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Schaeffler group earnings

Revenue EUR 14,241 m
EBIT margin before special items 9.7 %

Revenue increased by 3.9 % at constant currency in a challenging environment // Automotive business EBIT margin declines, Industrial significantly improved // Earnings per common non-voting share at EUR 1.33 (prior year: EUR 1.48) // Adjusted earnings target met

2018
2017
Change
Revenue
14,241
14,021
1.6 %
at constant currency
-
-
3.9 %
Revenue by division 1)
-
-
-
Automotive OEM
8,997
8,991
0.1 %
at constant currency
-
-
2.1 %
Automotive Aftermarket
1.859
1.880
-1.1 %
at constant currency
-
-
2.2 %
Industrial
3,385
3,150
7.5 %
at constant currency
-
-
10.1 %
Revenue by region 2)
-
-
-
Europe
7,313
7,183
1.8 %
at constant currency
-
-
2.9 %
Americas
2,874
2,910
-1.2%
at constant currency
-
-
4.9 %
Greater China
2.561
2.456
4.3 %
at constant currency
-
-
6.7 %
Asia/Pazific
1,493
1,472
1.4 %
at constant currency
-
-
3.3 %
Cost of sales
-10,558
-10,175
3.8 %
Gross profit
3,683
3,846
-4.2 %
in % of revenue
25.9
27.4
-
Research and development expenses
-847
-846
0.1 %
Selling and administrative expenses
-1,492
-1,413
5.6 %
Ergebnis vor Finanzergebnis und Ertragsteuern (EBIT)
1,354
1,528
-11.4 %
in % of revenue
9,5
10,9
-
Special items 3)
27
56
-51.8 %
EBIT before special items
1,381
1,584
-12.8 %
in % of revenue
9.7
11.3
-
Financial result
-155
-192
-19.3 %
Ergebnis aus at Equity bewerteten Beteiligungen
-4
0
-
Income taxes
-300
-339
-11.5 %
Net income4)
881
980
-10.1 %
Earnings per common non-voting share (basic/diluted, in €)
1.33
1.48
-10.1 %

in Mio. EUR

1) Prior year information presented based on 2018 segment structure.
2) Based on market (customer location).
3) Please refer to chapter "Performance indicators and special items" for the definition of special items.
4) Attributable to shareholders of the parent company.

Effective January 1, 2018, the former Automotive Aftermarket business division was set up as the company’s third division with its own CEO. Since then, the Schaeffler Group has been dividing its business into three divisions: Automotive OEM, Automotive Aftermarket, and Industrial.

The Schaeffler Group’s revenue for 2018 amounted to EUR 14,241 m (prior year: EUR 14,021 m), representing an increase of 1.6%. Excluding the impact of currency translation, revenue grew by 3.9%. While the Industrial division grew even more dynamically than in the prior year, generating revenue growth of 10.1% excluding the impact of currency translation, the Automotive OEM and Automotive Aftermarket divisions reported weaker revenue growth compared to prior year. In the Automotive OEM division, this was attributable, in particular, to weak market trends in the Europe and Greater China regions during the latter half of 2018. Subsequent to the encouraging revenue trend in the first half of 2018, this resulted in revenue decreasing from prior year over the remaining course of the year, excluding the impact of currency translation. Overall, the Automotive OEM division raised its revenue by 2.1% in 2018, excluding the impact of currency translation. Following a solid first six months overall, the Automotive Aftermarket division reported an unexpectedly weak revenue trend in the third quarter, resulting in the division missing its original full-year guidance. The slump was specifically attributable to decreased requirements in the Europe and Americas regions. The Automotive Aftermarket division’s revenue growth for the reporting period amounted to 2.2%, excluding the impact of currency translation.

Revenue in the Europe region was up 1.8% (+2.9% at constant currency). In the Americas region, revenue declined by 1.2% due to the adverse impact of currency translation (+4.9% at constant currency). The Greater China region grew its revenue by 4.3%, once again reporting the highest growth rate (+6.7% at constant currency). Revenue in the Asia/Pacific region was up only slightly due to the adverse impact of currency translation, rising by 1.4%. Excluding the impact of currency translation, revenue rose by 3.3%.

