said there will be no further inventory increase in the second half of the year, and that is obviously The second leg of the swing in our free cash flow. And last but not least, in regard to our financial situation and The liquidity position you see with the strong cash flow Generation in Q3, but also the EBITDA improvement, we We'd reduce our leverage ratio now down to 1.1%. Again, also pretty much Within the range that we anticipated and claimed. You also know that the Evelix transaction Has not closed yet. We'll close in this in the Q1 early in the Q1 of 2023 That has a 0.3 to 0.4 times impact on this leverage ratio for some time, and then we Gradually bring the town down again. You read that last week, we financed The secured financing for that deal with a €500,000,000 5 year term loan. In connection with that, we then also refinanced our revolving credit facility, increased it from 1.8 To €2,000,000,000 with a term of 5 years plus 1 plus 1, so maturity then earliest In November 2027, that leads to a secured liquidity position that at this Point stands at 17% of the last 12 months' net sales, so A comfortable liquidity position to go into the Challenges that are ahead of us. And with that, Claus, back to you. Thank you, Claus. I will finish with the outlook and that traditionally starts with our market assumptions. What has changed since August is clearly the global LVP numbers. They are more stabilizing. We are expecting now 81,800,000 from the market light vehicle production. We are still Conservative and saying that's beyond the safe side and discounting 1,500,000, so 80,000,000 cars Is a good proxy that would be something in the range of 6% growth. I think the key question is not so much what's going to happen in the Q4, that's It's more or less over, but how is that going to unfold in the next year aftermarket, More or less unchanged industrial production as well. And clearly, we need to Say that in that market, we think are well advised to expect a certain slowdown Because the overall expectation for a recession, at least in Europe, is probably Something that you would share guidance. As Claus already said, we confirmed all the metrics that we have, 6% to 8% gross, 5% to 7% EBIT margin and above 2.50%. And I think it's fair to say that We are confident, in particular on the margin side, that we will be able to reach the upper end of the group ranges. On the divisions, Nothing changed. There's clearly an element of cautiousness in Industrial. But given the environment, we decided Not to increase the guidance at this moment, for all the rest, I think I can confirm what you see here. And the probability is, I think high in confidence as well that we will get there. Now to the conclusion page, Page 30. I just Repeat the key messages, strong Q3 performance, strong quality of earnings in Industrial, Good work in Automotive, more work to be done in Automotive Technologies. You all know we're managing through this challenging environment. And I'm proud to say that the team here is very focused on getting the portfolio right. This means, in particular, For Automotive Technologies that growing the new and harvesting the mature business is elemental. And you saw the little Structural measure program that we announced that will help to push forward in Automotive Technologies. At the same time, In Industrial, we are balancing in terms of organic growth and external growth. Evelix is a super addition to the business, Gets a lot of positive attention from customers. We'll integrate this properly and that opens also New opportunities on the external growth side. Cost management is important, not only in the short term, but also in the longer term, the Structure measures speak for themselves. And clearly, we will continue to work on saving energy cost, gas in particular, but also electricity. You all know that our key selling point has always been the strong cash generation power. The balance sheet is robust With the leverage ratio of around 1, before the acquisition of Evelix And the fact that we have now adequate financial flexibility is a key to whether the complex environment, guidance, everything set. The current trading points, as I said, to the upper end, could start into the October months. And let's now see how we finish the year and then Provide you with some more color for 'twenty three. You will understand that we're not giving guidance today for 'twenty three. So We can maybe answer your questions there, but let's get the year properly done. We are in the planning season at the moment, and the key is clearly efficiency, preparedness and driving our execution. Thank you very much. With that, back to you, Renata, for questions and answers. Ladies and gentlemen, at this time, we will begin the question and answer session. Due to technical issues, you need to accept the security warning first before you can register for the telephone conference. There are no questions at the moment and I hand back to Renata Casavo. Thanks, Nathalie. Yes, we understand that many of the sell side and probably also Yes. Vice Chair as well, maybe in overlapping events in other corporate. So it could be that there are last questions. For sure, we'll wait a second. In the meantime, I will just Say that tomorrow, we start our roadshow, and then next week, we are also in conferences in Europe. And yes, in case there shouldn't be questions, you You can always write to us at IR, but I see that there is one in the pipeline. So over to Nathalie to let the question in. Thank you. We have one question from Alexander Wall from Stifel. Please go ahead. Yes, good morning. Thank you very much for taking my question. My first one would actually be on the pricing component. I'm not sure if I understood you correctly, but I understood that the pricing impact For the auto business in