Ladies and gentlemen, I am very happy to welcome you to today's Schaeffler Update Call. Thank you very much for making yourself available on such a short note. Press releases, the following presentation has been published on our investor relations homepage. Before we move on to the content of today's call, I am, as always, sure that you have all taken notice of our well-known disclaimer. For sure, we will provide the recording and the transcript of this webcast after the call. Today, Klaus Rosenfeld, our CEO, and Christophe Hannequin, our CFO, have joined the conference call. Klaus guides you through the key information in our presentation. Afterwards, both gentlemen will be available for our Q&A session. Let me directly hand over to our CEO. Klaus, please.
Thank you very much. Hi, all. Ladies and gentlemen, thanks for joining the call. You received this morning the second press release after the one yesterday and also our little slide deck. We have basically four messages for you. The first one is not a message, but just a confirmation that we believe in such an environment that we are all experiencing clear priorities and experience is something important. The three key messages are, we decided, given the weak performance of European OEMs in China, that you certainly follow, to do another cleanup step in our E-Mobility business and have, as part of our Q3 results, booked a one-off charge of EUR 220 million that will be complemented in the fourth quarter up to around EUR 240 million.
This is there to proactively reduce risk on the balance sheet and will result in a two-digit million relief in our P&L for E-Mobility going forward. So a proactive move to tackle the situation we have there. Some of you remember we did a similar transaction last year in the fourth quarter, given the situation in the Americas. I think this is the right way to deal with the headwinds that we have, that are not temporary, but probably more a continuous trend that we need to deal with. Let me say already here, this does not mean that we will refocus away from China. The opposite is true. We want to continue with our E-Mobility strategy that has a strong element of gaining business with Chinese OEMs.
Thomas is very well committed here to improve order books also with Chinese customers. The second thing was part of the press release we did yesterday after also internal communication, two key messages on self-help. We have given you a little bit of information how we finalized our last earnings improvement program or profitability improvement program, or structural measures, as we call it, that we announced in November 2024.
And am happy to say that we were able to implement that program faster and also more rigorously than expected, will come to the details in a moment. On top of this, triggered by the discussions in Germany about the pension reform, where certain existing partial retirement instruments or tools would fall away, we decided on August 5th to offer to our employees in Germany, according to the rules of these partial retirement programs, the opportunity to sign early retirement contracts.
I am happy to say that we overachieved our target of 1,300 by nearly 500 contracts. These are not contracts that we want to conclude. These are written contracts properly concluded that we can now execute, and I will come also back on the financial impact of that element in a moment. Number three is, we decided also to share with you latest news on humanoids. The new growth area is further improving, and we were able, in the last weeks, to improve our order book to EUR 400 million with two new Chinese customers placing production orders. On top of this, message number four, we decided to pre-release our preliminary Q3 numbers for the key figures.
I think these are, in an environment that is challenging, solid figures. In particular, when you look at free cash flow, that came out with EUR 260 million+ in Q3 2026. On that basis, I think you will not be surprised that we confirm guidance and also our midterm targets. Next page is just a repetition of our three key priorities, eMob recovery, self-help, and portfolio optimization, then new growth, in particular in humanoids, but also in defense and other areas. Let me come to the cleanup transaction on the next page. As I said, driven by the market development in China, where European OEMs are losing more than expected, starting or accelerating in the summer. We took basically two sets of measures.
We basically addressed overcapacity due to the continued volume reductions, SOP shifts, and also in some areas, project cancellations, and said, "Let's tackle this by a write-off, by also looking at capitalized R&D and other elements." That is the main part of the extra charge that we took. At the same time we said there is also a need, in some areas, for portfolio streamlining, and we decided to exit thermal management system business. That doesn't mean that we exit the complete thermal management business. The module and component business will stay as it is.
That is another sign that we say where we cannot make money going forward, it is better to exit the business, and that is part of this EUR 240 million one-off charge in 2026 as well. As I said before, the transaction will result in a double-digit EUR 1 million positive effect on EBIT in the subsequent years. This is part of our strategy to rightsize E-Mobility. We see that there is ample opportunity in Europe at the moment, driven by the higher oil prices and also by the subsidies. So it is really important here to find the right balance between cleanup and further growth.
I can only say here, as you also see from the margins later on, we are committed to bring E-Mobility across the line as we articulated in our revised midterm targets. Page number six is then priority number two, the so-called self-help measures. Two main messages here. You remember the program that we announced in November 2024, after the Vitesco merger was closed. We announced at the time 4,700 gross reductions to be achieved in 2029 at the latest. What we can say today, we are more or less in a position that we can deliver this one year earlier. You see in these little green bubbles what was achieved also in terms of timing.
