Dear ladies and gentlemen, welcome to the Schaeffler Group conference call. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. At our customers' request, this conference will be recorded, and the replay will be available shortly after the call on the website. May I now hand you over to Renata Casaro, who will lead you through this conference. Please go ahead, madam.
Thank you very much, operator. Dear investors, dear analysts, welcome to the Q3 2020 results of the Schaeffler Group. Thank you for your time today, although we have already published, abiding with ad hoc regulations, our Q3 preliminary results and our full year 2020 guidance. Leading the call will be Mr. Klaus Rosenfeld, Group CEO, and Dr. Klaus Patzak, Group CFO. Without further ado, I leave the floor to Mr. Rosenfeld. Klaus, the floor is yours.
Ladies and gentlemen, Renata, thank you very much for your introduction. Welcome to our Q3 results call. As Renata mentioned, the numbers have been pre-released some days ago. You saw yesterday evening that we also sent out an ad hoc regarding the guidance. Let me quickly put that in perspective. We simply followed here the inaudible regulation that is relevant for us. The tipping point for this guidance was the positive indications we have for October, and that led us to specify the so far qualitative guidance into something more quantitative that we want to explain to you during this call. Let me quickly go through my part in the overview, and if you please follow me to page four, there you have the key messages, and most of these numbers are known to you.
Group sales clearly show a sequential recovery in Q3, driven by the two Automotive divisions, both Automotive OEM, now renamed into Automotive Technologies and Aftermarket, while Industrial was -8% in the quarter, was lagging behind. I think a positive development on the margin was 9.4%. Also here, Automotive divisions with the stronger improvements in terms of earnings quality, Automotive Technologies, 8.3%. Clearly, a margin that is also benefiting from some of the tactical measures we have put in place. Number three, Q3 free cash flow, strong with EUR 333 million, very close to previous year. Here, you see the impact from proactive working capital management discipline on CapEx, clearly the improved business. This number does not include, for sure, any part of the new restructuring program that is not cash relevant in Q3.
As I said, CapEx, very conservatively managed with EUR 181 million below the 6% benchmark in Q3. In terms of our measures, I think we can report that the cost discipline at group, but also at the division levels, is high, and that the short-time work has, in particular, brought a positive EBIT impact in Q3 that will, over time, then reduce. We see on the headcount number that the previous programs are still showing impact. Headcount further reduced to 83,700. If you compare this over the last quarters, more than 9% down and shows that we are continuously improving in terms of cost management, the full effect related to Europe. I just mentioned the guidance, and we'll give you more color in the later part.
Let me quickly mention here, as all of you know, our next event is the Virtual Capital Markets Day next week, November 19th, where we will also explain midterm targets. If you want to have a high-level assessment over for the quarter, page five gives you the highlights and the lowlights. As I mentioned, business improved in Q3. We see a continuous recovery led by Greater China. Greater China, 16.5% FX-adjusted growth year-over-year. What is clearly positive in America, also with a slight growth compared to previous year, shows that these are the two engines that are driving the recovery. Let me add here, both in the automotive but also in the industrial world, where China is still, in terms of growth rate for us, above the auto growth rate. Capacity utilization further normalized through all the regions and also in all our activities.
In particular, industrial, we see over-utilization in Greater China, capacity utilization more than 100%. This shows that, again, the China business is really performing well. Coping with this crisis needs continuous cost and capital discipline. That is clearly implemented and followed through. That has also led them to this strong free cash flow with a conversion rate of 32%. The negative part, Europe is clearly lagging behind. Here, the impact on industrial was bigger than all the other regions. We have, as explained later in the deck, also had to take some profit impact on the gross profit side, on the industrial side that was driven by fixed asset write-downs and non-personnel related provisions that Klaus will explain later on. Q3 remains the quarter with high volatility and low visibility. In Q4, we expect not to be as strong as Q3.
While there is clearly positive signs in October, the uncertainty remains high, and that's also why our guidance for the year 2020 is rather cautious and conservative. Click quickly through the divisions, page seven. I'm not going to explain this all line by line, but as I said, Automotive saw a strong sequential recovery in Q3. EBIT margin is even above the previous year. Gross margin with an improvement also from all the efficiency measures, good cost containment, COVID-related, and clearly also the right direction in terms of flexibilizing our labor costs. The plants are doing a very good job at the moment to avoid any deviations, and we are quite proud also how the working capital management is steered, in particular by the Automotive plants. Overhead cost reduction 12% also speaks for itself. The two other negatives I already mentioned before, Europe sees the slowest market recovery also.