the Q3 was only 100 basis points and that you have now basically received all lump sum payments. So could you just confirm that for the Q4, you do Not to expect any further retroactive price adjustments in for the Automotive Technologies business. And then my second question, I mean, you have a pretty solid performance over the 1st 9 months in your Industrial segment. And you just confirmed the margin guidance. You said you want to be conservative, but maybe you can elaborate a little bit on Where you see the biggest headwinds that made you conservative or so conservative in mid November this year? Thank you very much. Okay. I'll take I'll Start out with the first question. So what I tried to explain is and that also connected To our call of the second quarter, there we said our margin in automotive is Because obviously, we are already facing the inflation on the cost side, but we are still in negotiation On the recovery sales price recovery side with our customers. And we, therefore, Also already indicated that there will in the second half of the year will be retroactive lump sum adjustment for the pricing in the first half of the year. And that is obviously an impact that we now enjoyed significantly in the Q3. And that onetime adjustment is a lump sum that really concerns the first half Of the year is therefore, in Q3, an extraordinary onetime impact, and that is an impact for the Automotive division of 100 basis points So of course, that lump sum payment comes also with the implementation Of the prices, now the new prices on a part number level going forward and that price, it's not a lump sum payment in the sense But now we got one payment and it's good. It's just the lump sum payment to make up for the price adjustment for the first half of the year. And from now on, it's normal pricing that's in the systems and will be invoiced with every shipment. And I hope that clarified that point. To your second question regarding Industrial, It is indeed, as you said, that we have I discussed that also you might have seen and I didn't expressly Talk about the one bubble on the industrial slide, but we also always give you the A portion of distribution sales in industrial. And as you know, distribution sales are from a margin And from a standpoint, higher than OEM sales. Therefore, in Industrial, quarter by quarter, there's always a Not insignificant mix impact in regard to how much distribution sales are in that quarter. So now you can say normally you would assume distribution business pretty stable and kind of developing with normal Business activities in all the sectors, but that's not the case. There's so called stocking orders of the distribution Customers, these stocking orders are dependent not just on the general economic environment, but also the stocking levels in their own distribution But mainly also then also with the cash flow managing needs of our customers. And therefore, Destocking orders and they are a very significant part of the distribution business can be volatile. We have seen Strong distribution orders in the Q2 and Q3 of this year. So we are a little bit from a mix standpoint, a little bit less. And I shouldn't say optimistic. It has nothing to do with our business. It really is a mix That we think that some of the distribution business for this year has already been done In Q2 and Q3, as it relates to these general stock levels, and now we are a little bit more conservative about this sales mix in the Q4. The next question is from the line of Mark Grenaton from Rabok Research. Please go ahead. Yes, good morning and thank you for taking my questions. First one would be on the free cash flow and And sorry if I've missed that, but I see for the Q3 in particular, it's quite a ramp up or let's say an increase in trade receivables. And I wonder whether let's say Truly driven by the increase in revenues in that quarter, whether you see any change in, let's say, your customers' behavior in paying receivables, let's say, with the change of the General interest environment probably, let's say, leaving its mark there. That would be the first question. Secondly, And the footprint and overhead measures you are doing at Automotive Technologies, is it something you have pulled forward from something which you would have Had to do anyway sometime in the future? Is it something which is now really tackling the current situation in specific? And thirdly, I think industrial, the business is holding up very, very strongly, let's say, given the, let's say, clouds we see on the horizon Regarding the overall economy, I think the 3 months order intake is coming down a bit. Perhaps you could give us some indication what you would expect there In terms of how resilient this business should be in, let's say, a tougher economic environment going into next year and probably beyond? Thank you. Okay. Let me tackle the last two questions and I'll start with Industrial. You're absolutely right. We should not extrapolate 14% margin into the next quarters. The environment becomes a little bit softer. But on the other hand, we are Very well diversified across different sectors, industrial. The homework is done. We are benefiting from all the cost initiatives of the past. So I'm optimistic that Stefan is able to continue the positive development Even in an environment that is a little bit less buy in and less supportive, don't forget, we're not managing for quarters. We are managing For the long run, and there, the industrial business is definitely on the right track and supports our diversification. I think the second question was on the restructuring measures. Let me say, we've always Said in the last years, this is a dynamic transformation process in automotive. It is dynamic not only because The overall environment, but also about because of the market situation