Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Schaeffler Group Q3 and nine-month 2021 Earnings Conference Call. 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. If you'd like to ask a question, you may press star followed by one on your touchtone telephone. Press the star key followed by zero for operator assistance. I would now like to turn the conference over to Renata Casaro, Head of IR. Please go ahead.
Thank you very much, operator. Dear investors, dear analysts, good morning from Berlin. Today, for the Q3 release of Schaeffler Group, here in Berlin are present Mr. Klaus Rosenfeld, CEO, Schaeffler Group, Mr. Claus Bauer, CFO, Schaeffler Group, together with the IR team. Without further ado, let's start the call. Klaus, the floor is yours.
Thank you, Renata. Ladies and gentlemen, welcome to our Q3 conference call that I will do for the first time together with our new CFO, Claus Bauer. As you just heard, there are many clauses. The CEO and CFO is pretty close, as it should be. The real distinction is my name starts with a K, and his name starts with a C. Claus with C, would you like to quickly introduce yourself to this round?
Yeah. Thank you, Klaus. Also welcome from my side. You already stole my entrance here. The most important message on the first slide is that I'm written with a C. I guess in the sixties there was a lot of Klauses in Germany, but again, my distinction is with a C. I'm very happy to be sitting here with you, Klaus, at my first call. Let me introduce myself a little bit. I think you already read it in press releases before or on this slide, but I started my professional life in tax consulting and public accounting before I came to Schaeffler in 1998.
I started there to create a new tax department and tax function, and afterwards headed the corporate accounting function, which was also implemented newly at that time, especially to implement the first international accounting for the consolidated group financials. At that time, IFRS was not as developed, so at that time it was the US GAAP. Since 2002 then, I took over as a regional CFO, first for North America and then later for North and South America when the two regions were merged. After 19 years of doing that, I now finally returned home. As you hear with my accent, I'm born and raised in Bavaria, where our headquarters is.
There is still, after 19 years, I was told, some Franconian accent, but I hope you still understand my English. As I said, I'm very happy to be sitting here, and I'm excited to participate in this first call.
Okay. Thank you, Claus. I think you will have over the years enough time to also meet investors personally and show your face and your strengths. Let me take over now in the usual sequence. I start with the overview. I will then talk about the business development and then hand over back to you on the financials. On page five, you have the key messages for today. I think we can say as Schaeffler Group, a solid Q3 2021 in a challenging environment, in particular in the Automotive Technologies business. Here, we clearly were impacted also by the market disruptions. On the other hand, you can clearly see from the numbers strong growth in Automotive Aftermarket and double-digit growth in Industrial.
As a general statement, also here upfront, I think there is no better quarter than this one to demonstrate to the market and to the investors and analysts how much sense it makes to have Automotive Technologies and Industrial together, as they both complement each other and as diversification in such an environment really can pay off. As you also see in the margin, Q3 EBIT margin 8.2%. We did quite a bit to protect our margin effectively in Automotive Technologies, despite the lower volumes, and had good margin progression in Automotive Aftermarket and Industrial. Here again, I would like to praise the performance of the Industrial division.
Stefan and his team have done for years the right thing to bring this division back on track. 12.4% margin in Q3, I think speaks for itself. We are already at the low end of our midterm guidance here, and that's clearly a success story. Free cash flow in Q3, EUR 225 million. If you go through the details, we are still seeing that CapEx on average is lower than in previous years, but it has increased in Q3.
I would like to put emphasis on the word tactically build some inventories because we are convinced that at some point in time the disruption in particular on the automotive technology side will go away, and then it's good to have invested a little bit into capital for inventories and for delivery performance. The nine months return on capital employed peaked clearly at a strong 18%. We are benefiting here from the strong first half, and we know that this will over time then normalize. I can assure you again that capital management is top of our list, and we wanna be very proactive here and manage our capital, but also our cost wisely and pay attention to the high need for flexibility.
Number five and number six are more forward-looking, and let me first comment on five. You all remember that our colleague, Matthias Zink, introduced some quarters ago the concept of mature and new to demonstrate our approach towards e-mobility and how we cope with that transformation. I'm now happy to share with you the next step in further sharpening that model and boosting our execution, and that is a second view where we differentiate our automotive technology business into powertrain-specific and powertrain-agnostic business. Nothing for today, but an important step forward to give you also more insight how our transformation is going and how we are coping with the challenges in these different four areas.
Last but not least, we have already shared with you this morning through our press and IR release that we confirmed our guidance for margin and FCF. The Automotive Technologies outperformance guidance is also unchanged, good third quarter with about 6%, and we even raised the top line for Industrial. However, the market assumptions for Automotive Technologies have changed, and that clearly means that we will not make the above 11%. That is also shown then later in the charts. All in all, as I said, a solid Q3, demonstrating our strengths in particular when it comes to execution. Page six, highlights and lowlights. I will do that quickly. I mentioned the outperformance in the nine months, 660 basis points in Q3, 750.
Again, it's a quarter is a quarter, but the trend is in our favor, and we can show that we in all the regions we have in automotive technologies, we have been outperforming on the top line despite weaker markets. In automotive aftermarket, also good sales development, increasing demand from individual mobility solutions. Industrial, I already said the most important things. We are and our growth is in particular driven by this brisk economic recovery. We see a broader growth across the sectors, and interestingly enough, wind at the moment is not growing in that quarter and where we're still has to catch up. The automotive industrial ecosystem and equation I mentioned before, and you all know strong free cash flow is what we stand for.
On the lowlights from my CEO perspective, yes, we are still suffering from the semiconductor shortage in Q3 more than in the previous quarters, and that is also a phenomenon that comes across all regions. This semiconductor is just one element of general market headwinds that we're dealing with. It's clearly the uncertainty around COVID, the supply chain situation also in other components and semiconductors and the low visibility. That situation is persisting, and it requires clearly our full attention. On top of this, a topic that we will clearly discuss also in your Q&A session, we see increasing cost of raw materials, energy and transportation as all our competitors do. The question is how does it impact our P&L? Here we have always indicated that that comes with a time lag.