We have also outperformance in that region. Some color in terms of the business exemplified here on page eight, executing RACE good on track. In powertrain, we see high activity. You remember from our structural measures, the new competence center for e-mobility in Bühl is progressing well. We are proud that we have just been honored by Ford with a prestigious Brand Pillar Global Award for our MHT module. You all know this. It's another proof that that is a big achievement. Obviously, that car takes off quite well, so we are benefiting from this. We have seen from a Japanese OEM a new nomination for a CVT project, what is pointing in the right direction, and also a first nomination for a heavy-duty e-motor. That again shows that our technology, in terms of e-motor and the wave winding capabilities we have, really pays off.
Not to forget the chassis, there's a new partnership with Bosch Automotive Steering to expand the development of our intelligent rear wheel steering portfolio. What also tells you that we are still focusing very much on new technology. Automotive Aftermarket also very short here. Sequential improvement, growth in independent aftermarket 5.5% compared to the previous year, what is clearly showing that business is also taking off robust profitability. We're starting to see first customer shipments from the AKO investment, a long-term investment that you have all followed for quite some time. The AKO is ramped up successfully, we will begin with the relocation of all our central German warehouses.
Just to mention it here already, there is for some time some duplication in this, but I think the tipping point has been reached where we will now successfully execute the relocation and then also harvest the improvement potential. Sales in the OES business has been rather weak with some improvement. That's also nothing unexpected, the higher than expected increase has also challenged our supply chain. Page 10 gives you again, a little bit of color on the AKO benefits. It's a major project. 60% of worldwide inventory is expected in AKO Europe by 2023. We're consolidating seven locations, there is a significant challenge in improving the efficiency with a targeted 30% reduction in run-through times and shipping times. Industrial, page number 11.
Here, as you saw in the second quarter already, China driving the business with continued strong business in wind and also some improvements in the power transmission area. We think that the election in the U.S. could further support everything that has to do with regenerative energy, that would be good for us. Good work on the overhead cost reduction, also the impacts that will be explained later. Also here, Europe rather contracting. In terms of the sectors, maybe just to give you some color, some of the more pre-cyclical sectors off-roads show some improvement. Power transmission also the same. Railway rather moving sideways with a good midterm expectation. Critical sectors like the industrial automation rather still be weak. You all know that tool machinery, for example, is a good indicator for industrial production, textile machines, printing machines, that is still rather weak.
Aerospace in a interesting situation with the civil aircraft's weak, but with cargo and also with military going well. This is also then on page 12, further exemplified with off-road. We have done a lot in the last months to get our distribution business up to where it was and have used the digital format here with some very good feedback from our sales partners. Off-road, I mentioned. Let me go to page 13. I think that's a continued success story, reducing our headcount and delivering on the different schemes we have announced. The voluntary severance scheme from end of last year is up and running well, and we are definitely in time and then also in budget. The new restructuring program announced, it's also achieving what we wanted to achieve. There's clearly no impact yet, but what is important for you to note that the plan is confirmed.
We are now in the third month after announcement and have yesterday already started the implementation of one critical part. The next voluntary severance scheme has been announced here for Germany yesterday. We have reached agreement with Workers' Council how to best do this. There's still a lot of work to be done. We are really pleased that after two months, our HR colleagues in particular, have paved the way here for a successful implementation of this program. Capital allocation, I think I already mentioned the key aspects. The CapEx ratio at the moment is running below our famous 6% threshold, 5.4% in the first nine months shows that we are disciplined. You also see this shift in terms of where we invest. When you look at the EUR 459, EUR 199 come from industrial.
That's clearly demonstrating that the new capital allocation logic with the reinvestment rate logic that we introduced beginning of last year, is starting to pay off with much more focus on making sure that we invest only in the growth areas and be very conservative in the areas where we don't want to grow anymore. That is clearly something that we'll also further explain during our Capital Markets Day. You still see a lot of investment in Europe, but also that will be more explained in the next week when we convene for the Capital Markets Day. With this, I hand over to Klaus for more detail on the numbers.
Yes. Thanks, Klaus, and good morning also from my side. Page 16 shows the key figures, but I will not spend time on that because the following slides lead you through the all relevant key figures. On page 17, on sales growth. Sales is down around about EUR 200 million, a nominal decline of 6%, FX adjusted 2.6%. We had, as already mentioned, a strong growth in China. Aftermarket was benefiting from a strong Americas business and industrial, on the one hand, with a decline in Europe, on the other hand, a growth in China, and I will come back to that in a minute. Also, as already hinted from Klaus, we had quite a good dynamic during the third quarter. Sales in September was already positive.
