Course of business
Overview of results of operations 2017
The Schaeffler Group continued its positive revenue trend in 2017, buoyed especially by the encouragingly dynamic growth in the second half of the year. The Automotive business once again grew faster than the market, i.e. global production of passenger cars and light commercial vehicles. The measures to improve efficiency and reduce costs in the Industrial division were consistently executed and are proving effective.
The Schaeffler Group‘s revenue increased by 5.1% to EUR 14,021 m in 2017 (prior year: EUR 13,338 m). Excluding the impact of currency translation, revenue increased by 5.9%, which was attributable to both divisions. All of the Schaeffler Group’s regions, and especially Greater China, contributed to this growth.
The market and competitive environment of the Automotive division continued to be characterized by the dynamic evolution of mobility in 2017, which entails ongoing technological change and the accompanying high capital expenditures. In this challenging environment, the division increased its revenue by 5.1% to EUR 10,869 m (prior year: EUR 10,338 m). Excluding the impact of currency translation, the division generated 5.9% in additional revenue. Revenue growth for the fourth quarter, excluding the impact of currency translation, amounted to 8.3%. Thanks to the strong third and fourth quarters the Automotive division once again expanded faster than global production volumes for passenger cars and light commercial vehicles, which grew by 2.1% during the year.
With global industrial production increasing, the Industrial division expanded its revenue for the year by 5.1% to EUR 3,152 m (prior year: EUR 3,000 m). Excluding the impact of currency translation, the division generated revenue growth of 5.7% primarily due to higher volumes in the Greater China region. In the fourth quarter, the Industrial division grew its revenue by 9.0%, excluding the impact of translation. These figures demonstrate that the Industrial division has returned to a long-term growth path.
The Schaeffler Group‘s EBIT for the reporting period amounted to EUR 1,528 m (prior year: EUR 1,556 m), resulting in an EBIT margin of 10.9% (prior year: 11.7%). Before special items of EUR 56 m, EBIT amounted to EUR 1,584 m (prior year: EUR 1,700 m). The group’s EBIT margin before special items amounted to 11.3% (prior year: 12.7%). The Industrial division’s EBIT margin before special items improved to 8.1% (prior year: 7.3%), thus continuing to stabilize. Meanwhile, the Automotive division’s EBIT margin before special items declined to 12.2% (prior year: 14.3%), primarily due to increased pricing pressure in the automotive original equipment business in combination with rising costs for new product launches and higher other expenses in connection with increased research and development expenses.
Net income increased by 14.3% from EUR 872 m to EUR 997 m. Excluding net income attributable to non-controlling interests of EUR 17 m (prior year: EUR 13 m), net income attributable to shareholders of the parent company amounted to EUR 980 m, 14.1% more than in the prior year (prior year: EUR 859 m).
Earnings per common share amounted to EUR 1.47 (prior year: EUR 1.29). Earnings per common nonvoting share amounted to EUR 1.48 (prior year: EUR 1.30).
The Schaeffler Group generated free cash flow of EUR 488 m in 2017, EUR 247 m less than the prior year amount of EUR 735 m. One reason for the decrease was cash flow from operating activities declining from EUR 1,876 m to EUR 1,778 m, one of the reasons being non-persistent cash outflows in 2017. Another reason was the increase in capital expenditures (capex) by 11.1% to EUR 1,273 m (prior year: EUR 1,146 m) or 9.1% of revenue (prior year: 8.6%) in 2017.
Schaeffler Value Added before special items (SVA) amounted to EUR 787 m during the reporting period (prior year: EUR 939 m), representing a return on capital employed (ROCE) before special items of 19.9% (prior year: 22.3%). The decline was the result of the weaker earnings trend compared to the prior year as well as an increase in average capital employed.