H2 sees already some impact. Klaus will explain that in detail, and this will also, that's our expectation at the moment, also impact 2022. Now let me go to page eight. Here you have a little bit more on automotive. Again, I said most of the things, so I'm gonna keep that slide short in the interest of time. Just to mention the highlights, in the nine months, 16% growth, very much a function of the H1 of the year. In the third quarter, -12%. The margin stands at 7.4% for the nine month period and 4.6% for this quarter. That is a good result compared to the strong headwinds we had experienced.
On page nine, you see some of the achievements and why we are confident that we are well positioned to win. Some of you were participating at the IAA, a very successful event. We have opened meanwhile our new state-of-the-art sustainable e-mobility plant, won the PACE Award for our e-mobility offerings, and are also pursuing on the chassis and mechatronics side the partnership with Mobileye. Clearly a long shot, but autonomous driving and everything that comes with that will be an important topic for the next years to come. Aftermarket, very quickly on page ten, not so much to report. We saw also here in the third quarter, good growth was 8.7%. Margin slightly down. Don't forget, in Q3 2020, there were extraordinary items.
The high comps here should not deviate from the fact that 14.3% or 14.6% is well within the range that we think is a sustainable number for this year. Also here, good progress in terms of our offerings. We are showing you on page 11, the REPXPERT remote support offering, our continuous efforts to make our services more digital pays off, and that is clearly an area where we also think that there is significant growth potential. Industrial, page number 12. You also here saw the numbers already, nine months, 12.1%. 12.4 margin, EBIT margin in Q3. From my point of view, really speaks for itself.
Stefan and his team are doing a great job here in harvesting all the efforts from the past. There's clearly more to come here because the Space Drive that is now, except for one location, automotive ready to go, will also roll in. On the other hand, clearly, the headwinds are going forward on the steel side, and Klaus will also explain what that means in terms of pricing. Here I would like to mention, on page three, a business success that we're really proud of because, on the one hand, it shows our strength in rail, and on the other hand, is a proof point for our commitment to become a player, in particular, when it comes to key sustainability aspects.
Here we are, won an award in the category Climate Change and Circular Economy, the prestigious Railsponsible Supplier Award. We have used, in particular, the circular economy aspect here to present an offering, a product that is not only reducing CO2, but also allows for 100% return service, something that we think is not only attractive to customers, but clearly a step ahead compared to our competitors. Now, if you go to 14, back to capital allocation, you see the key numbers here. One of the concerns in the first half was why is CapEx so low. You see that the CapEx ratio has increased to 6.4%. As we indicated, for the full year, it's still subdued with 4.7%. We think it will continue to increase.
Again, 6% this year is probably not achievable. What we are clearly committed to is to steer our CapEx in a differentiated manner by looking at the reinvestment rate by the different categories. Industrial, as industrial has earned its right to grow, will clearly benefit from a higher reinvestment rate. In auto, we'll look at the growth areas and clearly spend what needs to be spent on e-mobility. But in the other areas, we will consistently steer the reinvestment rate below one and make sure that the capital is invested wisely. You also see that by regions, and it's one of my key topics to make sure that that capital allocation works. Let me say one word on the dividend.
Yes, we are not here today to comment on the final dividend. That's a decision that others have to take. I think it's fair to emphasize that we are clearly following our dividend payout policy with the 30%-50%. Net income is back on track. We all appreciate and know how important dividend for some of you is. It's also something that we will then consider in our decision-making towards the end of the year. I can you know say here that we will definitely come with a higher dividend per share than in the last year. Certainly, a element that we will consider also when it comes to dividend continuity.
Now, let me quickly go through the three strategic issues that I wanna mention before I hand over to Klaus. First one is a little more insight on this portfolio management aspect. The new logic with the second view, powertrain agnostic and powertrain specific that Matthias has designed with us. You mentioned, you remember mature and new, where we said engine transmission on the one hand and e-mobility on the other hand. Now we have taken it one step further and said one of the core elements in our mature business that is powertrain agnostic is our bearing business. The bearing business is clearly a core business. You see it on the lower left-hand side. That is mature because we're doing it for many years.
It's also powertrain-agnostic because you need bearings in cars that are driven by combustion engines, and you need bearings in cars or in engines that are electrified. And therefore, this business is something that we wanna separate in a sense that we put more focus on how can we combine all our know-how, our technologies in the bearing side, and from there, consider how to best improve our products, be it for this type of powertrain solution or the other type of powertrain solution. There is clearly growth potential in this. These may not be the most expensive products, but these are the ones where we have expertise that others don't have, and that's why we think that should be a separate business.
It should be driven and managed by a person who is very experienced and should not be commingled with the other areas. This having said, we will then do a similar thing on the chassis system side. So far, our chassis system, our chassis business was chassis bearings and systems, and now the bearings will move into the mature powertrain-agnostic box while the chassis systems business will be a very new business. It's more mechatronic than the mechanical business, something where we clearly need to grow and also need to invest further to build a proper book of business. We're making good steps here, and I think those of you that participated in the IAA saw that.
If I then look at the powertrain-specific parts, this separation gives us an even better view on how to dovetail our offering towards the mature businesses, in particular ICE, versus the new business where we would have BEV and HEV. That's the logic. It clearly helps us, if we implement this will happen effective first of January 2022 onwards, to differentiate our steering of resources, of allocating capital wisely, and also going for the different growth buckets in these areas. I hope that you will support this. It is a next step to manage the transformation and further gain traction. Second point is synergies. Here, I wanna mention one example. The e-motor is clearly something that has a broader application than just cars. Off-road is very important. We have large off-road customers.
The idea of cross-fertilization between automotive and industrial clearly comes from combining our product know-how with the customer access in off-road. We have a sector that is an industrial sector. Stefan has the customer interface, and Matthias has the product know-how. If you combine this wisely, if we make sure that the leverage that the product know-how we have can be leveraged also towards the industrial customers, then that can make a big difference. This example from a customer that I cannot mention here is one of the encouraging examples that there is more synergies to be harvested if the divisions work closely together. That's page number 17. What combines all divisions and all functions and regions is our effort to become a sustainable company. You saw this end of October.
We have, for the first time, outlined and published our long-term sustainability targets. The headline here is we wanna be a climate-neutral company by 2040. As this is clearly something that requires a plan, we have articulated this against four major milestones, looking at the different scopes. The key logic here is by 2030, we wanna be basically in Scope 1 and 2, so our own production, climate neutral. You see -90% with an asterisk, and that means we are realistic here and say, some of this needs to come from compensation. The bulk needs to come from actual measures to avoid CO2.