You see that the green bars are the ones where people have left us already or exited the company. So of the 3,926 in 2026, 3,715 have already left. The lighter green bars tell you that we still have around 800 to go. This is not something where we need to search for candidates, but the contracts have been signed, so we can say the program is, from our point of view now, finalized and will run off according to plan. The EBIT impact that we promised at the time was EUR 290 million. I can say we overachieved this by more than 20%, as outlined in the press release, that will come in in the years to come. So also positive. Why did we overachieve this?
Because the gross reduction number is not far away from what we promised, but the net reduction number is higher, less transfers and more regulars reduction on the net side, and that increases the number above the EUR 350 million mark. What is also positive, and clearly you all perceive these kinds of programs as investments, we announced for this program, for the headcount reduction part, a provision of EUR 504 million, and we are able to deliver what we promised here with EUR 84 million less, and that's a positive as well.
So program delivered a little bit earlier than expected with a little bit better impact and also lower one-off charges. On top of this, we have this peculiar situation that one of the most interesting instruments in Germany to manage transformations and restructurings, the famous partial retirement contracts, were discussed in the summer that they will fall away. The government has not finally decided on this reform, but it can come every minute.
That's why we started already on August 5th this initiative and said, "Let's offer, using the terms of the November 2024 program, let's offer these contracts to our employees and see what they would like to do." The outcome is on this page here. We were calculating at the time with 20% rates. These programs are only applicable to employees that are older than or that have birth dates after 1971. We calculated 20%, but we came out now with a higher number. This is a staggered approach where someone can sign a contract that is either one year active, one year passive, two year active, two year passive, 3 + 3 , 4 + 4 .
What you see in the right-hand side of the picture in the middle is a blue bar. The 1,768 is the number of contracts that were concluded per October 5th. Of that, 1,569 are so-called 3 + 3 contracts. That means these people are leaving, with active phase being finalized by end of the year 2029. So you can basically add the 1,569 to the 4,804, and you see what the reduction in future will be. The beauty of this instrument is it has an impact on cash that is immediate, with EUR 50 million in 2027, but the EBIT impact only kicks in 2029. It requires a little bit of provisioning because there are some one-time payments included.
For these one-time payments, we have booked EUR 70 million provisioning, but you can basically say we used the 84 release of provision to build the new ones. So we have a built-in release of people over time that makes it plannable, that makes it also very socially responsible to people. Using that opportunity, before the government closes that window, was, from our point of view, the right thing to do. Let me add one more thought here on this table, on this page, to the actual headcount development. Because for sure, you can always compensate reductions by new hires. What you see in this little table there on the right-hand side is that since December 2024, we have reduced headcounts by 6,143 in the company. All sorts of different sources for sure, this is a global number.
But it tells you that we are managing the company in a much leaner way, and that we are not rebuilding what we get rid of elsewhere. I think it is fair to say we have a strong track record of executing structural measures. It is always not easy to do this, but it is a prerequisite for our transformation and for our strategy to become the leading motion technology company. Next page is very briefly on humanoids. This is not a humanoid show today, but we thought we should share at least the latest successes. We have added two China-based customers that placed production orders with us, making it five customers that now are in serious production with us.
We also see that some of the customers sourcing additional products, there is significant activity here. The number of sample orders has increased to 83, what is a significant increase. We also start to count the physical AI humanoid patents, and I can say this whole area has, in terms of delivery, a lot of activity at the moment. For sure, the hype that was there at the beginning is coming down a bit, but we see this as one of the four new growth areas that will guide us into the next years. For sure, an order book of EUR 400 million points in the right direction. Let me go to the last page number eight. We decided to give you and share with you the indicative numbers for Q3.
These are final numbers, but they have not fully gone through the normal process. But they are, in terms of quality, final, and Christophe can talk about this in a moment. What you see on this page is that we are well within our guidance ranges. Q3 with 4.2% margin is what we expected. We always said the second half will be weaker than the first half. For the first nine months, we are cruising at 4.5%. That is exactly in the middle of the range. You see that E-Mobility has improved from -17.6% in the first quarter to now 13.1%.
That is a gradual improvement. Certainly not there where it should be, but the nine months are also inside the guidance range. Powertrain & Chassis with a solid 10.2%, 10.8% in the first nine months, 15.1% in Vehicle Lifetime Solutions. The Bearings & Industrial Solutions close to 9%. That is, from my point of view, something that we can clearly say, is a solid print in a challenging environment. In particular, when you look at free cash flow, yes, over the nine months we are not already positive, but the EUR 260 million that you see there is a strong number, is a good number. You all know that typically in our fourth quarter, we make the biggest free cash flow contribution.
Let's see how this comes, but when you put all of this together, it is obvious that we confirmed our guidance, and on that basis, we also confirm the revised midterm targets. Let me finish my short presentation with the dates. This is a pre-release, as we said, on October 13th, and November 3 is the Q3 full release with much more details. Then we'll go on to the usual road shows, and come back to you then with the Consumer Electronics Show in 2027. I leave it here. I thank you for your attention, and we are ready for your questions. Thank you very much.
