Pre-Close Call

Jul 10, 2025

Slides

Ladies and gentlemen, welcome to the pre-close call Q2 2025 conference call and live webcast. I'm Moritz, the call's call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question and answer session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Heiko Eber, Head of Investor Relations. Please go ahead, sir. Thank you very much. Ladies and gentlemen, I'm very happy to welcome you to our today's pre-close call on the second quarter of 2025. Now, before we move to the content of today's calls, I'm sure that you have all taken notice of the well-known disclaimer. Please note that this release and all the information herein is still unaudited and that our next quiet period will start on July 11. We are holding this call to remind you of relevant public information that has been previously provided by Schaeffler AG or is otherwise available in the market, which may be helpful in assessing our company's financial performance ahead of our Q2 2025 results on August 6. Looking at the agenda, I will guide you through the key messages for our group and, of course, give you some more clarity on our four divisions. As already mentioned, after the presentation, there is the opportunity to ask questions. With this, I would directly jump into the content of today's presentation. On slide number three, to start with a brief overview of the key aspects of Q2 2025. Overall, we expect sales to be at previous quarters' level, but having this said, lower year over year. We will talk about the drivers of the sales development when we look at our divisions. Our adjusted EBIT will be slightly lower year over year, and thus also lower than in our first quarter. This means that based on the preliminary numbers, our adjusted EBIT margin for the half-year one is comfortably at the midpoint of our full-year guidance range of 3% to 5%. Allow me maybe one comment. As you all know, we are impacted, of course, by the well-known tariff situation. Despite the fact that we are making very good progress in recovering the effects from the tariffs from our customers, there is a timely delay. Q2 is already burdened with the tariffs we had to pay, while the recovery usually has a three-month delay. Therefore, the Q2 result is a little bit burdened by the tariffs. Going forward, in Q3 and afterwards, assuming that the tariffs remain on today's level, this one-time effect should disappear since the burden in Q3 will be compensated by the recovery from Q2. Regarding our free cash flow, we anticipate a significant improvement compared to our Q1 2025. We are confident that we can reach a neutral free cash flow for the selective Q2 and also therefore very confident to stay within our guidance level for the full year. Now, on slide number four, let's take a look at our four divisions and starting with E-Mobility. In a still volatile market, the trend towards electrification remains intact. There was a lot of talks over the last couple of years, but to be fair, over the last 12 months, we saw that the trend towards electrification regained some of its speed. Year-over-year sales growth is driven by a significant recovery of the market, as already said. In fact, we have several successful launches in Europe, in America, and in Asia-Pacific. As you all know, ramping up and executing our significant order backlog is one of the key success factors for our E-Mobility division. When we are talking about profitability, we were able to further improve our EBIT backed by the mentioned launches, which translate into higher volumes. Of course, we are also making progress on the operational excellence. On Powertrain & Chassis, sales declined year over year. In particular, the light vehicle production in Europe was down 5.5% in Q2, which of course dragged down our top line in the last quarter. However, a large part of the sales decrease in Q2 is driven by our planned phase-out of the non-core businesses and therefore in line with our often communicated strategy. On the long run, of course, will help us on our bottom line. As we have already anticipated in our Q1 release, we expect the Q2 margin to come in lower year over year and quarter on quarter, as if you remember, Q1 saw an exceptional margin north of 10%. When we look at the expected half-year one margin, also here, it should cruise around the midpoint of our guidance range of 10% to 12%. In a nutshell, for PTC, we could again secure a very decent margin level despite the fact that it was slightly lower than in Q1. Taking a look at Vehicle Lifetime Solutions, we see a continued positive market environment for service businesses influenced by the growing and, of course, aging car park. If you remember, Q2 2024 was the best quarter we have seen in 2024. Due to catch-up effects in supply chain, and therefore this represents very high comps for the comparison with our quarter two in 2025. Nevertheless, we were able to grow slightly more compared to last year, supported