The second element of the chart means by 2040, we wanna be climate neutral when it comes to our own supply chain. Here the same logic applies, -90% and some compensation. The Scope 3 upstream, ladies and gentlemen, for us is a challenge because you all know steel is important for our business. It's the main material that we source. Here I can say we announced this morning a significant offtake agreement with the well-known Swedish startup H2 Green Steel. From 2025 onwards, Schaeffler will have the ability to source 100,000 tons of green steel. What is a significant part of our overall sourcing volume from that H2 Gr+
een Steel startup.
That is one of the proof points that sustainability for us is clearly a top priority. With this, I would like to hand over to you, Claus, for the financial results in more detail.
Yes.
Thank you.
Thank you, Klaus. Let's just jump right into some detail of what we already heard in the highlights section. As you heard, Q3 sales decreased, volume and exchange adjusted, by 3%. That has two main drivers. We had obviously a very strong prior year quarter that was in V-shaped catch-up mode after the COVID shutdown in the second quarter of last year. Secondly, obviously, as you heard from many others, but also Klaus already alluded to it, the semiconductor shortage which limited the worldwide car production. Car production, as you know, was down almost 20% quarter-over-quarter. Our automotive division was down only by 12%, which obviously computes to the outperformance of almost 8% here.
You see also already here a little bit what Klaus already mentioned, automotive aftermarket and industrial compensated for the relative weakness in automotive with a very solid growth in almost all regions. From a regional split, you see on the lower right that the impact made in automotive was felt in all our regions except Asia-Pacific. Jump to the next slide and look at gross profit. Solid gross profit margin as you see on the left lower right side due to the fact that the industrial division balanced the relative weakness in automotive.
If we now go back to the left side and look at the waterfall chart a little bit more in detail, there are some really interesting aspects that I want to touch on it. First, reconciliation item here, price with EUR -8. Price is relatively low, negative impact. We would normally see a much bigger year-over-year impact, mainly due to contractual pricing and price reductions in automotive. However, we have some material price clauses in North American automotive contracts, which, with the escalating steel indices, obviously offset some of the normal contractual price reductions.
Automotive aftermarket has phased in already some of the recovery actions regarding the steel price inflation and could already provide some positive pricing impacts here. Next item with volume +EUR 38 million. That's a little bit counterintuitive now that we explain to you that volume was down. On a gross profit level, due to our divisional mix, actually, we see a positive impact with industrial and also automotive with relatively stronger sales performances and much higher margins than our automotive business providing here a healthy positive volume impact to our gross profit line. Lastly, production cost with -EUR 26 million.
I will talk on the next slide a little bit more in detail, but let me already say here that, as you are aware, we are in an almost dislocated steel price environment right now. That impact is hitting us from a purchasing standpoint as we speak. From a cost standpoint, we're facing it with some time lag between procurement and consumption of steel. You see the first impacts here in the column of production cost and the other cost and the other item and driver here obviously is the volume impact in our automotive plants due to lower production volumes.
Let me talk a little bit more in detail about the material price environment. When I say material, I mean mainly steel. As you see here, steel accounts for about 65% of our production material. Production material is about two-thirds of our overall purchasing volume. The rest almost completely is logistics and energy, as you see below, which also make up for 30% of non-production material. All three categories and that's not a surprise to you are a very significant cost driver right now. We have steel areas in cold-rolled steel in the flat product, for example, where we now are facing price increases of over 100%.
Logistics and energy, you have heard from others, I'm pretty sure that container costs are double what we have seen in the H1 of this year. These impacts, as I said, are now rolling in and phasing in. We are already impacted in Q3 by these effects by around 100 basis points. If I take the baseline of the first half of this year, we expect that to double actually in Q4. Q4 then would, based on our prediction of the steel pricing, be close to the peak.
We will see some more escalation in Q1 of 2022, and then hopefully throughout the rest of next year see some relaxation of mainly the steel price environment. As of now we are also expecting around 200 basis points of headwind due to material pricing all of next year, as I explained a little bit more front-loaded, so more challenging in the first half, definitely in the first quarter of next year. We mitigate the situation, as you can imagine, first of all with some material price clauses and contracts, as I already mentioned, in North America.
Really, with pricing actions on the sales side in all divisions. As you can imagine, in industrial with a little bit more catalog sales or catalog product related sales, it's a matter of adjusting the price list. We might see some effectivity in that regard a little bit earlier than in automotive, where it's really a one-on-one negotiation with each customer. Go to the next slide and look at functional cost. You see an increase of 12% quarter last year to quarter this year. However, that is really driven by the low prior year comp.
As you might remember, at that time, we still were in, especially in Germany, Europe, in a short-time work environment, and that obviously is normalizing now. You see the different categories. R&D obviously is back to pre-pandemic levels. Selling costs increased a little bit, also already with the pricing impact based on the logistics side and admin, and that's really also important for me as the CFO coming in here. Somebody said, "Never waste a good crisis." I'm really also trying to steer the entire company here to be conscious of increasing overhead expenses.
You see in admin, although we are now in a normalized environment, we are still significantly below the pre-pandemic levels if you look at Q1 2020. Jumping to EBIT, Klaus already mentioned it with 8.2%, considering the challenging environment, very solid performance for the quarter. We have obviously the Automotive Technologies, if you look at the table on the lower right, with a significant margin impact, mainly driven by the impacts that I already explained, which are the production volumes and fixed cost under absorption in that regard. Secondly, the material price inflation that's facing in.
Automotive Aftermarket, don't get too upset with the margin development quarter compared to prior-year quarter. There was some extraordinary impacts last year. If you looked more on the nine-month average in Automotive Aftermarket, you see we are in the range of 1-1.5 percentage points of profitability here. That is clearly the factoring in material cost impact in that division. Our shining star, Industrial, with really a strong margin, broad cyclical recovery, and offsetting most of the negative impacts that I have explained. Looking on the next page a little bit more into the divisions.