We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on the 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. Anyone with a question may press star and one at this time. Our first question comes from Ross MacDonald from Citi. Please go ahead.
Yes. Thank you for taking my question. I have three questions, if I may. First one is just, I guess from my own understanding, maybe to help investors as well. Obviously, there's a small miss on the Q3, and it sounds like you're bang in the middle of the guidance as you said, Klaus. Just can you help us understand why a pre-release is necessary? Because the deviation versus the consensus doesn't seem too material. Just keen to understand what exactly led to the pre-release. Because it sounds like there's some operationally good things happening, and obviously there's some market weakness in Q3, but nothing really that would suggest you don't have confidence in the full year or the long-term messaging.
That's my first question. Second one, kind of linked to that, just on the fourth quarter, you are basically bang in line on full year revenues. If I assume no growth in Q4. Digital] on margin, is kind of bang in line year- to- date on 4.5%. Can you maybe help us. You said the second half would be weaker, but can you maybe help us with the puts and takes on the fourth quarter?
I know there's a lot of talk around reimbursements in Q4. Maybe help us understand where the group margin can track, into Q4. Then final question, just on the assumptions around the China business. How important is it for the German OEMs to recover in China? Is that a reasonable assumption? And what would it do to the 2028 targets if the Germans keep losing share in China as they are? If that's clear. Thank you.
Well, maybe Christophe, I would take the first one and the third one, and you could take the second one. Why did we decide to pre-release? We had a situation here that the three elements that I just mentioned came together and we were ready to go with our preliminary figures. We decided to say, "Why don't we share that with the market? There's a lot of uncertainty at the moment." This is definitely not a profit warning. It's also not an ad hoc statement. We thought it rounds up the whole presentation if we give you an indication where Q3 is going to land. It was more this type of pragmatic thing.
If we go out with something, on the cleanup of E-Mobility, on the structural things, we decided then to add a little bit on humanoids and also the final numbers that were ready. That's the reason why we did this. It was more driven by what does it make sense for you guys to get, before we have a call on Wednesday, where you get ranges, give you the right numbers upfront, at least for the key headline figures. China business, I don't have a crystal ball, to be honest. What I can say that the trend is there since some years that the European OEMs started with the U.S. OEMs, but then also clearly impact the European OEMs, that they are reducing in China.
Being long in the industries, it's never something that cannot be reversed. I'm sure that the big German OEMs, be it VW or BMW or Mercedes, and others, will think hard what they need to do there. For us, the trend as such, became more obvious and also stronger, during the summer break I mean, you all know the numbers, and that's why we decided to do this cleanup thing. If it reverses, fine. Will it go further down, Ross.
To be honest, I can't give you a prediction here, but I think it's good to be risk-averse. It's good to take off risk from the balance sheet and focus on what needs to happen in the future. For us, it's obvious that we need to not only support our European customers as good as we can, but also focus on the growing Chinese OEMs, also when we think about export to Europe and to Germany. Christophe, the second one for you.
Sure. I'm hoping I understood the question correctly, but to give you a bit of flavor on Q4. We are being cautious to be transparent, given the context that we saw during the end of Q3, what we see in, sorry, the end of Q2, what we see in Q3. I've tried to give you a bit of a flavor. VLS, E-Mobility, should be on the right trend. The BIS and PTC are also on a good trend, but there's always a little bit of a seasonal component for these two activities, especially on the BIS side. Nothing unusual, nothing that should be a point of concern as far as you're concerned.
We used to have a problem or a complicated Q4. We again shown that we fixed that more or less last year. We entering Q4 with a cautiously optimistic approach, confirming the guidance. A little bit of noise also around the inflation on some raw materials. I am sure you have heard about circuit boards and the price pressure that we have there. To touch on the reimbursement that might have on Q4, you are correct in the sense that Q4 is typically a quarter where we tend to wrap up negotiations with customers, especially on the E-Mobility side, which tends to bump up a little bit about the bottom line. It is a clear seasonality on the E-Mobility side, a little bit visible on the rest.
Thank you.
Welcome.
The next question comes from Vanessa Jeffriess from Jefferies. Please go ahead.
Hi, guys. Thank you for taking my questions. Just firstly, on the third quarter numbers, as Ross said, small miss, but I think it is interesting that if you look at it versus consensus, it can actually kind of be explained by the higher loss in the other line. I think, as we think about the humanoid SOPs you are seeing, maybe you can help us out with the positive impact you will see from those, and then the offset from end-of-life activities and investment, and how we should think about the other line? Because you obviously do not guide for it, but if we say, EUR -50 million is the quarterly run rate, it obviously has an impact.