by a very strong delivery performance, especially in the last two months. The strong Q2 2024 EBIT margin was also partly influenced by a positive sales mix. However, we continue to expect a decent EBIT level that supports also for Vehicle Lifetime Solutions, our full-year guidance. Last but not least, on Bearings & Industrial Solutions, here, the market environment continues to be challenging. This is mainly due to the economic uncertainties that are not improving in an area surrounding where we, for example, still have not real clarity on the U.S. tariffs. Nevertheless, overall, FX-adjusted sales performance was solid in Q2. With regards to the regional sales distribution, especially Greater China performed well. We therefore could at least partly compensate for the weaker top line in other regions. Sector-wise, especially wind and aerospace performed very well and therefore significantly better than other sectors. The margin is higher year over year, obviously, underlining once more the clear improvements we see not only in selected sectors, but also with regards to the first positive effects related to our forward program. You might remember that the division's Q1 result, as we have stated various times, was included having some positive one-time effects. Nevertheless, our half-year one result for Bearings & Industrial Solutions will trend at the upper end or slightly above of our full-year guidance. We feel that this will also be achievable for the full year 2025. If we move to slide number five, talking about the targets for the full year, we confirm our guidance for all metrics. At the divisional level, adjusted EBIT in Powertrain & Chassis and Vehicle Lifetime Solutions is anticipated to come in at the midpoint of their respective target ranges. As said before, Bearings & Industrial Solutions should be trending at the upper end of the range, while E-Mobility, as we have already indicated in our Q1 numbers, will presumably be at the lower end of our guidance range. Before we now jump into our Q&A session, just one short notice. After the call, as usual, we will distribute our consensus sheet. As always, we would be very grateful for your contribution and your estimates, if possible, already until Monday next week after close of business. Now, let me hand over to the operator for your questions. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to disable the loudspeaker mode and eventually turn off the volume from the webcast while asking a question. Anyone who has a question may press star and one at this time. One moment for the first question, please. The first question comes from Christoph Laskawi from Deutsche Bank. Please go ahead. Hey, good evening. Hi, Heiko. Two, if I may. The first one would be just on the tariff effect that you highlighted with the lag effect. Is it fair to assume that this is predominantly in the Powertrain & Chassis division as this would be as E-Mobility is not as much impacted from this right away? I would assume just from the regional exposure. Could you just remind us on the sequential building blocks for the Bearings & Industrial Solutions margin? How much was in Q1, sort of the catch-up effect from a weaker Q4? What are the negative drivers Q1 to Q2? If you could provide rough sizes, that would be appreciated. Thank you. No, thanks, Christoph. On your first question, yes, the biggest part of the impact from tariffs we see on Powertrain & Chassis. A smaller part is also impacting our Vehicle Lifetime Solutions business since, especially for this business, not all products are localized, but the bigger chunk of the impact is on the PTC side. Regarding your question on Bearings & Industrial Solutions, you remember we had a Q1 with slightly above 10%. Very rough, there was roughly 1% that I would attribute to effects that could have also been shown in Q4 2024. Carryover effects and a similar amount where we had impacts due to inventory evaluation. I hope this helps to clarify. Thank you. The next question comes from Stefan Benhamou from BNP Paribas Exane. Please go ahead. Hello, Heiko. Thanks for taking my question. The first question is regarding the FX impact in Q2. What should we expect in terms of impact in Q2, and what's your assumption for the full year based on the spot rate? The second question is on the tariff again. You've mentioned earlier that there was around €3 billion of trade flows that were impacted by the current trade tariff policies. Could we have an indication of what could be the impact in Q2 just to anticipate what could be the full-year impact? The last question is about the guidance. Your guidance is for the moment based on the GLVP decline of 1.7%. S&P revised up its estimates to minus 1.3%. Are you now more comfortable with the upper range of the sales guidance given the latest update in terms of GLVP volumes? Thank you. Thank you. Maybe let me start with the FX impact. I have to apologize. Since we are still talking about unaudited