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Management Report

Report on expected developments

Expected economic and sales market trends

The International Monetary Fund (IMF) anticipates that the global economy will continue to gather momentum in 2018 (January 2018). The IMF expects global gross domestic product to grow by 3.9%. Oxford Economics anticipates the same growth rate (January 2018). In light of these forecasts, the Schaeffler Group expects global economic growth of just under 4% in 2018.

The expected development of the global economy is subject to a number of uncertainties. Should the international equities markets experience persistently falling prices, this would adversely affect on the real economy. In addition, if the global financing environment tightens up more than currently expected, for instance, in form of an unforeseen increase in interest rates, this could especially hamper the development of the emerging countries and could also destabilize the global financial markets. China remains susceptible to an unexpected set back in growth, especially considering the debt problem in that country. Finally, global economic growth might be impaired by increasing trade protectionism and an escalation of existing geopolitical conflicts.

The negotiations between the United Kingdom and the EU are currently focusing on future trade relations between the two economies. Based on their current status, it appears unlikely that the two parties will fail to reach an agreement – which would result in the United Kingdom withdrawing from the EU unsys tematically and trade regulations reverting to the rules of the World Trade Organization. Additionally, it is currently expected that there will be a transition period until the end of 2020, during which the United Kingdom will remain a member of the EU single market and the European Union Customs Union. However, if it becomes clear early-on that the result of the negotiations will be adverse to the United Kingdom, this could lead to (further) economic distortions prior to the withdrawal – primarily in the United Kingdom itself, but, due to existing trade ties, in other EU countries as well.

Taking into account the forecasts of research institute IHS (February 2018), the Schaeffler Group expects automobile production, measured in terms of the number of passenger cars and light commercial vehicles produced, to increase by about 2% in 2018. The Schaeffler Group anticipates growth of about 3.5% for the Europe region and a growth rate of about 1. 5% for the Americas region. The Greater China region is expected to experience a growth rate of about 3%, while automobile production in the Asia/Pacific region is forecasted to decline by about 1%.

In light of the IHS forecasts (February 2018), the Schaeffler Group expects the global vehicle population, measured in terms of the number of passenger cars and light commercial vehicles, to decline slightly in 2018 compared to 2017, with the average vehicle age remaining nearly unchanged.

The Schaeffler Group anticipates industrial production to grow at a similar rate in 2018 as it did in 2017 (Oxford Economics, December 2017).

Schaeffler Group outlook

The Schaeffler Group expects its revenue to grow by 5 to 6% excluding the impact of currency translation in 2018.

In addition, the company expects to generate an EBIT margin before special items of 10.5 to 11.5% in 2018.

The Schaeffler Group also anticipates approx. EUR 450 m in free cash flow before cash in- and outflows for M&A activities for 2018. In a change from the guidance provided for this indicator in the prior year, beginning in 2018, the Schaeffler Group will report free cash flow before cash in- and outflows for M&A activities. The adjusted comparative figure, free cash flow before cash in- and outflows for M&A activities for 2017, amounts to EUR 515 m.

The Schaeffler Group anticipates that its Automotive OEM division will continue to outperform the global automobile production of passenger cars and light commercial vehicles, expected to expand by about 2%, in 2018. Based on this expected outperformance, the Schaeffler Group expects its Automotive OEM division to generate revenue growth excluding the impact of translation of 6 to 7% (2017: 6.5%). This expectation is supported by orders won in the 2017 reporting period, known as lifetime sales, of EUR 11.5 bn, representing a “book-to-bill ratio”, the ratio of order intake to revenue for the year, of 1.3x. The company also expects an EBIT margin before special items of between 9.5 and 10.5% for 2018 (2017: 10.8%) for the Automotive OEM division.

Given the stable growth in the global vehicle population and a nearly unchanged average vehicle age, the Aftermarket business will likely also continue to grow as well. Based on its own observation of the market, the group expects the Automotive Aftermarket division to generate revenue growth – excluding the impact of currency translation – of 3 to 4% (2017: 3.2%) and an EBIT margin before special items of 16.5 to 17.5% in 2018 (2017: 19.0%).

In the Industrial division, an encouraging trend in order intake combined with the economic environment in certain sectors suggest a slight increase in revenue in 2018. Based on these considerations, the company expects its Industrial division to generate approx. 3 to 4% (2017: 5.7%) in revenue growth in 2018, excluding the impact of currency translation. In addition, the Industrial division anticipates generating an EBIT margin before special items of between 9 and 10% (2017: 8.0%) in 2018.



Herzogenaurach, February 19, 2018



The Board of Managing Directors

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