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Overview of results of operations 2018

The Schaeffler Group increased its revenue by 1.6% to EUR 14,241 m during the reporting period (prior year: EUR 14,021 m). The impact of currency translation had an unfavorable effect on the revenue trend. Excluding the impact of currency translation, revenue was up 3.9%. The divisional trends were mixed in 2018, in line with the relevant market conditions. With global industrial production increasing, the Industrial division expanded its revenue by 10.1%, primarily due to higher volumes in the Greater China region. Thus, the division continued its upward prior year trend with added momentum. The Automotive OEM division, on the other hand, was operating in a persistently highly volatile market environment in the global automotive business in 2018. Having met expectations for the first six months, the Automotive OEM division was unable to meet its targets in the second half of the year. The division reported a decline in revenue for the second half of the year compared to the prior year, excluding the impact of currency translation. This was mainly attributable to the weak market trends in the Europe (partly due to the new emissions testing methodology WLTP) and Greater China (partly due to continuing trade conflicts) regions. Compared to the prior year, the Automotive OEM division reported weaker overall revenue growth of 2.1%, excluding the impact of currency translation. This growth, generated under adverse market conditions, still exceeded average growth in global production volumes for passenger cars and light commercial vehicles, which declined by 1.1% during the reporting period. The Automotive Aftermarket division fell short of original expectations in 2018 as well. Following an overall solid first six months, the Automotive Aftermarket division reported a drop in revenue in the second half of 2018 compared to the prior year. This trend was primarily influenced by lower demand from a few major customers in the Europe and Americas regions. This division’s revenue growth for the full year 2018 amounted to 2.2%, excluding the impact of currency translation.

The group’s EBIT margin before special items declined to 9.7% (prior year: 11.3%), with the Automotive OEM division’s margin falling to 7.7%, considerably below the prior year level (prior year: 10.8%). On the one hand, the decline was attributable to weaker growth in global automobile production, with production figures dropping considerably in the Europe and Greater China regions, especially in the second half of 2018. On the other hand, the company could not offset the impact of these lower volumes and increased pricing pressure as well as costs related to the realignment of the business portfolio with sufficient compensating measures and increased efficiency. The 17.0% margin of the Automotive Aftermarket division also fell short of its prior year level (prior year: 19.0%), mainly due to adverse pricing impacts and increased functional costs. The Industrial division, on the other hand, considerably improved its EBIT margin before special items by 3.0 percentage points to 11.0% (prior year: 8.0%). Along with the clear increase in volumes, progress in implementing the measures of the second wave and the – now full – potential of the measures of the first wave of the program “CORE” made an impact in 2018.

Net income decreased by 10.2% from EUR 997 m to EUR 895 m. Excluding net income attributable to non-controlling interests of EUR 14 m (prior year: EUR 17 m), net income attributable to shareholders of the parent company of EUR 881 m was 10.1% lower than in the prior year (prior year: EUR 980 m). Earnings per common share amounted to EUR 1.32 (prior year: EUR 1.47). Earnings per common non-voting share amounted to EUR 1.33 (prior year: EUR 1.48). The Schaeffler Group generated free cash flow before in- and outflows for M&A activities of EUR 384 m in 2018, EUR 131 m less than the prior year amount of EUR 515 m. The decrease was caused by cash flow from operating activities falling from EUR 1,778 m to EUR 1,606 m, hampered by the decline in earnings in 2018. The change in working capital, on the other hand, made a positive impact on the cash flow trend. The working capital ratio improved to 17.9% (prior year: 19.0%). Capital expenditures amounted to EUR 1,232 m or 8.7% of revenue, less than in the prior year (prior year: EUR 1,273 m or 9.1% of revenue).

Schaeffler Value Added before special items (SVA) declined to EUR 556 m during the reporting period (prior year: EUR 787 m), representing a return on capital employed (ROCE) before special items of 16.7% (prior year: 19.9%). The decline was attributable to lower earnings in the Automotive OEM and Automotive Aftermarket divisions combined with an increase in average capital employed.