Next three pages, here starting with Automotive Technologies. I already have mentioned it, Klaus has mentioned it in the highlights. Very solid outperformance, but we cannot avoid being impacted by the global issue with reduced car production worldwide. You see on the bottom left, we have around 20%, 19.7% reduced volumes versus prior year quarter. Our sales performance in that area is 12.2%. You see also the regional split which is pretty close. China with a smaller outperformance than the other regions for this quarter.
If you look at last year, which are the numbers in the bottom line here, then China clearly outperformed everybody else. Now we have a little bit of the reverse impact. You also might have read and seen a few of our top global customers, mainly Volkswagen, also experienced relative weakness this quarter from a production and sales volume in China. That is impacting us as well.
From a waterfall chart on the right side, if I bridge EBIT of last year's quarter to this year, in automotive, you obviously see the significant margin drop that we already talked about. Most of that you see is included in the first reconciliation item. It's coming from gross profit, which I already explained. It's really two impacts, production costs due to lower fixed cost absorption as well as material price that is starting to impact us. Maybe you see a relatively significant item on the right side here with others.
This is the recovery of some indirect taxes in Eastern Europe, which we could successfully complete and had a positive impact in that range. Jumping to automotive aftermarket, you see a solid growth here with almost 9%, and you see it then on the left side in the lower area. It's mainly due to the OES business that recovered here. There's also some special impacts in the OES of prior years. Since I am coming from the Americas, I know very well what it is.
It's one specific product that had a repair bulletin in the Americas and that was driving this very significant change and fluctuation in that specific segment. If we look at the reconciliation item or waterfall chart here, then I already said, don't get too much distracted by the significant change here of the margin quarter-over-quarter. Look more on the original month margin, which is in the same range or the spread reduces from this 4% here to around 1%. You see it clearly in the waterfall.
It's also due to higher input costs. Then in the selling expense category, you see also not an insignificant cost increase, which is mainly due to our kitting operation that is now ramping up in Halle, in Germany. That still requires some parallel operation in the old warehouses while we are ramping up. The investments and cost coming with it that we put into our digital sales platform in China. Last but not least, in industrial. Next slide. Yeah. You see the 15.8% sales growth quarter-over-quarter.
You also see on the lower right, actually what Klaus already mentioned, wind and rail a little bit is the sector that is not performing to the other sectors. You see every other sector is close to or significantly over 20%. Wind, we see obviously a normalizing demand level mainly in China in relation to the subsidy policies there. We then reconcile the EBIT year-over-year. You see a very significant gross profit impact that we already explained.
Some of the cost areas in the selling expenses, the EUR -10 is mainly driven by our Project Mountain that I think you're all aware of. That was the attempt to acquire Dodge in the U.S. The cost are now flowing or have been flowing in this last quarter.
On the other side with -EUR 10 million, here we have almost completely negative foreign exchange impact from China between the euro and the renminbi. In total, just to conclude, you see the 12.4% margin, and as Klaus said, we are very well in the direction of our midterm ambition there already. I'll come back a little bit more to the legal side, and you're now looking at the nine months reported EBIT and net income. Then you see, first of all, that our EBIT reported is higher by EUR 27 million than our EBIT before special items.
That is a positive impact from a reversal of accruals in relationship to our Roadmap 2025 that we, because you might remember last year, obviously, that was a special item when we built the accruals, and now the reversal is a special item as well. That is explaining the EBIT reported. Then if you follow the waterfall to the net income, there's really nothing that is concerning here. The income tax rate is in the range of our average tax rate, so no abnormality here.
The financial result actually is a little bit better than what you would have expected based on our interest-bearing debt due to the fact that we had some interest income from an indirect tax case in Brazil that we won. The interest portion of that because it was a very long-running case it is also worked into the financial result. Next slide, please. The net income of EUR 149 million translates to earnings per share of EUR 0.22. It follows exactly what was explained in the prior slides so nothing really to explain on top of that.
Klaus already mentioned the strong ROCE of 18%. That is mathematically obviously driven by four very good quarters of the last 12 months, especially the last quarter of last year and the first two quarters of this year, with still a relatively low capital employed due to our investment activity in the first half. We would expect that ROCE peaks for the next few quarters at that level. Nevertheless, I don't want to take anything away from the very good result for this nine month period. Maybe now coming to free cash flow.
This is actually something that I think we should go into a little bit more detail. Very strong cash flow in the third quarter, actually our best quarter this year. We see cash flow conversion ratio with close to one, also good, and that is despite of the fact that we, as Klaus already alluded to, increased CapEx this quarter significantly. If you look at the top right, you see there's a little bit of working capital increase, and Klaus already mentioned that as well.
We are intentionally managing our inventory to not get caught in supply chain disruptions once our customers can build cars again in the automotive area. As well, we don't want, as you can imagine, to jeopardize any sales on the industrial and automotive aftermarket side with shorting inventory there. We are very conscious in maintaining and improving our delivery capabilities in these two areas.
CapEx, we mentioned, with EUR 215 million, a high spending quarter, with 6.4% for the single quarter, a little bit above our normal guiding level, offsetting some of the slower CapEx of the prior quarters, where you see we have been below 4%. From an outlook standpoint, I would expect a Q4 CapEx a little bit lower, but directionally in the same area. Taxes, as I already mentioned, in the normal levels and the other impacts actually relatively small here as a net number.
That other column already includes, as you see in the bottom table, EUR 75 million cash outflow for our various restructuring programs that you are very well aware of. That is also the main reconciling item between our free cash flow before M&A and special items. You see here, that is even better in the range of EUR 300 million for the quarter.
If you look a little bit right of that, if you look at the nine months, then you see a total restructuring payout year to date of EUR 276 million, which would bring our adjusted free cash flow to almost EUR 750 million, which I think is an exceptional result. If we then go to the next page, you see our net debt and our leverage ratio. Leverage ratio is now better than what our normal guiding corridor would be in the range of 1-1.2.
That is obviously also a mathematical function of our very strong EBITDA that is based on very strong four quarters in the last 12 months. Obviously that math will normalize a little bit going forward. The other factor in that calculation, as you all know, is the increasing cash reserves due to our strong cash flow profile. It's worth mentioning that, as you are aware, we canceled some of our Schuldscheine that we issued last year. They will be paid back in the range of EUR 260 million, actually the day after tomorrow.