That means with FX adjusted growth and also in October, we had a continued kind of positive dynamic and again growth in all regions except for Europe, but Europe was also declining more in a low single digit range. You can also see from the difference between nominal and FX adjusted growth that there have been quite strong currency impacts, mainly coming from the renminbi, the peso, the real, and the U.S. dollar. On the next page 18, on the gross profit. You see that gross profit came down around EUR 100 million. The gross margin is 23.8%. This is 160 basis points lower than a year ago. If you look at the bridge, you can see that the price was around EUR 50 million negative, basically stemming totally from Automotive Technologies. Automotive Aftermarket was actually positive. Industrial was more or less flat.
You see in the middle of the bridge, the production cost, it is only -12, but within that kind of piece, there are two different pockets. The one is that we had a strong improvement in production cost, specifically also in Automotive Technologies. On the other hand, this positive improvement was more than compensated by write-downs of fixed assets and higher warranty accruals in both Automotive Technologies and Industry. I will come to that back later. You can also see on the FX effect that this was a EUR 33 million negative. Obviously, that has something to do also with the FX impact on sales, which was EUR 122 million. On the next slide, page 19, you will see the EBIT adjusted development. EBIT adjusted was more or less flat with EUR 320 million in the third quarter.
Actually, the adjusted EBIT, our margin increased by 30 basis points. This strong Q3 margin development was a result of the market recovery, at least this kind of short-term catch-up, as well as temporary measures. These temporary measures include, on the one hand, some postponements of project, but on the other hand, the short-term work, as mentioned by Klaus Rosenfeld. We already saw in the third quarter that the impact of short-term work was significantly lower, basically only half of what we had in the second quarter. Again, I would expect that number to go down again 50% in the fourth quarter. Having said that, also what is clear to you, I guess that the fourth quarter margin will be lower, that it has also something to do with seasonality, specifically in the automotive area.
With that, on page 20, you'll see further information on Automotive Technologies, nominal decline of 4%, FX adjusted 1.1%. October actually again quite good and showing also some growth. Outperformance for the overall business was 2.4%, and year-to-date, 5.5 percentage points, which is clearly above the historical average. That is something which I would not expect for all years to come. On the right-hand side, profitability was up EUR 22 million- EUR 180 million in the quarter, and the margin was at 8.3%, the adjusted margin at 8.3%, 130 basis points above prior year. Again, here you see on the gross profit side, EUR -9 million reported.
Here again, you see this combination of a significant reduced production cost, which is more than compensated by, on the one hand, the price decline mentioned earlier, but on the other hand, also write-down to fixed assets and higher warranty accruals. You also can see then in the following parts of the bridge that in our savings, in R&D, selling and administrative expenses helped us to improve earnings by EUR 39 million, and had therefore a significant impact on the margin. Again, Q4 will be seasonally lower like in prior years. Page 21 on Automotive Aftermarket, nominal down 5.5%, FX adjusted 0.2%, also here, October was good with growth. On the bridge, you see that EBIT adjusted was stable with EUR 86 million, and the margin was up 80 basis points.
Keep in mind, in Q4, margin will be lower because there will be additional costs for AKO, mentioned earlier from Klaus Rosenfeld, which could be in the range of around two percentage points compared to the third quarter. Also seasonally, typically the aftermarket business has some higher mark-on costs to digest. On industrial, page 22, nominal decline, double digit, -11.5%, FX adjusted 8%. If you look on the lower left-hand side, you see that the growth, as mentioned earlier from Klaus, was driven by wind and power transmission. In October, there was still a negative year-over-year development, but only a low single digits, obviously also here, at least in that month, that the business stabilized somewhat. On the margin and the profitability, EBIT adjusted was EUR 29 million lower, coming in with EUR 54 million, and the margin was 7%, 240 basis points lower.
Here you see, if you look at the column gross profit, that the gross profit was burdened by, on the one hand, volume, lower volume. Secondly, uneven capacity utilization with idle capacity in Europe. You remember that Klaus hinted also to the decline of the European business, and on the other hand, also overcapacity in China. Overcapacity also is meaning that you have higher cost than in a perfect capacity utilization. In addition, there have been write-downs of assets, and these write-downs of assets, they are adjusted in the column others in [audio distortion] EUR 20 million. What's not as adjusted is this higher warranty accruals, and in the end, this higher warranty accruals, they also led, if you want to kind of sum it up, also to this decline in margin year-over-year.
On the next slide 23, EBIT before special items to reconciliation, you see that we had special items of EUR 511 million. EUR 485 million out of that are part of the structural measures we communicated September 9th. They split more or less similar to what you can see on the right-hand side into the divisions. For the fourth quarter, I would expect further charges in the area of EUR 50 million-EUR 100 million. That's still depending on further negotiation and communication also outside of Germany. This EUR 511 million, in addition to this EUR 485 million, also includes this EUR 20 million fixed asset write-down, which I mentioned earlier. On the financial result, EUR 24 million, this benefited from a appreciation of the embedded option of the former high-yield bond.