Significant events 2018

Schaeffler presses ahead with transformation

Strategy Dialog

The Schaeffler Group’s Strategy Dialog held from July 9 to 11, 2018, was dedicated entirely to the implementation of the Schaeffler Group’s medium-term strategic objectives for the strategic challenges E-Mobility and Industry 4.0. Participants extensively discussed issues including positioning the Schaeffler Group in the chassis field, the direction of the company’s IT infrastructure in view of the implementation of the Digital Agenda, and the implementation of the “Global Supply Chain” initiative.

Agenda 4 plus One

The comprehensive program for the future, the “Agenda 4 plus One”, was expanded from 16 to 20 initiatives in early 2018 in order to also address issues the company has more recently put a sharper focus on. All 20 initiatives under the “Agenda 4 plus One” are in the implementation phase. Implementation of the program is currently 55% complete.

One example of this is the opening of the new European Distribution Center (EDC) celebrated in Kitzingen on June 4, 2018. The Schaeffler Group invested approximately EUR 110 m in the construction of this new location, which will distribute the Industrial division’s products to the European market. In addition, the Automotive Aftermarket division started construction of its Aftermarket Kitting Operation (AKO) in Halle (Saale) on June 15, 2018, another milestone of the implementation of the “Agenda 4 plus One”. With capital expenditures totaling approximately EUR 180 m, the construction of this state-of-the-art assembly and packaging center represents the Schaeffler Group’s Automotive Aftermarket division’s largest single capital investment project to date. The AKO will commence operations in the first half of 2020. Both of these initiatives will directly help improve the Schaeffler Group’s delivery performance and secure its competitiveness.

Two of the 20 strategic initiatives comprising this program for the future will be successfully completed in early 2019.

Schaeffler AG and IG Metall sign future accord

On April 16, 2018, the company’s Board of Managing Directors, Works Council, and the IG Metall trade union signed a Future Accord. The parties’ intention in signing the Accord was to jointly and collaboratively manage and drive the ongoing development and transformation of the Schaeffler Group – with particular regard to the three key future trends of E Mobility, Industry 4.0, and Digitalization – in the interests of the company and of its employees. Under the Future Accord, the Schaeffler Group will make available a EUR 50 m innovation fund over a period of five years. The purpose of the fund is to foster innovations and thereby to actively harness the great innovative capacity of Schaeffler’s employees and to achieve sustainable value creation.

Leadership roadshows

“Leadership road shows” were held across all regions in 2018 – starting with the Executive Board – in order to embed a common understanding of leadership. Starting with the Executive Board, these roadshows were moderated by human resources staff and held throughout all levels of the company. During the last four months of 2018, the focus was on the four major locations in Germany: Herzogenaurach, Buehl, Langen, and Schweinfurt.

Schaeffler simplifies structures

Schaeffler streamlines its structures and strengthens its plants

On May 7, 2018, the company announced that the Board of Managing Directors of Schaeffler AG has decided, with the approval of the Supervisory Board’s executive committee, to integrate the company’s “Bearing & Components Technologies” (BCT) unit, which had previously acted as an internal supplier, into the divisions. Under this reorganization, the plants previously assigned to BCT were transferred to the Automotive OEM and Industrial divisions. The reorganization has eliminated duplicate structures, established clear responsibilities, and brought Schaeffler closer to the customer. As a first step toward implementing the change, the BCT organization was transferred to a starting organization effective July 1, 2018, that has been replaced by the target organization implemented effective January 1, 2019.

Schaeffler reorganizes UK business

On October 29, 2018, Schaeffler AG’s Board of Managing Directors decided to reorganize its UK business activities as part of the “Global Footprint” initiative of the company’s program for the future, the “Agenda 4 plus One”. The reorganization calls for the consolidation of the logistics centers in Sutton Coldfield and Hereford and the closure of the production locations in Plymouth and Llanelli. These locations’ production will be moved to existing locations in other countries. The Sheffield location – the Schaeffler Group’s largest location in the United Kingdom in terms of revenue and number of employees – will be retained. The proposals are designed to generate synergies and increase efficiency. Appropriate restructuring provisions were recognized for the reorganization of the company’s UK business activities.