With that, we then have no further maturities until March of 2024. The available liquidity, as you can read, is also a very healthy 27% of last twelve months sales. With that, I am through and would then transfer back to Klaus for the conclusion.
Thank you very much. Let's focus on page 33. Ladies and gentlemen, that's our outlook going forward. As regards to market assumptions, clearly changes here on the auto side. You all remember the sharp cut that IHS took. We are now expecting 47.8 million cars being built, which means 18.9 million Q4. That is slightly higher than the IHS forecast. We are up to 75.3, and we'll see how the year is gonna end. Clearly, when you think about where we started, we were cautious when we started. You remember, we talked about around 80 million cars with a 5 million discount in February 2021. It clearly shows, you know, how challenging this year was. Let's wait for next year.
There are various different views on what could happen next year and how this dislocation will disappear. Aftermarket, you know, the GDP grows and also the industrial production grows. Not much more to say here. On the guidance, 34, again, as we said, we have confirmed the EBIT margin with 8%-9.5%. We have confirmed our above EUR 400 million free cash flow guidance. Let me emphasize here the word is above EUR 400 million. No one said that it's EUR 400 million as a point guidance. That also may tackle one of your questions, whether we assume a negative free cash flow for the fourth quarter.
We also confirmed the divisional guidance, the above 6% in auto, clearly, one of the most important cornerstones of our guidance and aftermarket in industrial. In industrial, we even moved the top-line guidance up, while at the same time confirming the outperformance guidance. You all know what that is. The market development, if we add it all up, in auto tech, does not confirm the above 11%. We have brought it down here to above 7%, and I think that is fair and consequential as our guidance was always market plus outperformance. Let me finish the presentation and before we go into Q&A with the final page 35, and I'm not going to read that page to you.
Let me quickly again say there's a lot of operational challenges, I think for all companies, not only for ours. The focus must be on tactical mitigation actions, all hands on deck. With Klaus, we clearly have someone who knows how important the plans and the management of the plans is to manage our performance. I think we have shown to you over the last quarters that we are clearly dedicated to relentless execution and to delivering a solid operating result and strong free cash flow. We also shared with you the more strategic aspects, sustainability, the whole question of further sharpening our model in automotive technologies to manage the transformation.
You know that we wanna pay a decent dividend, but also, you know, stay a strong free cash flow company. What the third quarter clearly demonstrated how positive it is that we have Automotive Tech and Industrial. It starts to really pay off the big investment into the industrial restructuring and the 12% margin from my point of view at that stage here in this environment is a very solid success. Success at the end of the day. I wanna extend that to everybody involved on our side. It's always a function of teamwork and in this environment it is a privilege to have a team that works so seamlessly together in divisions, regions and functions, also to the board colleagues.
I wanna really say thank you here to all of you in this environment. That's not easy. It will stay challenging. We are sure that the environment will not clear up on first of January. The dynamic environment that requires all this flexibility will be a challenge going forward, but those that are able to manage that will also be successful going forward. With that, thank you very much, I hand back to Renata for your Q&A.
Thank you very much, Klaus. I will just remind that we have some roadshows coming up, and you have the financial calendar that's on page 36. Now, for sure, let's hand over to the operator for the Q&A.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. First question is from the line of Gabriel Adler from Citi. Please go ahead.
Thank you for taking my questions. It's Gabriel from Citi. My first is on semiconductors. Can you comment, please, on what you're seeing that gives you confidence auto production could be half a million units higher than IHS expects in Q4? Do you have any view at this point on how you expect auto production to develop into 2022, and if you think IHS estimates also look a little cautious for next year? And then my second question is on the automotive price recovery. Can you update us on any progress that's been made already with the one-to-one customer negotiations that you referenced in the presentation around price recovery for the auto business? And are there any examples you can provide where you've successfully achieved meaningful price recovery from your auto customers in the past?
Because generally investors we speak to are quite skeptical of how successful auto suppliers can be in these discussions. Any update on this topic as well would be really helpful. Thank you.
Okay, let me take on the first one, and then I will share the second one with Klaus. You know, the 500,000 more cars is at the moment our best estimate. It's slightly more positive than IHS, but that should not say that we think the crisis on the semiconductor side is over. We are rather conservative when we look into the next year. We have the privilege to assemble all sorts of data points from various customers. What we are seeing at the moment in October sounds a little bit like we are through the worst, but it doesn't mean that the picture clears up dramatically and very quickly.
Don't put too much weight on this 500,000 more cars. The 75 million is more or less also what IHS says. That's the answer here. On auto tech price recovery, clearly one of the most difficult topics. You will understand that we cannot share with you customer names. What I can share and what I can stress is that our business gathers our sales teams on auto tech are clearly not only us, but also you know driven and move forward into going into these hard negotiations. That is customer name by customer name a discussion. It depends on the contractual relation. It depends on the negotiation power we have in certain areas. That is different by nature.
If you have a broad customer portfolio like we have, to some extent it's easier. You can imagine that a very large customer where you're competing with on new business behaves differently than in another situation. The fact that we have new and mature may help us here in that respect. Maybe Klaus can say something on the one example where, in, not in Europe, but outside Europe, we have contractual relationships where that works quite different than you would assume here in Europe. Again, we cannot mention the name, but maybe you wanna say something as a positive, how that could be structured or how it is handled in the US.
Yeah. A bit before I come to that, maybe, because you also asked from past experience, and I obviously in my prior function at that time as the Regional CFO for North America, I still remember the last steel price inflation. That, by the way, was nothing as we are seeing right now. Nothing was seen like that, dislocation of steel prices that we are seeing currently. Nevertheless, in 2006, 2007, we had the last steel price inflation, and it was exactly as Klaus described. I mean, it was customer by customer, sometimes customer cross product or product line, depending on where the negotiation leverage and power lies.
Then it was an assessment what can be achieved and not. The most important point in that is, I think, that I in my function as the CFO will provide the transparency what the impacts are on the cost side, and then also provide the transparency and reasonable targets for the recovery. Now coming to what Klaus indicated in North America, and I said it in my part of the presentation, we were successful. That's actually also going back to 2006 and 2007 that we have been successful in implementing and sustaining some material price clauses in our contracts with our customers.