we have, about the competitive situation that we have And clearly about the technological challenges. And it would be wrong to assume that you can handle such an environment with one big restructuring and that's it. That's not possible, not on the portfolio side and also not on the capacity side. And that's why we now adjusted. We said this This is the right moment. There are strong indications that the e mobility business is accelerating across the globe. And therefore, it's right now to put in place these measures. These measures are not going to pay off in the first half twenty twenty three. These are measures that need still adequate negotiation with Workers' Council. We think that we can harvest the 100,000,000 in 2026. So you see, it's always important to look at the end of such an investment, €130,000,000 restructuring cost also need to be earned. So I think and I feel good that we are now out with this. The most important thing is not the announcement, but this is that this is executed Properly, we have ample experience with these kinds of programs, and it was absolutely right to put this in place now. Okay. Then I take over for the first question regarding cash flow and, let's say, timing pattern of the cash flow. It's for sure the revenue growth and especially the price recovery component of that then falls So to the bottom line and increases, our cash inflow was one part of it. And the other part that I was referring to, which I explained in last quarter's call, was We increased inventory in the first half of the year in the range, and that now includes FX And valuation topics, of course, by €500,000,000 And we already said in that call that we will not increase In the second half year by another CHF 500,000,000. So that is already really indicating a swing in that of that size So if you compare the cash flow generation of the second half year versus the first half year. So I hope that About payment behavior also in regard to the interest rate environment, we are not seeing A change in payment behavior in at large scale. And In regard to your other question, are we going into a recessionary environment or not? I mean, I would Assume that cash will get a little tighter along the entire supply chain and that we have to Really manage our receivables very carefully. But that is to answer your question, that is not yet The case also cash flow seems to be neither in limitation or limited right now Along the supply chain nor is there any red flag or alert yet about change in Agents behavior one way or the other. Okay. Thank you. Operator, we have received a set of questions from Christoph It's Kabi from Deutsche. And the team here said I should quickly read them because they came in by e mail due to a technical issue. The first question is, should we expect further retrospective price adjustments for Q4 or everything done already? Are you in discussions with OEM on wages and energy? And any indication on energy cost into 2023, how much hedge and what to do Current contracts imply. That's the first set of questions. Claus, you're going to split that. And the second one is for Industrial, 14% is clearly a strong result. How sustainable is this in a lower volume environment? Could you comment on pricing currently now That the short term order book has fallen below sales. I think we Christoph, we already Explain to some extent the industrial question. As I said, don't extrapolate 14%. We you know the guidance 12% to 14%, that's our midterm target, and that's probably a good range going forward. Yes, We said we were benefiting in the 1st 9 months also from the strong market development. Let's see how that develops in a Recession or more recessionary like scenario. However, what we get from our Business, guys, is that they are due to the broad sector coverage, they think there is The ability to outgrow the market in Industrial and clearly don't forget all the measures that we put in place from space Are not fully in the P and L. So there is also some support from that angle. And I can definitely confirm our midterm target of 12 To 14 for the next year's pricing power in Industrial is tentatively higher than in Automotive. You I can imagine, Claus also talked about the distribution business, very important part of that. So again, we are confident All the midterm for our industrial business. In terms of price adjustment, let me quickly Talk here about Energy and then I hand over to Claus. The Energy, in particular gas and electricity side, It's very interesting. Lots of dynamic changes. You saw what was decided in Germany With the gas price and electricity price break logic, that has really started to pay off in terms of Coming down the market, gas prices, so spot prices are significantly reduced compared to the peak that we had In the summer, same holds true for electricity prices. However, ladies and gentlemen, we will not go back to What we were used to in 'eighteen and 'nineteen and the key answer to this is, let's save as much as you can. And on gas, I think, Klaus, we can say we will achieve the 10% target saving that we demanded from our plants and our businesses in this year. We'll continue to save in the next years. The target is 30% until 2025 Compared to 2021, that also has to do with a fuel switch. One of the key logics here is To electrify parts of our production, and that means more electricity need. And the answer there is a similar saving program. We're still working on this, But also a investment into more own energy production. I think I can say here the target is for the next years until 2,030 that 25% globally of our energy needs will be produced by ourselves. So that's an investment, but in the long run with what we're expecting, It will definitely pay off. How that translates into crisis, ladies and gentlemen, is a second