numbers, I will have to ask you for your patience. FX impact, we would comment during the Q2 call. I hope you can understand. Regarding the tariff impact, in Q2, we had a low triple million impact from negative impact from tariffs. As I mentioned, we are very confident that we can, I'd say, fully recover this impact now in Q3. The last question on the outlook for this year. Agreed. We see that according to S&P, there might be some upwards potential. Nevertheless, since the call-off horizon that we receive from our customer is significantly lower than it was in the past. Historically, we normally had quite good visibility for three to six months. At the moment, we don't get any better call-off numbers than for the next four to six weeks from our customers, which shows that there is still a lot of uncertainty also on the customer side. Therefore, for now, we feel that we are well advised to keep the guidance where it is today. For sure, we would not be sad if volumes in the second half would turn out to be a bit stronger than what we see at the moment. Very clear. Thank you. Thank you. The next question comes from Vanessa Jeffries from Jefferies. Please go ahead. Hi. Thanks for taking my question. Just first, on E-Mobility, I was wondering what are the factors in the second half to give you confidence on getting into the guidance range, and how much is R&D reimbursement versus your own actions? Let's start with the R&D reimbursements. The good thing is that over the course of the last one and a half years, we did quite some effort to make sure that we don't get all the reimbursements just in the very last quarter because then you always run the risk that the one or the other customer might slip over to the next year. We were able to prepone or to, let's say, level it a bit better over the second half of the year. Of course, a part of the anticipated improvement to get us within the guidance range is driven by the not just expected, but by the contracted R&D reimbursements. The second part, and frankly speaking, the bigger part is really coming from volume and accomplished ramp-ups since typically in the first three to six months after you ramp up a new project, you are facing higher ramp-up costs that, of course, are normalizing over the course of the year. Especially what we have seen now with the launches we had over the last three months, the launches went really smooth. That, of course, is helping to avoid unwanted one-time effects. Volume-wise, we would still hope that the market recovery continues and might, and hopefully, continues to speed up a little bit. It is, I think, good that we have it in our own control to reach our guidance range with E-Mobility, and we are not so much depending just on a stronger market recovery. Thank you. Just on Vehicle Lifetime Solutions, a lot of the growth seems to be coming from Asia-Pacific, where the margins are a bit lower, I think. If you keep seeing that growth come from Asia-Pacific, is there any risk to the full-year guidance? Maybe we did a mistake in our previous communication when you got the impression that our margin in Asia is lower than in the rest of the world. I can assure you this is not the case. If we get some tailwind in Asia, that will contribute to our bottom line development, same as if the tailwind would come from any other region. There is no significant margin difference between the regions. Okay, thank you. You're welcome. The next question comes from Mark René Thon from Babok Research. Please go ahead. Yes, good evening, and thank you for taking my question. Just to come back to the tariff effect, just to make clear that I understood that right, you said it was a low three-digit number as an adverse effect of putting it into our. Low double-digit EBIT number. I hope I didn't. A low one, right? Low double-digit? How do I express this in a nice way? Low to mid-size? Does this help? Okay. I think that because otherwise, I mean, the underlying margin would have been very strong in the second quarter. That's just what I wanted to make that clear. The second question would be a bit on the Powertrain & Chassis sales decline. I think when I look back in the first quarter, FX-adjusted, I think it was down about 11%. When we think about the second quarter, should we assume a similar magnitude in a year-on-year comparison, or is there anything materially different? for Powertrain & Chassis, it is pretty much on the same level like our Q1, in absolute terms. As said, a part is, of course, coming from the weakness we see, especially in Europe. Frankly speaking, we, of course, still see that also in China, despite the fact that range-extended cars are picking up a little bit, but we still see an unbroken trend in China to best cars. There is no real help on the Chinese market. Really, the biggest driver is the fact that we are now more and more seeing the expected and actually wanted effect from phasing out the non-core businesses. That's mainly