We have not presented here the full set of numbers. Would it be fair to pause that question and answer it on November 3rd? That would be easier, but maybe, Christophe, if you want to add some color here. Your observation is in principle correct. You remember that other is not just new growth. There are also other elements in there. For example, parts of our special machinery building. It's a little bit difficult to predict that number. If we can shed more light on this on November 3rd, but at the moment, I would be a little bit hesitant to put out a number here. Because maybe you—
I would go exactly the same way. It deserves a more structured explanation, which we should be able to give to you on the communication on November 3rd.
Thank you so much. Then just secondly, on VLS. I know you said there were operational issues in the first half, and you couldn't fulfill the strong demand, but it looks like from your growth in the third quarter that those are fixed. So maybe if you could just speak about if you're still seeing those issues and if they're all fixed. Should we see the same level of growth in the fourth quarter?
Well, I thought VLS is a business that is pretty stable, because of its European and American setup. We have here and there, a bit volatility. The issues I think are more or less fixed. We saw that as usual, that in the summer, there's a little bit less activity, but September was a strong month. I would say if that continues, and there's no reason to be of a different opinion, then VLS should continue in the range where it's moving at the moment. So, for us, it's one of the cornerstones of the quality of our earnings and, at least what I know at the moment, as of beginning of October, it looks that they are in line with their plans.
Thank you. Last one, just on Powertrain & Chassis. Obviously, it's great that you're able to maintain such a strong margin there, but Q3 much weaker than, say, Q1. When I look at that compared to the medium-term targets, I'm just wondering why does it get better? Because I'm assuming it's quite tough recently because of China, your most profitable region. Obviously, sales will keep declining around the world, you'd think, besides the U.S. So what puts you towards kind of the midpoint of that 2028 target?
Christophe, you want to take that question?
Yeah, keep in mind when you're looking at PTC on a full year basis, you have the impact of settlement of a dispute or quality issues with one specific customer that we booked that overwhelmingly impacted. We had several divisions impacted, but the bulk of the impact hit PTC, and distorts the margin that you see on the year-to-date quite a bit. For me, what PTC is demonstrating more or less quarter- over- quarter is the resilience of its margin basis. They are impacted maybe a little bit stronger also than the others on the China side, over the last few months.
So the market evolution over there and our representation of the combustion engine side versus the E-Mobility side in the overall portfolio today, not tomorrow, is impacting them a little bit more than the rest over the last few months. If you combine the two impacts, then the question will become what happens to combustion engine market in China next year and the following years. This one we're still trying to figure out. But otherwise, we have a solid performance there on the PTC side, and we believe we have the path to the midterm target between now and 2028.
Thank you.
The next question comes from Michael Punzet from DZ Bank. Please go ahead.
Yes, Michael Punzet, DZ Bank. Good afternoon. I have two questions. First one is on the special item of EUR 240 million. Will you receive any kind of compensation payments from the OEMs because we heard from several OEMs that they have to pay a supplier compensation for lower than expected BEV volumes. The second question is, what is the impact from that situation on your order book for E-Mobility?
Well, two important questions. For sure, if you have a situation like this where volumes fall away that were nominated some years ago in totally different circumstances, every supplier goes and sees that he gets compensation by the customer. That is certainly not included in this transaction at the moment. That is something we need to decide how we best do this. It is typically part of a larger negotiation package. You can rest assured that we will go after this. The only thing I want to say here is, this is sometimes between a European supplier and a Chinese customer, and yes, even if it belongs to a European group, sometimes a little bit more challenging.
Yes, we will definitely see that we get this. The EBIT impact that we are saying here, positive, has nothing to do with this. This is the result of the write-offs and lower depreciation in the future. Order book, what I can say is we are adjusting our order books, not just in case of such a write-down. We are adjusting them on a regular basis, reviewing the volumes, reviewing what kind of is the SOP plan still achievable. Therefore, this will be included in order book numbers on a regular basis because of reviews and recalculations. You know that, I think we have shown this, that we have this order book tracking with new orders coming in, orders that become revenues, but also orders that are adjusted because of lower volumes.
Okay. Thank you.
You are welcome.
Ladies and gentlemen, that 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. Thanks a lot, Klaus. Thanks a lot, Christophe. With this, I guess we have reached the end of our call. Thanks a lot for your interest. Thanks a lot for making yourself available on this short-term notice. I hope we could provide you with some additional helpful information. You will not be surprised that we will cancel tomorrow's pre-close call because, to be honest, nothing I could give you tomorrow in terms of a range is better than having a pre-release of the numbers.
Again, if there are more questions, feel free, reach out to our team anytime. Please be reminded that nevertheless, we will start our upcoming quiet period on Thursday this week. Any questions until then, more than welcome. With this, thank you very much for your time. Thanks to the team for the preparation, and have a nice rest of the day. Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.