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With this annual report, it is our pleasure to present and explain to you the development of the Schaeffler Group during the past financial year.
2016 was an eventful year. We moved things forward and achieved a great deal. This is true not only for our financial result and business successes, but most notably with regard to the further advancement of the Schaeffler Group into becoming a leading global automotive and industrial supplier.
The environment in which we operate has become increasingly uncertain, complex, volatile and ambiguous. This holds true for the macroeconomic uncertainties and political risks to which we are exposed, as well as for the overall operating conditions and technological change that affect our business worldwide. Therefore, it is all the more important for us to focus on our strengths and address issues that can and need to be improved.
Strong result – Financial flexibility restored
The result delivered by the Schaeffler Group in the 2016 financial year is impressive. We continued to grow. Our revenue rose to around EUR 13.3 bn, corresponding to a 3.4% increase p.a. at constant currency. The main driving force for this development was our Automotive business, which grew by 6.0% p.a. at constant currency. Revenue in our Industrial division decreased by 4.8% at constant currency due to market-related factors. In the course of the year, a stabilization in revenue development became evident.
On this basis, we generated earnings before interest and taxes (EBIT) before special items of EUR 1,700 m. This corresponds to an adjusted EBIT margin of 12.7%, which means that we have maintained our earnings quality at an above-average level.
Free cash flow developed in a particularly positive manner. Totaling EUR 370 m in the prior year, it rose to EUR 735 m in the 2016 financial year. Even if the figure for the prior year was adjusted for one-time items of approximately EUR 170 m, this increase is impressive proof of the exceptional high quality and cash flow generation power of our operating business. This is all the more evidenced by the fact that our capital expenditure in financial 2016 was higher than in the prior year.
Additionally, in the course of 2016 we achieved a significant reduction in the Schaeffler Group’s net debt. While net debt had amounted to EUR 4.9 bn at the end of 2015, it stood at EUR 2.6 bn on December 31, 2016. At the same time, the net debt to adjusted EBITDA ratio improved from 2.1x to 1.1x. Thanks to the early repayment of liabilities by IHO Holding and the resulting cash inflow, which we used for prepayments of loans, we were assigned an investment grade rating from Moody’s in October 2016. This means we not only achieved our strategic targets much earlier than expected, but also regained the necessary financial flexibility to supplement our growth strategy by making selective, technology-oriented acquisitions.
Strategy “Mobility for tomorrow” adopted – Excellence program “Agenda 4 plus One” launched
The year 2016 was characterized by more than just our strong result and restored financial flexibility. In my view, it was particularly important that, after intensive preliminary work and discussions, the Executive Board and Supervisory Board of Schaeffler AG adopted the “Mobility for tomorrow” strategy finalized during 2016, and that we communicated it externally and internally. Following our IPO in 2015, this means we have reached another milestone in consistently making the Schaeffler Group equipped for the future.
Our strategy "Mobility for tomorrow" encompasses four main elements. The starting point is our vision to shape the future of mobility with a passion for innovation and the highest standards of quality as a technology partner of our customers. We thereby want to make a contribution to a world that will be cleaner, safer and smarter.
As an integrated automotive and industrial supplier, we are wherever things move. Here, we concentrate on 4 focus areas: (1) Eco-friendly drives, (2) Urban mobility, (3) Interurban mobility and (4) Energy chain. At the heart of our strategy are 8 strategic pillars, which describe the scope for future action. In addition, there is an implementation program of 16 strategic initiatives, which we call “Agenda 4 plus One”. Read more about our strategy and its elements in the image section of this annual report.
As the Executive Board of Schaeffler AG, we are convinced that our strategy “Mobility for tomorrow” provides a resilient framework with which we can successfully position the Schaeffler Group for the future. The positive feedback we have received from our customers and business partners, as well as from our employees and management, confirms this assessment.