That pricing is automatically bound by indices. There's also a significant portion of our business that we entered into a so-called steel buy program, where actually the risk of the steel price is completely transferred to the OEM. We are actually freed of any impact and fluctuation. Also, obviously, you're also giving up opportunities in that regard, but it's a risk mitigation, and that is not insignificant. I mean, it's a model that may be the current situation let our auto OEMs think about it. We see auto OEMs increasing their prices or at least not offering to the end consumer price reductions.
That's obviously not just owed to the material price environment, but also to the dislocation of the demand versus the supply due to the chip shortage and car production. Anyways, we see pricing action in the market along the supply chain, and we will and have to try to recover as much as possible.
That's great. Thank you. Congratulations on the strong success result.
Thank you.
Thank you.
Next question is from the line of Christoph Laskawi from Duetsche Bank . Please go ahead.
Good morning, Christoph Laskawi from Deutsche. Thank you for taking my question. The first one would be a bit of a follow-up to Gabriel, just on the industrials business. Can you remind us of the structure there and how easy you can do price measures? It feels like it might be a better situated even than for the Auto Technologies business, which seems to be managed fairly robust in the sense that you just elaborated on. The second question will be even might be a bit too early to ask on the split that you've shown for the Auto Technologies business. If you could comment just roughly on the size of the bearings and the chassis systems in revenue share or absolute revenues.
The last one, also on Auto Technologies, you highlighted tactical cost savings that help you show the solid margins in Q3. Should we expect part of those costs that you took out in Q3 to come back in Q4 and early 2022, or would those measures be sticky for longer term? Thank you.
Well, let's maybe start with the industrial question first. Klaus, if you wanna add to this. I have more strategic point again. You know, the customer negotiation power in automotive tech is, by the nature of the business, where you have more or less global customers, where the top 10 customers make around 60% of revenues, is quite different than if you operate in an environment with eight different sectors with different dynamics. Here, also the product is quite different. It's less development driven, and some of our product just comes through a catalog. By the nature of that business, we have, you know, a completely different ability to recover higher costs or increase prices. We're doing that on a regular basis.
Certainly you also have here and there development businesses. I would say also in that respect, the industrial part and I would also include the automotive aftermarket part helps us to get through this challenging situation. Again, here diversification counts. Klaus, I'm not sure whether you wanna add a little bit of flavor to the industrial side in terms of what we do in terms of price increases. It's a more regular thing than a one-to-one customer-based price increase.
Yeah, I mean, it's maybe worth to mention that 1/3 of our industrial business is industrial distribution, so through the distribution channels, and that's a price list catalog program based on activity. I don't want to say it's easy, but you adjust your price list and then the typical question is how effective is your price increase in the price list? Because normally you're not impacting existing orders and protect and give the customer price protection in that regard. So it takes some time until price increases phase in.
I think in the East and I would also include automotive aftermarket in all price list oriented business models there's no question that this is a normal exercise. The extent to which it might be necessary now with 100% more expensive steel might be a little bit extraordinary, but it's actually a pretty normal activity per se.
Chris, help me with your, I think your third question. What was the other question? One was on the measures, whether they are sticky or not. I mean, let me answer there also a little bit broader. On the one hand, we have done our strategic homework with the large restructuring programs. You see from the also the restructuring payouts that this is going well. But it will roll in over the year 2022, 2023. We have always said, you know, we wanna finish one program before we start a new one. With the existing program, we feel quite good about this.
In terms of the tactical measures, the tactical measures have to do with how to react on lower volume, in particular in the plants. You know, if volume increases again, if we see significant capacity needs, then we will react accordingly. That flexibility, again, has to be valued. You know, I feel strongly that we have shown in the past that we can operate in this environment. In terms of restating numbers, and I think that was, if I remember correctly, your third question on chassis mechatronics and chassis and how much bearings is in there. Please, again, understand we have highlighted today the logic of this, highlighted why we want these four buckets.
I wanna stress again, the sometimes reception the market that Schaeffler is only a combustion engine-driven company that has no future is from my point of view not only conceptually wrong, but it's also not differentiated enough a view on our portfolio because the bearing business is powertrain agnostic, and that's what we wanted to bring across. We don't have the numbers right yet. We will come up in the new year and give you information about how these four buckets look like. We've done this in the past for the top line, and I think that's also expected going forward. Please understand, I cannot disclose something now. It will be premature, but in March, we'll come back to you on that.
Thank you. That's well understood. Just one follow-up, if I may.
Sure. Please.
On the comments that you made on the tactical cost savings and the volumes. In Q4, when volumes pick up again, we should just see the regular operating leverage on that, and the cost coming back that you took out because of the low volumes, but nothing extraordinary on top when volumes would be more flattish also, rather the usual in the near term.
Yeah, I would not expect. I mean, there is a steel price impact. That's what Claus described. That clearly has an impact, but I can't see anything that would, you know, dramatically change the picture if now there's a big volume increase. Let me say one more word here. You heard this loud and clear. We have invested in working capital, and we feel that our free cash flow allows for this. You know, that can make a difference because delivery reliability, in particular in industrial and in automotive aftermarket, but also to some extent in the auto tech business, is critical.
I mean, let me also add, that was actually what I wanted to add before. Our profitability is not just a function of effective cost management. I think we are doing that. There's no question about it. But as I tried to explain, it's really also a function of what Claus just explained, the positive margin mix in our volume. The volume in total is reduced, but the margin mix is better because the relative weight of industrial and automotive aftermarket is higher and therefore, obviously mathematically, you also come to a higher profitability number. It's really both.
That actually is, I think, another demonstration of our resilience due to our multi-divisional setup.
Thank you for the detail. Very clear.
Next question is from the line of Antoine Bruguier from Exane BNP Paribas. Please go ahead.
Yes, hi. Thank you very much for taking my questions. I had a couple. The first one would be on the e-powertrains and what has been the recent performance. We've seen some of your peers downgrade their expectations or guidance for the full year, and I see that you still had a year-on-year decline despite the very fast acceleration of the sector. The second question would be on the consolidation of the market. In Europe particularly, there are a lot of powertrain players. It's a difficult environment. Any view that you would have on the mid-term or short to mid-term consolidation of the market? Thank you.