Keep in mind that for the fourth quarter, I would expect here a negative impact in this line item from the refinancing exercise, specifically that includes then the full write-down of the embedded option of this former high-yield bond, which has been repaid in the meantime. Income taxes is positive. That basically is a reflection of the restructuring accruals and the deferred tax accounting, which has been considered here. On the next page, net income. Net income is down EUR 384 million. That is obviously due to the restructuring provisions and Schaeffler Value Added decrease to EUR -75 million due to the lower EBIT. On the other hand, average capital employed declined only in part due to the write-down of goodwill of the Automotive Technologies division in the first quarter. On the free cash flow, page 25. Free cash flow reported actually is up EUR 11 million.
If we strip out the impact from acquisitions in the prior year, we are down by EUR 29 million. Still, I think EUR 333 million in the quarter is a good result, and is benefiting from what Klaus Rosenfeld mentioned earlier, that we had good management on the inventory side, and on the other hand, followed through with the CapEx discipline of the earlier quarters. Within this EUR 333 million, there is a cash out for restructuring expenses, roughly EUR 35 million, but clearly more than offset by the benefits of the German short-time work. Again, here, that positive impact will be lower in the fourth quarter. In addition, in the fourth quarter, there will be a free cash flow impact from the cost, from the cash out from the refinancing exercise, including transaction fees, this [audio distortion] early redemption cost, and so forth.
On the next page, you can see the year-over-year bridge for the free cash flow in the end. You can see it is EUR 29 million difference coming from working capital, which is also a reflection of the high dynamics within the third quarter. You see on the EBITDA, the second column to the left, that this is obviously including the restructuring and other special items in the third quarter of EUR 511 million expense. On the other hand, in others, that has been reversed because this is an accounting entry but not a cash-out at the moment. We also had, in October, a continuation of the positive trend in free cash flow. Next page on working capital. Working capital came down EUR 168 million. If you look at the balance sheet, obviously that includes a negative FX impact.
CapEx was EUR 181 million, down EUR 48 million year-over-year. I guess we can say that for the fourth quarter, we will continue with the CapEx discipline. Reinvestment rate in the third quarter was clearly below one. On page 28, on net debt or net debt to EBITDA, you see that there is an increase from 1.4 a year ago to 1.6. That's driven by lower EBITDA last 12 months. That is what we show here. We expect for the fourth quarter a slight improvement there. The liquidity situation is strong. We have now a cash balance of EUR 1.2 billion, and the available liquidity is at 22% of last 12 months sales. On the upper right-hand side, you see also again, the refinancing topic.
There was, in the fourth quarter, you will then finally see in the numbers a cash on the one hand of EUR 1.5 billion, but also what we have done in October and November is to repay debt of more than EUR 1 billion. With that, I would give it back to you, Klaus.
Thank you very much. Klaus, I've finished the presentation with page 30 and 31. 30 just shows again the new guidance for 2020, excuse me, with the quantitative numbers that you, according to the template that we used at the beginning of the year before we suspended the guidance. I think I don't have to go through here in detail. The only thing I want to say is that this is based on market assumptions, Automotive Technologies. We expect here a decrease of global passenger car production for the full year of -18% to -20% to previous year, also a decline of the industrial production of around 5%. We have clearly based this guidance on the assumption that the coronavirus pandemic will not result in any significant new adverse implications in terms of a second full lockdown or anything that could even be more serious.
You should regard this as a conservative guidance against a development that we see rather cautiously optimistic. Let me conclude on 31, sequential top-line recovery. As I mentioned, Industrial lagging a little bit behind with gradual improvements, but an environment that is still muted, strong earnings quality improvements in both automotive divisions and Industrial with the higher provisions in Q3 that Klaus explained. We are clearly focused on cost reduction, as you know, and the structural measures that are announced at the beginning of September are in implementation and will clearly be executed as promised. The guidance is specified, we all know that the uncertainty will not go away tomorrow, it's still something that we are very focused on to make sure that we improve our competitiveness and also the resilience of the company.
I think the organization has shown that it can cope with the [audio distortion] crisis. We are quite proud what, in particular, our colleagues on the plants and the shop floors are delivering every day. That makes us also optimistic that with our diversified portfolio, with the strong balance sheet, Klaus mentioned the strong liquidity, but also our ability, the proven ability to manage free cash flow. We are on the right track to position us well for the year 2021 and thereafter. 32 has the main dates. We will do, after the Capital Markets Day, a little roadshow in selected countries with the help of JP Morgan, Berenberg, and Jefferies. More importantly, next week at 1:00, our virtual Capital Markets Day, where we will also share with you our midterm targets. Thank you very much. Back to you, Renata, for the Q&A section.