Schaeffler successfully completes merger of Indian entities

On March 20, 2018, the shareholders and creditors of Schaeffler India Limited consented to the merger of the two unlisted entities, INA Bearings India Private Limited and LuK India Private Limited, with listed company Schaeffler India Limited. The merger was effective October 22, 2018. The completion of the merger has resulted in the Schaeffler Group having only one subsidiary in India, the listed company Schaeffler India Limited. The transaction increased Schaeffler AG’s indirect interest in Schaeffler India Limited from approximately 51% to approximately 74%. This transaction has simplified the previous structure, reduced complexity, and created a strong Schaeffler entity in India in order to better realize the potential for growth in India.

Schaeffler continues to execute M&A strategy

Based on the group-wide M&A radar, which defines seven focus areas for the acquisition of expertise both within the various divisions and across divisions, the Schaeffler Group has established the Schaeffler Paravan Technologie GmbH & Co. KG joint venture and acquired Elmotec Statomat Holding GmbH as part of its M&A strategy in 2018.

Schaeffler acquires “Drive-by-Wire”-Technology

On August 6, 2018, the Schaeffler Group signed a master agreement with Roland Arnold, Arnold Verwaltungs GmbH, and Paravan GmbH for the formation of a joint venture. The objective of the joint venture, which is named Schaeffler Paravan Technologie GmbH & Co. KG and has commenced operations on October 1, 2018, is the further development of the Space Drive “Drive-by-Wire”-Technology and the development and sale of mobility systems. As part of the transaction, the joint venture has acquired Paravan GmbH’s Space Drive-Technology. Schaeffler Technologies AG & Co. KG has a 90% stake in the new company.

Schaeffler acquires Elmotec Statomat

On November 28, 2018, the Schaeffler Group entered into a contract to acquire Elmotec Statomat Holding GmbH (referred to as “Elmotec Statomat” below) based in Karben near Frankfurt/ Main, Germany. Elmotec Statomat is one of the world’s leading manufacturers of production machinery for the high-volume construction of electric motors and possesses unique expertise in the field of winding technology. With this acquisition, Schaeffler is expanding its expertise in the construction of electric motors and thereby driving forward the implementation of its electric mobility strategy. The acquisition of Elmotec Statomat, which closed on January 31, 2019, has expanded this expertise by adding further know-how regarding high-volume production of stators for electric motors.

Schaeffler strengthens team

At its meeting on March 2, 2018, the Supervisory Board of Schaeffler AG appointed Andreas Schick (previously Regional CEO Asia-Pacific) to become member of the Board of Managing Directors of Schaeffler AG as of April 1, 2018. Andreas Schick has taken over the role as Chief Operating Officer of Schaeffler AG from Oliver Jung, who left Schaeffler AG as of March 31, 2018. Congruently, the contract of Corinna Schittenhelm, Chief Human Resources Officer, was extended for a term of five years ending on December 31, 2023. Helmut Bode has replaced Andreas Schick as Regional CEO Asia-Pacific and was appointed to the Executive Board effective April 1, 2018.

At its meeting on October 5, 2018, the Supervisory Board of Schaeffler AG decided to extend the contract with Klaus Rosenfeld, the Chief Executive Officer of Schaeffler AG, for a further five years to June 30, 2024.

Results of operations compared to outlook 2018

On February 19, 2018, the Board of Managing Directors of Schaeffler AG approved guidance on the development of key operating financial performance indicators for the Schaeffler Group and its Automotive OEM, Automotive Aftermarket, and Industrial divisions for 2018. On October 30, 2018, Schaeffler AG decided to reduce the 2018 guidance for the Automotive OEM and Automotive Aftermarket divisions and, as a result, for the Schaeffler Group. Rather than revenue growth of 5 to 6% excluding the impact of currency translation, an EBIT margin of 10.5 to 11.5%, and free cash flow before in- and outflows for M&A activities of approximately EUR 450 m, the Schaeffler Group was expecting to generate revenue growth of 4 to 5% excluding the impact of currency translation, an EBIT margin of 9.5 to 10.5%, and free cash flow before in- and outflows for M&A activities of approximately EUR 300 m. The Schaeffler Group achieved revenue growth of 3.9% excluding the impact of currency translation, falling just short of the adjusted revenue guidance for the year. Its EBIT margin before special items amounted to 9.7% and free cash flow before cash in- and outflows for M&A activities was EUR 384 m. Thus, the adjusted guidance for these two performance indicators was met.