Hello, Antoine, thank you very much for the more strategic question. Let me tackle the second one first. Yes, you see a lot of movement at the moment. As Schaeffler always said, for us, it's important that we focus on our core business, on operational challenges, and we have our strategy. We have, to some extent, this peculiar situation with automotive and industrial. For us also making all these strong inroads on the mobility side with a really strong e-motor business with good order intake, you remember the first half. I don't see at the moment any need to do something on the consolidation side. We are rather focused on getting our businesses further improved.
The market may see further moves in other areas, but we think we are well-positioned for future organic growth in that area and delivering on our promises. As you all know, the Dodge transaction was clearly something where we said, maybe there is M&A growth, external growth opportunities for industrial what would further balance our portfolio. In terms of the powertrain business, again, I'm not 100% sure whether I really understood your question. We confirmed our guidance here. We confirmed the above 6%.
We have been cautious, as you know, and let's also be very clear. I mean, this above 6% at the 4.something% in the third quarter shows it is a function of the very strong first quarter. That's not coming back. The order intake, as the other indicator, is continuing well. 2.1 in the first half speaks for itself. Also the fact that we established this new plan with the more efficient footprint gives me some optimism there. Again, this whole transformation is still ongoing, and it will last for quite some time, and the best companies will win, that's for sure.
Thank you very much.
You're welcome.
Next question is from the line of Akshat Kakar from JPMorgan. Please go ahead.
Thank you for taking my question. Akshat from JP Morgan. The first one on automotive technologies in 2022. I know it might be too early, and there are a lot of uncertainties in the market today, but it'd be really helpful if you could lay out the big moving parts for earnings into 2022. Obviously, volumes will be a positive, mix and cost inflation will be negative, but how should we put all of these elements together? Do you think you can still do the more than 6% margin level or even more than 6.5% margin that you will deliver this year? That's the first question. The second question is on working capital management and especially the inventory situation. You mentioned you have tactically built inventories.
Can you help us with what kind of levels do you want to normalize inventories or total net working capital probably as a percentage of sales by the end of this year, or if you have a target for 2022? Thank you.
Okay. You will not be surprised that I'm not going to give more insight on 2022. We first have to finish the year 2021 in this environment. To come out too early with an estimate is, I think, not right. I mean, I fully understand what you're saying. We have these different levers and drivers, and we'll come back to you at the March conference. Volume mix, price will clearly play an important role. Please also, you know, take with you, we guide on the divisions. We'll stay with our guidance logic.
The idea that we started with this year was, I think, the right thing, and it's clearly a function that the three divisions have to be looked at differently. On working capital, yes, I think it's the right thing to do when you have a supply shock to be on the safe side when demand could come back. No one knows how the situation unfolds. Therefore, the tactical inventory building, from my point of view, should be a good investment. We don't guide for working capital ratios, but Klaus, if you wanna give some flavor on how you see it, with your long-term experience, then that's fine. Please go ahead.
Yeah. I mean, a working capital ratio is interesting in a stable environment, and then you can actually steer towards that if you do exactly what Klaus described, and want to
Strategically, position yourself with working capital, especially inventory, then obviously it's getting a little bit meaningless because in area where you have maybe a lower sales level, you want to have a little bit higher inventory to be ready for the recovery boom. I would question a little bit the working capital ratio as a steering KPI, especially in a volatile environment. From an absolute level, I think we are at the absolute level that we would wish and desire. I mean, there's still optimization potential that we will exploit. There is opportunities maybe that we still want to take advantage of.
For example, if we are still into steel price contracts with relatively attractive prices, then we would like to procure as much steel from that source as possible still before year-end until new prices kick in. There are still some technical fine-tuning, but I would say from a big picture, from an absolute standpoint and not as a percent of sale, I think I would feel comfortable where we are at the end of Q3.
Understood. Thank you so much.
You're welcome.
As a reminder, if you'd like to ask a question, please press star followed by one on your touch tone telephone. Next question is from Horst Schneider of Bank of America. Please go ahead.
Hey, good morning. Thanks for taking my questions as well. It's Horst from Bank of America. I want to ask them, if possible, one by one. The first one relates to your great outperformance figure that you achieved in Q3. I mean, already Q2 was excellent. I'm just wondering if you can provide some more details what has triggered this outperformance. Was it driven by. As far as I can see, it was more driven by a higher scale of premium business probably. While that is good at the moment, maybe I'm getting a little bit concerned then about 2022, because maybe a higher outperformance this year means a lower outperformance next year, just because the comp base is getting so high. Would you agree to that or not?
Horst, thanks for the question. You have a little bit more insight on 25, and we all know outperformance is a measure that you have to look at on average. 7.5% for the world in the quarter. In the full year 2020, 4.5%. Then you see something that is a little bit an indicator why Q3 here was also special. You see strong outperformance in Europe while you have little outperformance in China. Europe was 12.1% in the last year, and clearly 2020 was a crisis year. It was 0.9% and the opposite in China. Asia Pacific is our smallest region, clearly here that can be an effect from one of the other large customers.
What drove the outperformance in Q3 is this stronger situation in Europe. Now there are a variety of reasons for this. Some of them are customer related, some of them are product related, some of them are timing related. I think, again, let's not look at this one quarter and build the strength. We have always said 3%-5% is doable. We have shown this over the various quarters more or less seamlessly that within or slightly above this range we will perform. There's no reason now to say the outperformance potential is exhausted and next year that's not possible anymore.
Clearly there is this more strategic issue, wherever you have very strong market positions, outperformance is easier to achieve than where you have very limited market positions. Without saying too much for the new year, this outperformance that we shared with you is part of our midterm target thinking, and it's a more long-term band, 3%-5%, where we are confident that we can achieve this also over the next years.
Mm-hmm. Excellent. Before I ask the next question, I just want to say I also like the numbers. We have great results. Don't get me wrong now, but when I look at the sales by business division, it strikes me that e-mobility year-on-year is down. Less down than engine systems, transmission systems, chassis systems, but nevertheless, when I look at the XEV sales globally in total, and EV sales have more than doubled globally in Q3, if I'm right, and also the PHEVs, let's say are up by, I don't know, 30, 40% globally. I'm surprised that your e-mobility sales are down, but the overall market seems to be up double-digit or am I reading something wrong in this observation?