Thank you very much, Klaus. Dear operator, thank you to leading us through the queue of questions.
Thank you. Dear ladies and gentlemen, we will now begin our question and answer session. If you have a question, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question unanswered before it's your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making a selection. The first question we received is from Akshat Kacker of JP Morgan. Your line is now open, sir. Please go ahead.
Thank you. Akshat from JP. Morgan. Good morning. The first one is on M&A and inorganic growth opportunities. Is there any update that you would like to share with us on the M&A optionalities or any targets that you're looking at? Also, in your presentation, I don't see a mention of hydrogen. Any initiatives there that you would like to highlight? And finally, in this context and this topic of other growth opportunities, when you look at your balance sheet with an expected unrestricted cash of around EUR 1.1 billion by year-end, do you agree that bolt-on acquisitions can be financed by cash? That's the first one, broadly around M&A. The second one is on the first nomination for heavy duty e-motors. Is it possible to share more details around the size of this order and the timeline of delivery?
Klaus, if you could share the rationale for OEMs to outsource this to suppliers in an industry that is much more concentrated and vertically integrated, that'll be helpful, please. The last one is on your full-year 2020 guidance released yesterday. What are you seeing from your OEM customers in Q4? Some color around Europe, especially into the fourth quarter, will be helpful. Thank you.
Okay. These were basically six questions. Let's share them. As we have the Capital Markets Day in front of us, we refrained in this presentation from talking about M&A. You know the radar and the strategy. We'll share more with you also in terms of criteria in the Capital Markets Day. Same was true for the hydrogen. I think we indicated that that's one of the growth initiatives. It's also a very interesting proof point to show why automotive and industrial in our Schaeffler case makes a lot of sense to do it together. We are fully determined here. I will also give you a little bit of insight on what that means. There's a hype on hydrogen for sure. Our ability to industrialize a certain technology here is clearly something that is seen as a positive from the many inquiries we get.
We feel that we are well-positioned on that front. On the unrestricted cash, I hand that over to Klaus. The e-motor order, please understand that we cannot give more detail here at this moment. I think this is in the truck area, quite interesting to see that also the business here is not only passenger cars, but it covers more sectors. Also here, we will give you a little bit of insight next week. The OEM behavior in terms of what's coming indicates that the recovery stabilizes. I can say that across the board in our automotive plants, we see good demand also for the next two or three months to come. The outsourcing question is a more strategic question. The key focus is going forward for us on e-mobility, and we know that we compete in certain areas with our OEMs themselves.
In our core technology, I think we have a competitive edge in USPs that they cannot really do themselves. On the question for the unrestricted cash and the guidance, I would hand over to Klaus.
Yeah. I think there was a question also on cash and M&A. I think, first of all, if we talk unrestricted cash, I rather want to first talk about restricted cash because I want to bring that number down. This number will come down in this year and probably also in the next year. We are working on that in part with our banks in order to come here to good solutions. That will then also help the unrestricted cash. At the moment, we are running at 22% of the last 12 months' sales. I think that makes a lot of sense in the current environment, but if you would see that the pandemic is out and the market is getting more stable, then also we can bring that down to a figure which is more in comparison to the historic numbers.
That means also that if there is a stabilization, we could free up cash and then bring it into growth initiatives. That's the first point I want to make. Obviously, we want to keep net debt to EBITDA in a reasonable range. You saw the numbers. Is it 1.6? I said also that will come down a bit in Q4, and that might then be also a level where we feel comfortable with. The other thing I want to mention is on the M&A side that our radar is obviously on. In the Capital Markets Day, we also might give an indication what kind of financial criteria we have discussed in the board. Therefore, please bear with us until next week.
Thank you so much. Looking forward to the CMD.
The next question we received is from Henning Cosman of HSBC. Your line is now open, sir. Please go ahead.
Hi. Thank you. Good morning. I have three questions, please. The first one is, if I understood right from Klaus Patzak, I think you said you're anticipating a two percentage point margin dilution in Aftermarket in Q4 as compared to Q3 from the AKO. If you could please confirm that and also talk about how you see that developing going forward, I think Klaus Rosenfeld said in his opening remarks that there's a tipping point coming, and at some point, of course, the efficiencies will start offsetting the cost redundancies. If you could just remind us of the trajectory of the benefits and the double cost structure. The second question is on the price component in automotives. It does seem a little bit elevated as compared to normal levels. If you could just talk about that a little bit again.