question. We have done well this year. Claus explained that, achieved more or less all our targets in all the 3 divisions. In particular, the guys in Automotive have done a Superb job. That was new territory and they really did it well, not destroying customer relationships and on the other hand, achieving the targets. You can't do this every quarter. And in Automotive, it will we will continue to look at this and then see what we're going to do in 'twenty three, but it's Too early to give you, Christoph, more information at the moment how the sales recovery action will look like for 'twenty three. What I can say, There will definitely be sales recovery action. Yes. And maybe let me add to that. That's, I would call it wave 2. But I think the gap in answering your questions was So still related to wave 1. And you asked, is there still any retroactive adjustment It's a onetime impact anticipated in Q4 of this year. There will be Smaller adjustments, but it will not be at the size and volume that we have seen here in Q3. So I would say, yes, and I think I said it, if you look at the 9 months now, we are pretty much at that level That the pricing actions are as if the pricing actions wave 1 would We fully executed. There's a little bit of a catch up effect still to come in Q4, but not significant, as I said. Okay. Yes, there was one more question. There's one more question on that, Renata, just sent it over from JPMorgan, Gemma Pammalo, I hope I spelled this correctly. The question is keen to hear what rating agencies are saying if you're targeting on getting back to investment grade. Maybe I'll do this quickly. I mean, we have just been out with the numbers. The numbers will be shared with rating agencies as usual. So far, they confirmed ratings that we had. Let's see what that means now. We are not expecting any bigger changes at the moment. And is there a target to get back to investment grade? We have always benefited from the position we are in. And at the moment, I think the differential between investment grade and where we sit at the moment is not that big. The superb delivery of Claus and his team on the refinancing shows that. So we don't see that as a Strategic thing, if it goes in that direction, fine. But for us, the most important thing is that we get the rating drivers right and That's clearly margin, cash flow. And as you know, we are fully focused on this. And let's see what the risk rating agency The assessment will look like, but we feel confident with where we are playing at the moment. We have another question from Eduardo Spina from HSBC. Please go ahead. Good morning. Thank you for taking my questions. I have three quick questions. The first on financial cost. If you can remind us how much of your debt is on variable rates and if you expect the financial cost to increase in 2023. If And the second question is on steel and raw materials. I believe the price has passed The peak. So can we expect to see flat raw material prices for you raw material peaks in 2023 or even a decline in raw material costs, Excluding the energy and logistics. And the final question is on energy cost. If you can give us some visibility on the new prices you're paying, but particularly If you can highlight difference by region, if we're going to see if we should expect that the regional profitability will be affected Okay. So I start out With the financing cost, it's our terms and conditions with the new financing are almost It's unchanged. The margin is a little bit higher. But with having said that, obviously, it's on a flexible base rate. And it's now our task to also make that as Economically sound and predictable as possible with instruments around it. In regard and I Start with steel and energy and then Claus, you might want to add. But The energy cost, it's clearly, as you indicated, it's extreme regional differences. And we are very in this discussion, very Europe focused and centric. The problem is In Europe, there's no issue in volatility or significantly increased prices in any of The other regions, even within Europe, we have a significant variety of topics and issues Between Western and Central Europe and then Eastern Europe in regard also to the capability of Really entering into longer term price fixed contracts. I think as we stand here with the gas And energy prices having developed as they developed in the last 2 to 3 weeks, it doesn't seem To be as critical anymore as it was 2, 3 months ago, but it's definitely on our risk management agenda. We are talking about this Almost every day and as a complete executive board really every other week. And I think we have a sound strategy how to Secure supply, that's the first one. I think we can report that we have secured supply for 2023 100% in every single location And then secure that supply then also at a reasonable price. You know the discussion here in Germany about Question here in Germany about gas price, Premze and so on is also impacting the tactics in that regard. But You can be assured that, that is a top priority on our agenda here to Assess the environment and draw the economically best Solutions out of it. In regard to steel, indeed, steel prices relaxed, And it's always different to look at steel prices At the spot price or when you talk about forward prices for longer term, but No question for wave 2 right now. It seems for wave 2 of our price recovery topics that we talked before, The cost drivers are different ones than they were in 2022. Claus, I don't know. And maybe I can just add to give you one figure. I mean, the debate about steel prices by regions, Eduardo is a longer debate, but I'll just give you one indicator to for some Color around what Claus said. If you look at the price for hot rolled coil in Europe, the peak for that was sometime at the End of Q1, beginning of