Significant events 2017
Fitch assigns investment grade rating to Schaeffler AG
On April 25, 2017, rating agency Fitch Ratings published its first rating of Schaeffler AG. Fitch assigned a rating of BBB(investment grade) to Schaeffler AG with a stable outlook. The bonds were also rated BBB-. Thus, Schaeffler AG is now rated by three rating agencies – Fitch, Moody’s, and Standard & Poor’s.
Dividend – increase to 50 cents per common non-voting share
On April 26, 2017, Schaeffler AG’s annual general meeting passed a resolution to pay a dividend of EUR 0.49 per common share (prior year: EUR 0.34; special dividend EUR 0.15) and EUR 0.50 per common non-voting share (prior year: EUR 0.35; special dividend EUR 0.15) to Schaeffler AG’s shareholders for 2016. This represents a dividend of 34.1% of net income attributable to shareholders before special items, falling within the dividend payout ratio of 30 to 40% planned by the company.
Schaeffler accelerates transformation
The Schaeffler Group’s Strategy Dialog held on July 10 to 13, 2017, was devoted to the necessary decisions on the direction to be taken with respect to certain strategic issues. One of these was the decision to create an independent E-Mobility business division bringing together all products and system solutions for hybrid and pure battery electric vehicles as of January 01, 2018. Further, the company is setting up an additional competence center for E-Mobility in China, alongside the existing German E-Mobility competence center in Buehl, to accommodate the increasing importance of the Chinese market in the field of E-Mobility. In the Industrial division, the entire industry-specific business with mechatronic systems and digital services as well as the required related components have been combined in an independent organizational unit Industry 4.0 since January 01, 2018. The strategic decisions were made based on the model of an integrated automotive and industrial supplier and the company’s strategy “Mobility for tomorrow” with its three key opportunities for the future – E-Mobility, Industry 4.0, and Digitalization.
Indian subsidiaries being merged
On August 30, 2017, the Schaeffler Group announced its intention to merge its three subsidiaries in India – Schaeffler India Ltd. (previously FAG Bearings India Ltd.), INA Bearings India Private Ltd., and LuK India Private Ltd. The merger is subject to the required local regulatory approvals and the consent of the minority shareholders. The transaction is expected to close in the third quarter of 2018. The objective of the transaction is to simplify the existing structure, reduce complexity, and create a strong Schaeffler entity in India in order to better realize the potential for future growth in India. Based on the strategy “Mobility for tomorrow” and the “Agenda 4 plus One” excellence program, the company is also taking another important step toward establishing the “Schaeffler” brand as a global umbrella brand and ensuring a uniform brand identity worldwide. The company will be known as “Schaeffler India Limited” and remain listed. The transaction increases Schaeffler AG’s indirect interest in Schaeffler India Ltd. from currently approx. 51% to approx. 74%.
Schaeffler sets up third division
At its meeting on October 05, 2017, the Executive Committee of the Supervisory Board of Schaeffler AG accepted the proposal of the Board of Managing Directors to separate the Automotive Aftermarket from the Automotive division of Schaeffler AG and to set it up as a third stand-alone division as of January 01, 2018. As a consequence, the Schaeffler Group will divide its business into three divisions – Automotive OEM, Automotive Aftermarket, and Industrial.
On that basis, the Supervisory Board of Schaeffler AG decided to appoint Michael Söding to become member of the Board of Managing Directors of Schaeffler AG effective January 01, 2018. He has assumed responsibility for the Automotive Aftermarket business at board level. Previously, Michael Söding had been Head of Automotive Aftermarket within the Automotive division since 2009.
The three divisions of the Schaeffler Group will in future be managed from decentralized divisional headquarters located in Buehl, Langen, and Schweinfurt. The Automotive OEM division will be headquartered in Buehl. The new Automotive Aftermarket division will be managed from Langen. The Industrial division continues to be located in Schweinfurt. The corporate head office of the Schaeffler Group is in Herzogenaurach.