Is it related to certain regions, to certain customers? Do you regard this as rather exceptional or should we sort of brace ourselves for something more similar going forward? The third question, going a little bit into the CMD direction, again, clearly a super strong quarter, again, as were Q1, as were Q2. Quite exciting CMD coming up. All the investors agree, basically, at the same time, they're all a bit anxious to put fresh money behind the story, ahead of a looming, potentially quite large capital increase. Can you just maybe say again if you think this is something that you expect will go away?
Something you'll be able to say next week and give people more confidence to start getting involved with the case more again, or do you envisage this to last beyond the CMD, having the risk of jeopardizing the strong message of the CMD a little bit? Thank you very much.
Thank you, Henning. Maybe I take the last one first and explain again that what we asked for in the summer was an authorization and not a capital increase. That's a big difference. We explained that there's no need for a capital increase, in particular, not from an operating point of view, and I think you see now in the third quarter that that was completely right. The third answer to that point is, we explained that and said we want to have something in our toolbox, and have that completed, going forward. That was also the question from the colleague from JP Morgan. There are opportunities that we may want to look at, there's nothing in the making, nothing concrete that would hint to a capital increase. It's all about flexibility and all about optionality. I can only repeat what we said before.
This is totally consistent, what we always said. There is, please, no intention at all to finance restructuring costs or anything like this with a capital increase. That would be completely wrong. This is, again, it's about flexibility and making sure that we have the right tools available in an efficient manner at the right moment in time. Don't forget, others have also authorized capitals. This is something very normal in a German environment. There's nothing else than this behind that.
On the other, I think two questions. First, on the Automotive Aftermarket business, yes, I can confirm that sequentially, fourth quarter compared to third quarter, I expect increase in expenses for AKO. That would be around 2% margin impact. Also, in 2021, there will be a negative impact investments in AKO, which will be followed then in 2022, with a positive impact coming from the topics which Klaus Rosenfeld mentioned, the better productivity and lower also material costs coming out of that consolidation. On the price decline, I would regard that as a normal price decline. There is nothing which I would see as a big change here. What is good and important is that we are able, with productivity measures, to counter that price decline. With that, back to the next question.
Yeah. Thank you. Sorry, just to clarify then, in 2021, the net effect of the AKO is still a negative effect, right?
Yeah.
In 2022, it turns into a positive effect, correct?
Correct.
That's correct, Henning.
Okay. Thank you very much.
The next question we received is from Sascha Gommel of Jefferies. Your line is now open, sir. Please go ahead.
Yes, good morning. Thank you for taking my questions. It's Sascha from Jefferies. My first question would actually be on the organic growth in e-mobility. Compared to the last quarters, that was a bit soft against the market recovery. Maybe you can give us some more details what was behind that. That would be my first question.
Well, let's go to the page.
The e-mobility was down 5% organically in Q3.
Yeah.
In the last quarters, e-mobility was outperforming quite drastically versus all the other divisions. I was just wondering why it's not the case anymore.
As we always said, you see this also from the sales number. This is EUR 190 million in Q3 2019, and EUR 118 million, Q3 2020. There are some structural effects here that explain these numbers that have to do with also the inclusion of Compact Dynamics and Elmotec, the recovery of the China-Americas market. Don't take this as a trend. This is still the smallest part of our automotive business. What we need here is the midterm focus and the long-term focus. As we're not sharing order book details in the quarter, I can say that there is a positive development there. The book-to-bill ratio is definitely significantly above the ordinary or, let's say, traditional core business, and that's the number to look to.
We feel quite good about our e-mobility position, and I think the two projects that I just mentioned show that even in such a crisis, there is positive momentum to be expected in the future.
I see. We shouldn't consider 180, 190 as a plateau. It's rather we kind of accelerate again from there.
No, definitely not.
Okay. Good. My second question, coming back to the guidance with a bit of focus on Automotive, since you clarified Aftermarket. Why is Automotive seasonally weaker from a profitability perspective in Q4? My understanding is in most years, you should get your R&D reimbursement in Q4. Can you explain that again to me, please?
Well, it's typically demand-driven. I would say Q4 this time is a very unusual situation. In Europe, where we have still the bulk of our business, typically, the December month is not a full month. That normally explains the weakness. In China, that may be different. I think the answer there was more a historically related question. You saw from our guidance that, and that's the general logic there, that we are conservative on purpose. The environment is still challenging. There's a lot of uncertainty and whatever this semi-lockdown means now is difficult to project. Therefore, again, take this as a conservative guidance for both Automotive Technologies and Aftermarket.
Okay, perfect. Understood. My last question would be on the restructuring charges. You booked, let's say, about EUR 500 million after nine months. I think you said you want to book EUR 700 million, Mr. Patzak said you only expect another EUR 50 million-EUR 100 million in Q4. Does that mean there will be another EUR 100 million-ish in 2021, do you think you need less than the EUR 700 million initially expected?