the non-core business that has been inherited from Vitesco. On the turbochargers, for example, this is now really taking effect since the volumes or the projects have reached now the end of their life. We have reached the end of our contractual obligation, and therefore, we see the respective effect in the top line. Perfect. Thank you very much. You're welcome. The next question comes from Sanjay Bhagwani from Citi. Please go ahead. Hi. Thank you for taking my question also. Three questions as well. The first one is on the tariffs. I think you mentioned that there will be a three-month time lag. Is this something subject to negotiations or has it already been agreed? Can there be a retroactive payment in Q3 for Q2 plus Q3, or is this more like a rolling, assuming the tariffs stay there? For example, for Q4, you get in Q1 next year. That is the first question. I'll just follow up with the next one after this. Thank you. You're right. It is rolling. It is unfortunately not as easy as it looks. It's not so much about whether the customer agrees or disagrees that we get compensated for the tariff impact. On that side, we are clear with most of the customers. There is a general agreement that we get refunded for the tariff impact. The actual doing is what makes it a bit more tricky because basically, the customers would like to see a proof basically on a part number level. To put together this information, to have it verified by the customer, and then to get compensated finally, that's what I meant with this roughly three-month time delay between the time when we are actually paying the tariffs and when this administrative execution of the recovery is eventually done. Therefore, we will not see a situation or most likely not see a situation that in Q3, we see the recovery of Q2 plus getting the direct payments for Q3. It will be more like a rolling thing. Q3, we get the money for Q2. Q4, we get the money for Q3, and so on and so on. That's a little bit the logic. Understood. That's very helpful. The second one is on the cash flow. What's driving the significant improvement in cash flow? Is it fair to say because you will also receive the payment for the tariffs, which you incur this quarter and you didn't? Sequentially, do you expect the cash flow to be better, like Q3 and Q4? If you can provide some color there. I mean, you remember now, our guidance on the cash flow was minus $200 million to zero. We already indicated in our last call that, of course, it's our ambition to not end up at the lower end of this guidance range for various reasons. Having started the year within, let's say, normally seasonalized pattern with a significantly negative cash flow, Q2 now, significant improvement. We expect that this improvement will continue. What we have to keep in mind, also Q2 and the following quarters, they are still impacted on the cash flow side with cash outs for the integration costs and for the forward program. That remains unchanged. The cash generation ability of Schaeffler AG is still intact. The operative cash flow is still as strong as it used to be over the last years. Thank you. Helpful. The final one is on, I understand Q3 has just started. I think you mentioned it's normally maybe it's like three to four weeks of call-off visibility you have. Have you seen anything unusual in any of the regions which you think could be worth flagging? No. I mean, where we continue to be optimistic is on the industrial side in China. What we see at the moment is that the nice performance that we have seen, especially in Q2, can be sustainable. That's, I think, good news. On the automotive side, the pattern is unchanged. We see Europe still under pressure. We see that the stocking for pure EVs is picking up again. That's basically a mix of people rediscovering their love for EVs and, of course, the increased number of ramp-ups in the industry. The available models are increasing month by month. Other than that, the big question mark with regards to market development remains the U.S. We would not dare at the moment to make a prediction on how the U.S. market will develop over the next months. It remains an area of uncertainty, I would say. Thanks, Heiko, as always. Very, very helpful. You're welcome, Sanjay. Ladies and gentlemen, this was the last question. I would now like to turn the conference back over to Heiko Eber for any closing remarks. Thank you very much. As always, I would like to thank you for your time and for your interest in our company. If there are any questions, please let us know. Final reminder, Q2 numbers will be published on August 6th. As said, we are very thankful for your contribution to our consensus. With this, all that is left to say is a big thank you to our team for preparing the documents and setting up the call. Thank you very much. Have a nice rest of the day and talk to you soon. Ladies and gentlemen, the conference is now over. 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