Investing in Aftermarket Kitting Operation (AKO)
In November 2017, the Board of Managing Directors of Schaeffler AG and its Supervisory Board approved a EUR 180 m investment to build a new state-of-the-art assembly and packaging center called “Aftermarket Kitting Operation” (AKO) in the “Star Park” industrial estate in the city of Halle (Saale) in Saxony-Anhalt. Occupying an area of about 40,000 square meters, the new facility will assemble and package kits from Schaeffler’s inventory of automotive aftermarket spare parts and repair solutions. The new assembly and packaging center will further optimize the Schaeffler Group’s Automotive Aftermarket processes and generate sustained improvements in quality of delivery.
Execution of M&A strategy continued
On October 04, 2017, the Schaeffler Group concluded a purchase agreement for 100% of the shares in autinity systems GmbH. The Chemnitz-based IT company specializes in digital machine data recording and evaluation. The acquisition represents another important step in implementing the Schaeffler Group’s Digital Agenda and is part of the M&A strategy adopted by the company. The M&A strategy supports the strategy “Mobility for tomorrow” by targeting additional technological capabilities for Industrial and Automotive in seven strategic focus areas.
One year after acquiring a majority interest in Compact Dynamics GmbH, the Schaeffler Group acquired the remaining 49% interest in this company from SEMIKRON International GmbH on December 12, 2017. Compact Dynamics GmbH based in Starnberg is a development specialist in the field of innovative electric drive concepts with a focus on high-performance drives and integrated lightweight construction in small volume production and motor sport applications. The acquisition expands Schaeffler’s expertise in the field of electric motors and power electronics for developing and manufacturing electric drives.
Changes in Board membership
At its meeting on July 17, 2017, the Supervisory Board of Schaeffler AG appointed Dietmar Heinrich (previously Regional CEO Europe) to the Board of Managing Directors. On August 01, 2017, Dietmar Heinrich took up his role as Chief Financial Officer of Schaeffler AG, replacing Dr. Ulrich Hauck. The Supervisory Board also decided to extend the contract of Dr. Stefan Spindler, CEO Industrial, for a term of five years ending on April 30, 2023. Jürgen Ziegler was appointed to the Schaeffler Group‘s Executive Board effective August 01, 2017, succeeding Dietmar Heinrich as Regional CEO Europe.
In November 2017, Oliver Jung, Chief Operating Officer, informed the Supervisory Board that he will not renew the contract for his position on the Board of Managing Directors, which expires on September 30, 2018. The Supervisory Board took note of Oliver Jung’s wish.
Results of operations compared to outlook 2017
The Schaeffler Group had issued guidance regarding revenue growth of 4 to 5% for 2017, excluding the impact of currency translation. This guidance was based on the assumption that global automobile production would expand by approx. 1.5% and worldwide industrial production would grow slightly. Based on these considerations, the company expected to generate an EBIT margin before special items of 12 to 13%. In addition, the company expected approx. EUR 600 m in free cash flow. On June 26, 2017, the Board of Managing Directors decided to reduce its guidance for the EBIT margin before special items to 11 to 12% due to a substantially lower earnings development in the Automotive division in the second quarter 2017 compared to the prior year. At the same time, the guidance for free cash flow was reduced from approx. EUR 600 m to approx. EUR 500 m. The company confirmed its revenue guidance.
Excluding the impact of currency translation, the Schaeffler Group’s revenue grew by 5.9% in 2017. Thus, the Schaeffler Group has exceeded its revenue target for 2017 of 4 to 5%. The Automotive division raised its revenue by 5.9% compared to the prior year, excluding the impact of currency translation. The Industrial division reported additional revenue of 5.7% excluding the impact of currency translation.
The EBIT margin before special items of 11.3% falls within the company’s earnings guidance of 11 to 12% (previously 12 to 13%), which it had reduced on June 26, 2017.
Free cash flow for 2017 amounted to EUR 488 m, also reaching the outlook reduced to approx. EUR 500 m (previously EUR 600 m) on June 26, 2017. Free cash flow included EUR 27 m in net cash outflow for M&A activities.