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Earnings

Industrial division

EBIT margin before special items 8.1%

Industrial division back on long-term growth path: revenue increases by 5.7% at constant currency – growth rate for Q4 at 9.0% // Mainly driven by power transmission, offroad, and raw materials sector clusters // Significant additional revenue in the Greater China region // Margins stabilized further – gross and EBIT margins increased over prior year // Cost and efficiency measures are consistently executed and proving effective

2017
2016
Change
Revenue
3,152
3,000
5.1%
at constant currency
-
-
5.7 %
Revenue by region 1)
-
-
-
Europe
1,803
1,772
1.8 %
at constant currency
-
-
1.7 %
Americas
575
561
2.5 %
at constant currency
-
-
3.3 %
Greater China
472
378
24.9 %
at constant currency
-
-
29.3 %
Asia/Pazific
302
289
4.5 %
at constant currency
-
-
4.9 %
Cost of sales
-2,260
-2,163
4.5 %
Gross profit
892
837
6.6 %
in % of revenue
28.3
27.9
-
Research and development expenses
-133
-133
0.0 %
Selling and administrative expenses
-505
-510
-1.0 %
EBIT
245
183
33.9 %
in % of revenue
7.8
6.1
-
Sondereffekte 2)
9
36
-75.0 %
EBIT before special items
254
219
16.0 %
in % of revenue
8.1
7.3
-

in € millions

Prior year information presented based on 2017 segment structure.
1) ) Based on market (customer location).
2) Please refer to chapter Performance indicators and special items for the definition of special items.

Industrial division revenue increased by 5.1% to EUR 3,152 m (prior year: EUR 3,000 m) in 2017. Excluding the impact of currency translation, the division generated 5.7% in additional revenue and has thus returned to a growth path. This growth was mainly driven by significant increases in the power transmission, offroad, and raw materials sector clusters, all three of which reported double-digit growth rates. The industrial automation and Industrial Distribution sector clusters also made significant contributions to the division’s growth, while revenue in the aerospace and railway sector clusters grew slightly. The twowheelers and wind sector clusters, however, experienced declining revenue.

The Industrial business is primarily managed based on regions. On this basis, the Europe, Americas, Greater China, and Asia/ Pacific regions operate as profit centers responsible for the Industrial business in their respective markets.

In the Europe region, revenue rose by 1.8% (+1.7% at constant currency), mainly due to higher sales in Industrial Distribution. The raw materials, offroad, power transmission, and industrial automation sector clusters also reported considerably higher revenue. Revenue in the wind, aerospace, and railway sector clusters, however, declined from the prior year period. The twowheelers sector cluster was flat with prior year.

The Americas region reported a considerable increase in revenue of 2.5% (+3.3% at constant currency) during the reporting period. This trend was primarily driven by double-digit revenue growth rates in the raw materials, offroad, and power transmission sector clusters. The aerospace sector cluster and Industrial Distribution generated revenue growth as well. The railway, wind, two-wheelers, and industrial automation sectors experienced declining revenue in 2017.

The Greater China region reported significant revenue growth of 24.9% (+29.3% at constant currency), with all significant sector clusters reporting double-digit growth rates. The region’s encouraging revenue trend was bolstered significantly by considerable increases in demand in the power transmission, wind, industrial automation, railway, and raw materials sector clusters. Industrial Distribution revenue was in line with prior year.

In the Asia/Pacific region, revenue increased by 4.5% (+4.9% at constant currency), driven, in particular, by the aerospace, offroad, and power transmission sector clusters. The railway, industrial automation, , two-wheelers, and industrial distribution clusters generated revenue growth as well. The significant decrease in demand in the raw materials sector cluster had an adverse influence on the region’s revenue trend.

Industrial division cost of sales increased by 4.5% to EUR 2,260 m (prior year: EUR 2,163 m), growing less than revenue. In total, the Industrial division improved its gross profit by EUR 55 m or 6.6% to EUR 892 m (prior year: EUR 837 m). The division’s gross margin of 28.3% was 0.4 percentage points ahead of the prior year level (prior year: 27.9%). The division offset price reductions as well as cost increases, primarily due to collectively bargained wage and salary increases, with operational improvements in costs and economies of scale. The fourth quarter of 2017 was adversely affected by quality-related expenses and by temporary productivity losses resulting from extremely high utilization of capacity. The division plans to step up its investments in additional capacity in 2018.

Functional costs of EUR 638 m (prior year: EUR 643 m) were slightly below the prior year level. Functional costs as a percentage of revenue fell to 20.2% (prior year: 21.4%). Research and development expenses amounted to EUR 133 m (prior year: EUR 133 m), and selling and administrative expenses were EUR 505 m (prior year: EUR 510 m). The cost reduction measures of the program “CORE” more than offset inflation-related cost increases, particularly in personnel expenses, as well as higher group overheads.

The division increased its EBIT for 2017 to EUR 245 m (prior year: EUR 183 m), while its EBIT margin stabilized further, improving by 1.7 percentage points to 7.8% (prior year: 6.1%). EBIT was adversely affected by EUR 9 m in special items representing the Industrial division’s share of restructuring expenses incurred to set up a shared service center in Europe in 2017. The prior year was adversely affected by EUR 36 m in special items, including EUR 32 m in restructuring expenses for the stepped-up efficiency measures aimed at revitalizing the Industrial division as part of the second wave of the “CORE” program. In addition, the division had recognized EUR 4 m in expenses for legal cases in the prior year. Based on these items, EBIT before special items improved to EUR 254 m (prior year: EUR 219 m) in 2017, and the EBIT margin before special items increased to 8.1% (prior year: 7.3%). The increase was the result of an increase in gross profit as described above and the success of the program “CORE”, with cost and efficiency measures consistently executed and beginning to prove effective for the long-term. Currency translation had an adverse effect on the division’s EBIT margin, however.

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