Well, I think here you need to make sure that we understand the difference between sales levels, where our customers buy cars and our production level, the production levels that are key to us. Again, it's in a market where the whole division Q3 over Q3 is down 12%. It's still the one that has the lowest downward trend. Q3 2020 was already a quarter after the very bad quarter, Q1, Q2, that was up, and in particular, China was up. Now the situation in China is slightly different. That explains this delta. Again, we don't see this as a trend.
We see this as an outlier in a difficult Q3 2021 with all the hiccups in supply chains. We are confident that our e-mobility will grow and outgrow the other divisions over time.
Okay, great. The last question, if I have the opportunity, I still like your Rolling Chassis concept that you presented at the IAA in Munich. I mean, have you got already any first feedback from customers? In your speech, Claus, you mentioned that it's more long-term story, nothing with immediate impact, but any feedback so far from the industry?
Well, definitely the IAA show, as I said, and I think you were there as well, was well received. This Mobileye, you know, construct with our cooperation there is also well taken. For someone like us who is normally associated with bearings and clutches and combustion engines, this is a step forward. You all remember that we acquired in 2018 the drive-by-wire technology that plays an important role here. We're not a software company, but we see that there is ample opportunity in this area. Yes, there is conversations. It's premature to talk about an order book in that Rolling Chassis area.
I can tell you that our chief engineers, the R&D colleagues are looking at this. As usual, the fact that we have a large presence in China, where people sometimes move faster than elsewhere around the globe, helps us here. We'll pursue this. This is a strategic, you know, topic and nothing for a quarter. We'll see how we can, you know, differentiate ourselves. You all know these corner modules, you know the wheel hub motors, things that we have shown for several years now on fairs, and that's the basis for also building this whole Rolling Chassis, and hopefully make a difference in 5-10 years.
If you talk to customers, you mainly talk to the EV startups, right? It's a typical startup product.
Well, well, Horst, now we're getting into something that really becomes very interesting.
Yeah.
Because this whole new world of new players, I can tell you, we have just established a separate GCAM. GCAM means a Global Customer and Account Manager for these small startups. There's so many requests from these areas where people wanna test certain things or ask for new things. This whole world with the new EV players is interesting not only from powertrain, but also from chassis mechatronics. Just think about weight and how important weight reduction and light materials are if we wanna make EV cars more successful.
From this very much narrow focus on, oh, this is a combustion engine versus an electricity-driven car, now the more holistic view on who can contribute what to the car of the future is much broader, and that's, I think, that is positive for us.
Excellent. Thanks very much.
You're welcome.
Next question is from the line of Stephanie Vincent from JP Morgan. Please go ahead.
Hi. Thank you so much for taking my questions. Just a couple from me. Just you guys have been very, I guess, you know, active in the high yield market with green bonds. Thank you so much for the disclosures today. Just wondering what disclosures you're planning on doing next year, in terms of this new EU taxonomy, and if there's any additional disclosures we can expect for investors next year. Then just very quickly on Schaeffler Finance B.V., I know that you don't really plan on doing any issuance. Just wondering if there's anything new happening with that entity, if that's still a subsidiary for Schaeffler AG.
Then finally, if you can allow me one more question, just any differences in contracts, with this new, transitory or longer inflation or energy pricing picking up? That would be super useful. Thank you so much.
Let me take the first one, and then Claus can talk about any plans on the issuance side. I think you saw from the balance sheet information, we are in a situation where we are sitting on significant cash and need to think how we further optimize without any immediate maturities becoming due that we cannot repay. Claus is gonna talk about this. In terms of EU Taxonomy, that is clearly an interesting debate. You will understand, I cannot tell you at the moment what we wanna do simply because the regulations are so unclear at the moment.
In particular for suppliers like ours, I think you know this, there is still a debate with the accountants, the Big Four. You know, are auto suppliers excluded from this? Are they not excluded? Do they come into a specific rule? What are critical components? There's a lot of uncertainty here. From our side, we have done our internal homework. We have tried to apply the standards to our business when it comes to green top line, green CapEx, green OpEx. We've also set our own ideas and said how much of our, let's say, five-year CapEx plans should be devoted to improving on the sustainability side. You saw the targets.
I can only stress again, we are 100% committed to make these targets step by step. It's a long-term exercise. I do believe the regulations will develop. Hopefully with more insight than at first shot. The fact that the new board will be established in Europe and in Frankfurt, where all the big regulators are teaming up is a good sign from the COP. We're a part of the discussions at the COP on this. Again, for our business, that is more than just an auto business, is even more challenging to make sure that we get our information right. In general, Stephanie, I can say, the whole question of non-financial reporting will become much more important in the future. It will be merged with the financial reporting.
I see this as at least a three to five-year task until all of this is properly settled, like we have with IFRS and U.S. GAAP conversions, that there's a lot to do here. I can assure you, we will do our best here to be at the forefront of proper reporting on the one hand, but also at explaining how different business models can be. What counts is really the ambition to deliver step by step. Here again, I can say we are 100% determined to pay what we need to pay on the compliance side, on the other hand, to go for the opportunities for all this to come from there. Klaus, would you take the
Yeah.
The question on the financial side?
As I presented, we have an available liquidity of 27% of last twelve-month sales right now. Klaus, and I also presented our very comfortable cash position. I presented that we are now more in the mode of canceling Schuldscheine whenever we can and paying back. Issuance under normal circumstances right now, also with no further maturities until 2024, is not very likely. When I say under normal circumstances, of course, if you remember back the Dodge discussion. If something like that would have happened, that obviously is also going along with a significant financing exercise.
Under normal circumstances, as I said, nothing is planned in the near future.
Okay. I think that's it. If there are no further questions, I would just like to conclude. Thanks for the interest and all the support. Let me just outline at the end three things that I think is important. Auto and industrial is a competitive advantage for us. Cash generation remains key. We wanna pay a decent dividend, and we will continue to put all our focus on proper free cash flow. It goes hand in hand. I mean, you all know this better than I do with a focused and differentiated capital allocation across the portfolio. You know, going in the right directions in auto and on the other hand, realizing synergies and growing where possible in the industrial side.
With that, thanks for your interest and bear with us. It will be an interesting end of the year and great opportunities to meet with us during the next conferences. Thanks a lot and bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.