No, the EUR 700 million still stands. If I recall correctly, we said of that EUR 700 million, we expect 80%-90% to be booked in the current fiscal year, depending on the progress. It was clear from the beginning that a part of that can be booked only in 2021, a smaller part, because that has something to do with moving production from one location to the other location, right? This is something which you cannot just book by announcing your plan. These are costs which then need to be carried when they arise.
Appreciate it.
No change in plan.
Done? All right. Thank you. Thank you, gentlemen. Have a good day.
The next one is from Christophe Boulanger of Barclays. Your line is now open. Please go ahead.
Hi, good morning. I will have three questions. The first one is on your financial results. Can you please quantify what will be the Q4 impact of the refinancing on the bond on the financial results? Which is the first question. Second one is on your liquidity position. As I can see on your slide 40, your liquidity position stand at EUR 2.8 billion excluding restricting cash at the end of Q3. It looks to me that historically, it stands below EUR 2 billion, implying over EUR 800 million of excess liquidity. Once the market is normalizing, can you please help us to understand what will be first a fair level of liquidity? Then secondly, would you potentially consider outside acquisition to potentially repay some debt? If so, what type of debt would you repay? The last question is on net leverage.
Your net leverage ratio is at 1.6 x. What will be the acceptable range for this ratio? Is it between one and 2x , or are you willing to go over 2x on a potential acquisition? That's it.
I give it a shot. The first one was on the financial result and the refinancing impact. This refinancing impact, as I mentioned earlier, includes the non-cash impact, which is that we kind of write down the value of the embedded derivative of the high-yield bond. The overall impact could be close to EUR 40 million. The cash impact obviously will be lower then because the write-down is not cash effective. That's on the first question. Second one, on liquidity.
Please keep in mind two things. The overall refinancing exercise was EUR 1.5 billion in new bonds in order to repay EUR 1.6 billion in existing bonds, right? That was not a kind of increase. In the interim, there is an increase, but that will go away when we have fully paid back the bond due in 2022. You have to keep in mind that what your colleague said earlier, the EUR 700 million charge out of the communicated restructuring measures of September, they will be, and that's what I said in the call, roundabout at 90% cash effective. That basically flows into cash flow in the years 2021 and 2022 mainly. In addition, there is restructuring cash out from the former programs, and I mentioned in the call in September that this is around EUR 100 million, so a bit more, so I would say rather EUR 120 million.
That needs to be kept in mind. Obviously, on the other hand, we expect and we work on having an operational free cash flow, and therefore we try to work against that. You will also on the CMD see that free cash flow will play a significant role also going forward in our target system. On the net debt to EBITDA, I think that the 1.6 debt will actually come down a bit. That's what I said already. I think if you talk M&A, then you have to talk not a quarter but also long term, right? In the end, I would not be worried if that is a higher number for a couple of quarters, right? Then there needs to be a plan to bring it back, including with the profitability and cash performance of that entity.
Maybe just to follow up, what will be your long-term target of net leverage ratio then?
That will be communicated in the CMD.
Okay. Thank you very much.
You're welcome.
The next question received is from Catrine Laurie of UBS. Your line is now open, madam, please go ahead.
Hi, good morning, gentlemen. I have three questions. The first one would be on the free cash flow since it was strong versus the prior year looking forward into 2021. Can we expect to see a continuation of the improvement in free cash flow as well similarly? How much of the lower CapEx spend would you consider sustainable? How does that tie in with the investment requirements that you might need for the e-mobility division? The second question would be on the cost reductions. Could you maybe shed some light on how much of the cost reductions are sustainable into the next years? Some of your competitors have given a split on how much they think is temporary and how much they think is sustainable for the next two years. The last question is on the Q4 quarter.
Some suppliers have been speaking of OEMs potentially prolonging Christmas vacations and therefore having less production days in December. You kind of insinuated on generally that there is a seasonality aspect in Europe anyways, but have you heard similar comments on this, and is this baked into your more conservative guidance expectations as well? Thank you.
Okay. Let me take the last one and the first one. I think as Klaus mentioned several times, we will, in the Capital Markets Day, give you also our midterm targets. The guidance for 2021 will come with the annual report sometime at the beginning of next year. In terms of free cash flow, I think you know that this is our major KPI to look at. We have always been good at managing free cash flow. Certainly, there are, as also already mentioned, there are some impacts in there, for example, from short-time work that is not sustainable. Clearly, in terms of CapEx, we follow a strict capital allocation and use of cash policy that is driven by the portfolio and the growth prospects. I would like to leave it like this, and more to come then in the Capital Markets Day.