Q2, around €1400 per tonne. That is down to Somewhere in the 600 to 700 range, and that's now a level that we were dealing with at the beginning of the year 20 21. So this significant peaks and volatility is gone. However, this is not It's clearly reflecting to some extent the recessionary trends. But don't forget, I mean, this is Still a volatile environment, in particular, the steelmakers will need to digest the high energy prices. So there's no reason to believe that everything will be fine in 2023. We will still need to deal with A volatile environment here, and it's something that we know well. We are sourcing from dozens of different steelmakers. And I can say, as Claus said, this is not our that's not the predominant issue for the next weeks months to come, But let's watch out carefully, how this material price develops. There are also other raw materials that are critical. And For us, we I think we feel good about how we handle this and hedge this going forward. And maybe that's Thank you. Yes, you're welcome. Next question is from the line of Himanshu Agarwal from Jefferies. Please go ahead. Hi, Himanshu from Jefferies. Thanks for taking my questions. The first one is on the restructuring measures. If you could just Talk about the timing of these measures. Are these going to be front end loaded or back end loaded? And secondly, I just wanted to come back on the energy at weight Inflation, based on your negotiations so far, how confident are you in terms of passing through increases in energy and weight inflation to your customers and also if you can talk about the potential increase in 2023 on those 2? Thank you. Well, let me start with your last one. And I'm sorry to say, but we are not guiding for 'twenty three. We have agreed this before the call and said, Let's see how the rest of the year develops and then we'll give you proper guidance. That's also why I cannot really say something about sales recovery action. The only thing That I can say is that we will continue with that based on the learnings from the year 2022, but it would be premature to give you anything more than that. And help me again, what was the first question on the restructuring measures? Again, you have seen from us Several of these programs, this will have a similar structure in terms of Profile in terms of when do we achieve what. So you can basically assume this runs according To the experience from the larger program space, and that means 2026, Let's say more than 90% of what we want to achieve should be in, but it depends on the negotiations. For me, let me also stress this here. It is very important that this is done in a socially responsible manner with our workers' council. While some of the capital markets always think that that is the soft version, that's not the case for us. It's important to get the things properly executed. And We have always done well when this is handled carefully and consistently. And therefore, the profile of this, just copy the As our last bigger program for 2020. Understood. Thank you. Just a quick clarification question. In terms of the price increases that you have realized in this quarter, including the retroactive pricing. Can you just talk about the cash flow impact of these price increases? Have you already are you receiving the cash And as you are realizing these in the P and L? Or are these still sitting in your accounts receivable and you will get the cash in next quarter in Q4? Yes. As you can imagine, a lump sum payment for the first Half of the year, we already waited a long time due to the negotiations. So cash inflow and EBIT effect is Not simultaneous, but very close. So you for modeling, you can assume that it's pretty much also Cash flow impact full immediately. It's basically synchronized. There's not last It is not that we booked the revenues and cash is coming in later. It's it was not a last minute exercise in September. It is well synchronized over the months. Thank you. You're welcome. We have a follow-up question from Eduardo Spina from HSBC. Please go ahead. Hi, sorry. Very quick follow-up. Hi. On the regional differences, I was curious about one thing. If you're facing different cost inflation in Europe Compared to China, for instance, does it mean that you are pursuing a different pricing strategy in Europe compared to China With stronger price increase in Europe, for example. Thank you. Well, the pricing strategy, and again, it's different by Divisions for sure. Pricing power is a function of the business model and where you sit in the in terms of your competitive edge. And it's also different in regions. I mean, in certain parts of the world, you cannot execute things that we executed in Europe Simply because of what customers are willing to accept, and I would leave it here. The cost drivers are also different, but still it's at the end of the day what the customer is willing to accept and how competitive the market is. Okay. Thank you very much. You're welcome. Okay. I think we are finished. Thanks a lot. After it started a little Slow with questions. We had a lot of questions now. What is good, thanks for the interest. I can only repeat one more time. These are interesting times. And I think these are times where there is a potential for strong companies to get even stronger. We want to be on that side and not on the other side. And I feel very confident with the execution power we have With what we have shown in the past that even if there is a recession in 2023, a diversified supplier with a balanced portfolio will make it. We're looking forward to the next call and to roadshows that are upcoming, also at the beginning of the year. Thanks for listening, and thanks for your Ladies and gentlemen, the conference is now concluded and you may disconnect. Thank you for joining and have a pleasant day. Goodbye.