E-Mobility, Industry 4.0 and Digitalization – Key opportunities for the future
As can be seen from the 5th strategic pillar of our strategy "Mobility for tomorrow", we will be focusing on three key items that are relevant for the future: E-Mobility, Industry 4.0 and Digitalization.
Without any doubt, the global automotive industry is facing major technological changes. The electrification of the drive train is one of the most important future trends in this context. As an automotive supplier with a high level of manufacturing expertise and in-depth understanding of systems – please remember the motto of our 2015 annual report – we consider this development a challenge, but also a great opportunity for the future. We have been investing in the required capacities over the past few years. This also applies to the fields of R&D and production. The number of customer projects and volume production orders is growing steadily. The purchase of electric motor manufacturer Compact Dynamics is a first step in strengthening the Schaeffler Group’s technological competence through external acquisitions.
While electric mobility plays a crucial role for our Automotive division, its equivalent for our Industrial division is the topic of Industry 4.0. This is another promising future opportunity for us. Here, too, manufacturing expertise and an in-depth understanding of systems are called for. Anyone who knows how to design and build rolling bearings and is familiar with complex systems at the same time – whether in mechanical, automotive or plant engineering – will understand that bearings are ideally suited to generate data. Based on these data, we are able to gain insights that we will utilize to create additional benefits and added value for our customers. This is our concept of Industry 4.0.
Digitalization, our third key opportunity for the future, goes even beyond this. It is not just about new products and services that are in the interest of customers. It is also about our own machines and processes. This involves analysis and simulation options, as well as the development of new algorithms and interfaces that help us optimize and control our own operations. In this, we are aware that the acceptance of digital offers – both internal and external – depends not only on the quality of the data used, but also on positive user experiences. There is enormous potential in all these areas, and we are determined to consistently leverage and put it to good use. These are highly challenging tasks for which we are preparing systematically. To this end, we have developed our “Digital Agenda” as part of our “Agenda 4 plus One”. It includes four elements – Products & Services, Machines & Processes, Analyses & Simulation, and User Experience & Customer Value. Implementation of the “Digital Agenda” needs to proceed at a fast pace and we are making good headway. It is not without reason that we have chosen "Digitalization – A Key Opportunity for the Future"” as the motto for our 2016 annual report. Take a tour of discovery and pay particular attention to pages i18 to i35 of this report.
Continued growth – Creating lasting value
Despite a continually challenging environment, we have set ourselves ambitious targets for 2017. We want to grow 4 to 5% p.a. at constant currency, achieve an EBIT margin before special items of between 12 and 13% and a free cash flow of around EUR 600 m before external growth. In addition, we want to pay 30 to 40% of our adjusted net income in dividends. These are ambitious goals. But in addition to these financial targets, we also want to make the Schaeffler Group even more attractive and enhance its image internally and externally. We want to continue to invest, and to create new and, above all, future-oriented jobs. We want to play an active part in shaping the vast changes in the markets and regions in which we operate. We want to continue to be innovative. And we want to create lasting value and assets – all of this in the interest of our customers, business partners and our many employees, and of course, in the interest of you.
Ladies and gentlemen, dear shareholders, the year 2016 was an eventful year. We made significant headway. Our results are impressive. Our strategy is adopted. We are looking forward to the future with confidence. At the same time, we are aware that we will only be successful if we combine long-term thinking and our proven success factors with strength in innovation and future-oriented action. We want to shape the “mobility for tomorrow” with and for our customers. That is our aspiration. This can only be achieved through good leadership and a strong foundation of values: sustainable, innovative, excellent and passionate. That’s what we stand for.
On this note, and on behalf of my colleagues on the Executive Board, I would like to extend my sincere thanks to our family shareholders, members of the Supervisory Board and to you for the good, constructive and trustful cooperation throughout 2016. Special thanks go to our employees around the world, whose excellent and hard work has made the remarkable results of 2016 possible. I look forward to our continued cooperation in the years ahead.
Klaus Rosenfeld | Chief Executive Officer