Last point, what are we seeing for our Q1 call-offs are definitely showing a positive momentum. I can say that I've not heard anyone who says they're going to extend Christmas vacation. I would, at the moment, rather think that the opposite is going to be the case. At least in some areas, we're seeing that capacity utilization is rising. I cannot say that there is a company that has told us that they want to extend Christmas vacation. Then on the cost reduction, Klaus, I'm not sure whether you want to add something there.
Well, there is an impact, obviously, from kind of postponements of projects, right? Therefore, I would expect that the run rate of the overhead costs will be higher in next year than in the third quarter. That's quite normal.
In addition, we mentioned that the impact of short-time work, which has helped us in the second, in the third, and also still in the fourth quarter, that will.
Probably not material anymore. On the other hand, I think also cost discipline will stay in our focus. While we still are investing in improving the company, including in IT and digitalization, we will make sure that structurally we will improve also the cost situation by means of shared services and things like that. Again, here, we will tell you more about the midterm targets in the CMD.
Okay. Thank you both.
Before we take the next question, just a reminder, if you would like to ask a question, please press zero one on your telephone keypad. The next one is Horst Schneider of Bank of America. Your line is now open, sir. Please go ahead.
Good morning. Hello, Rosenfeld. Hello, Patzak. I have got basically just two questions left. They both relate a little bit to outperformance and production outlook. For the fourth quarter, I just want to understand basically how the outperformance is going to develop in the fourth quarter. I understand on market volume, there is always some uncertainty, but on outperformance, you should have better visibility. What is driving that outperformance in the fourth quarter? Can it accelerate further? In that context also, can you explain again what has driven the great outperformance in transmission systems in Q3? Coming back to this comment that you made on Christmas vacations, what is your visibility on that? If the OEMs now run into too high stock levels, they can still change their mind and they can nevertheless leave mid-December already into plant holidays, right?
You know already today that this is not going to happen. Thank you.
Okay. Let me try to take the one on outperformance. As Klaus said, the year-to-date number we see above 5% should not simply extrapolate it. In Q3, it was more in the 2%-3% range. Again, we're going through an unusual situation in terms of development. The transmission situation clearly tells you that when people buy cars, there are not enough e-cars available. The transmission area is benefiting from traditional demand. It's one of our areas where we have the highest profitability as well. At the end of the day, it all depends on which projects are ramping up. To just give you an example, the outperformance in the Americas was strong in Q3 because of the MHT module, that's an e-mobility part. Transmission systems was strong because there was some new projects from torque converters and one-way clutches.
There is also in the thermal management module, it is going well, also in wheel bearings it is going well. It is across the board, where at the moment we see this regional outperformance Q3. Again, when demand continues as it is continuing, I think we should expect something in the normal range that we always had, that is somewhere between 2%-4%. It remains to be seen. This is demand-driven and visibility is getting better. We talked to you about October with a positive development, but the year is not over and there is still a lot of risk. I would like to remain cautious here with any detailed number on Q4 outperformance. The trend from my point of view is solidifying.
Driven then really by the regional mix and the different content per vehicle by region.
Yes.
It is driven by that.
Just think about the dual mass flywheel that you know, is one of the key contributors. If that demand is high in China, it makes a difference.
Yeah. Okay. All right. Christmas vacation, the last question I had.
Again, I said that we don't have any information that people will go into an extended Christmas vacation. What I see from production levels, again, we saw this at the beginning of this year when we shared that with you during the crisis. These numbers all point into a different direction that the week-by-week plant utilization is rather going up than down.
What is the notification period for that? For the December production then? When you have full visibility on that?
That's different plant by plant and region by region. I can't give you that number.
Okay.
We can come back to you and I will talk to them.
Yeah.
What I can say again.
Thanks very much.
That the plants have done an excellent job at the moment, and you see this from working capital. What we had always in the past, where there was some sort of consumption deviations and so on, that's all handled in a very proactive manner, and we're really proud of what the plants are contributing at the moment in terms of cost management and working capital management.
Excellent. Thank you.
You're welcome.
The last question for today is from Gamal Tenaro of JP Morgan. Your line is now open, madam. Please go ahead.
Hi. Thank you very much. I'm not sure whether you are in a position to answer this question.
Sorry. We couldn't hear what you said. Can you please repeat that? Hello?
Mrs. Tenaro hang up at the moment. As there are no further questions, I hand back to Mr. Rosenfeld.
Well, thank you very much for coming together, ladies and gentlemen. We appreciate the interest in the Schaeffler story, there's more to come next week on the 18th. You're cordially invited, we look forward to a next session on the story. Thank you very much. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.