Comparison to outlook 2018 – group

Actual 2017
Outlook 2018
issued 02/19/2018
Outlook 2018
issued 10/30/2018
Actual 2018
Revenue growth 1)
5.9 %
5 - 6 %
4 - 5 %
3.9 %
EBIT-margin before special items 2)
11.3 %
10.5 - 11.5 %
9.5 - 10.5 %
9.7 %
Free cash flow 3)
5154)
~450
~300
384

in Mio. EUR

1) Compared to prior year; excluding the impact of currency translation.
2) Please refer to chapter "Performance indicators and special items" for the definition of special items.
3) Before cash in- and outflows for M&A activities.
4) Adjusted comparative figure before cash in- and outflows for M&A activities.

With markets in the global automotive business highly volatile (WLTP, trade conflicts), the adjustment of the full year 2018 group outlook was mainly triggered by deteriorating market conditions for the Automotive OEM division in China. Instead of revenue growth of 6 to 7% excluding the impact of currency translation and an EBIT margin of 9.5 to 10.5%, the Automotive OEM division was anticipating revenue growth of 3.5 to 4.5% excluding the impact of currency translation with an EBIT margin before special items of 8 to 8.5%. Revenue growth excluding the impact of currency translation amounted to 2.1% in 2018, and the EBIT margin before special items to 7.7%. Thus, the adjusted guidance was not met for both performance indicators.

Furthermore, a weaker-than-expected revenue trend in the third quarter of 2018 resulted in an adjustment for the Automotive Aftermarket division. Instead of revenue growth of 3 to 4% excluding the impact of currency translation and an EBIT margin of 16.5 to 17.5%, the Automotive Aftermarket division was expecting revenue growth of 1.5 to 2.5% excluding the impact of currency translation with an EBIT margin before special items of 17 to 17.5%. The division’s revenue growth of 2.2% before the impact of currency translation and EBIT margin before special items of 17.0% were within the adjusted guidance for both performance indicators.

In contrast, the Industrial division had raised its outlook dated February 19, 2018, in light of the encouraging trend in the industrial business. Instead of revenue growth of 3 to 4% excluding the impact of currency translation and an EBIT margin of 9 to 10%, the division was anticipating revenue growth of 8 to 9% excluding the impact of currency translation and an EBIT margin before special items of 10.5 to 11%. The division generated 10.1% in additional revenue excluding the impact of currency translation, exceeding the adjusted 2018 guidance. The division’s EBIT margin before special items amounted to 11.0%, at the upper end of the adjusted guidance.

Comparison to outlook 2018 – divisions

  • Actual 2017
    Outlook 2018
    issued 02/19/2018
    Outlook 2018
    issued 10/30/2018
    Actual 2018
    Revenue growth 1)
    6.5 %
    6 - 7 %
    3.5 - 4.5 %
    2.1 %
    EBIT-margin before special items2)
    10.8 % 3)
    9.5 - 10.5 %
    8 - 8.5 %
    7.7 %
  • Actual 2017
    Outlook 2018
    issued 02/19/2018
    Outlook 2018
    issued 10/30/2018
    Actual 2018
    Revenue growth 1)
    3.2 %
    3 - 4 %
    1.5 - 2.5 %
    2.2 %
    EBIT-margin before special items 2)
    19.0 % 3)
    16.5 - 17.5 %
    17 - 17.5 %
    17.0 %
  • Actual 2017
    Outlook 2018
    issued 02/19/2018
    Outlook 2018
    issued 10/30/2018
    Actual 2018
    Revenue growth 1)
    5.7 %
    3 - 4 %
    8 - 9 %
    10.1 %
    EBIT-margin before special items 2)
    8.0 % 3)
    9 - 10 %
    10.5 - 11 %
    11.0 %

1) Compared to prior year; excluding the impact of currency translation.
2) Please refer to chapter "Performance indicators and special items" for the definition of special items.
3) Comparative figure based on 2018 segment structure.

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