Cost of sales increased by EUR 383 m or 3.8% to EUR 10,558 m during the year (prior year: EUR 10,175 m), driven by volume in particular. Gross profit declined by EUR 163 m or 4.2% to EUR 3,683 m (prior year: EUR 3,846 m) with a corresponding drop in gross margin by 1.5 percentage points to 25.9% (prior year: 27.4%). The decline was mainly due to the decrease in earnings at the two Automotive divisions. The Automotive OEM division’s gross margin fell to 22.5% (prior year: 25.4%). The decline was partly due to sales falling short of plan and the resulting decrease in utilization of production capacity on hand, combined with compensating measures that were not yet sufficiently extensive for the rapid decline in sales. The margin of the Automotive Aftermarket division dropped to 34.5% (prior year: 35.9%), mainly driven by the adverse impact of pricing and currency translation. The Industrial division, however, increased its EBIT margin to 30.1% in 2018 (prior year: 28.3%), buoyed especially by economies of scale. In addition, the initial application of the new financial reporting standard, IFRS 15, during the reporting period has resulted in a change in the presentation of certain development services, among other things, as the new standard requires them to be classified within gross margin (see Note 1.5 to the consolidated financial statements). This change in presentation had an adverse effect on the gross margin trend compared to the prior year, but decreased research and development expenses in return.

Functional costs rose by EUR 80 m or 3.5% to EUR 2,339 m (prior year: EUR 2,259 m), growing to 16.4% of revenue (prior year: 16.1%). Research and development expenses of EUR 847 m were flat with prior year (prior year: EUR 846 m), representing an R&D ratio of 5.9% (prior year: 6.0%) of revenue. Selling and administrative expenses, on the other hand, rose by EUR 79 m or 5.6% to EUR 1,492 m (prior year: EUR 1,413 m), mainly due to higher logistics expenses and increased administrative expenses in connection with the program for the future, the “Agenda 4 plus One”.

EBIT decreased by EUR 174 m or 11.4% to EUR 1,354 m (prior year: EUR 1,528 m) during the reporting period. The Schaeffler Group’s EBIT margin was 9.5% (prior year: 10.9%). EBIT for the year was adversely affected by special items of EUR 27 m (prior year: EUR 56 m). This included EUR 48 m in restructuring expenses related to the integration of the internal supplier, “Bearing & Components Technologies”, and to the reorganization of the company’s UK business activities. Income from the reversal of a provision following the completion of an investigation of a compliance case by the relevant authorities had an offsetting effect on EBIT of EUR 21 m. The prior year included EUR 17 m in special items for legal cases resulting from provisions for claims for damages. In addition, the company recognized EUR 39 m in restructuring expenses incurred to set up a shared service center in Europe in 2017. Based on that, EBIT before special items declined to EUR 1,381 m (prior year: EUR 1,584 m) in 2018, and the EBIT margin before special items decreased to 9.7% (prior year: 11.3%). The decline in gross margin described above – partly due to the adverse impact of currency translation – and higher functional costs were partially offset by gains on transactions denominated in foreign currency.

The Schaeffler Group’s financial result improved by EUR 37 m to EUR -155 m (prior year: EUR -192 m) in 2018.

Schaeffler Group financial result

2018
2017
Interest expense on financial debt 1)
-99
-123
Gains and losses on derivatives and foreign exchange
-1
-17
Fair value changes on embedded derivatives
-43
-14
Interest income and expense on pensions and partial retirement obligations
-40
-38
Other
28
0
Total
-155
-192

in € millions

1) Incl. amortization of transaction costs and prepayment penalties.

Interest expense on financial debt amounted to EUR 99 m in 2018 (prior year: EUR 123 m). The improvement in interest expense is largely the result of the prior year’s expenses for the prepayment penalty of EUR 13 m and EUR 5 m in deferred transaction costs derecognized not being incurred in 2018.

Net foreign exchange losses on financial assets and liabilities and net losses on derivatives amounted to EUR 1 m (prior year: EUR 17 m). These include the impact of translating the financing instruments denominated in U.S. dollars to euros and hedges of these instruments using cross currency swaps.

Fair value changes on embedded derivatives, primarily prepayment options for external financing instruments, resulted in net losses of EUR 43 m (prior year: EUR 14 m).

Income tax expense amounted to EUR 300 m in 2018 (prior year: EUR 339 m), resulting in an effective tax rate of 25.1% (prior year: 25.4%).

Net income attributable to shareholders of the parent company for 2018 was EUR 881 m (prior year: EUR 980 m). Net income before special items amounted to EUR 901 m (prior year: EUR 1,022 m). The Board of Managing Directors and the Supervisory Board will propose a dividend for 2018 of EUR 0.54 (prior year: EUR 0.54) per common share and EUR 0.55 (prior year: EUR 0.55) per common non-voting share to the annual general meeting. This represents a dividend of 40.1% (prior year: 35.4%) of net income attributable to shareholders before special items.

Basic and diluted earnings per common share decreased to EUR 1.32 (prior year: EUR 1.47) in 2018. Basic and diluted earnings per common non-voting share amounted to EUR 1.33 (prior year: EUR 1.48). The number of shares used to calculate earnings per common share and earnings per common non-voting share was 500 million (prior year: 500 million) and 166 million (prior year: 166 million), respectively.

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