SFFLY - Schaeffler AG (SFFLY) Q2 2023 Earnings Call Transcript

2023-08-06 12:50:06 ET

Schaeffler AG (SFFLY)

Q2 2023 Earnings Conference Call

August 02, 2023 04:00 AM ET

Company Participants

Renata Casaro - Head of Investor Relations

Klaus Rosenfeld - Chief Executive Officer

Claus Bauer - Chief Financial Officer

Conference Call Participants

Akshat Kacker - JP Morgan

Horst Schneider - Bank of America

Sanjay Bhagwani - Citi

Tom Smith - Morgan Stanley

Jemma Permalloo - JP Morgan

Presentation

Renata Casaro

Dear investors, dear analysts, thank you for joining the Schaeffler Group Second Quarter 2023 Earnings Call. As usual, our call will be conducted under the disclaimer.

Without further ado, I will pass the floor over to Mr. Klaus Rosenfeld, CEO of the Schaeffler Group; and Mr. Claus Bauer, CFO. Klaus, the floor is yours.

Klaus Rosenfeld

Thank you, Renata. Ladies and gentlemen, welcome to our second quarter conference call. You all have the presentation in front of you that we published this morning and I would immediately jump to page number four where you have the overview with the key messages. You saw the numbers, Q2 sales up nearly 10%, driven by volume growth in the automotive divisions, and also by continued favorable pricing in all three divisions. Gross profit margin in Q2, more or less in line with Q2 2022 at 21.8%. Also here, a function of the year-on-year improved margins in automotive technologies and aftermarket and a little bit of a weaker margin in Q2 for industrial. Then EBIT margin, 7.1% in the quarter, 7.6% in the first half. Let me start again with industrial, weakened industrial, 8.8%, clearly a disappointment in Q2; on the other hand, a very strong margin in automotive aftermarket. Let’s point to the first half, 17% in automotive aftermarket clearly speaks for itself and I can say already here upfront that the positive trend also continues into Q3. And then, solid in automotive technologies, you all remember Q1 where we posted 4.3%. Now another 4.3% in Q2 clearly led us to also the change in our divisional guidance. Before I come to this very briefly on the free cash flow 103 million positive free cash flow in the quarter, a significant improvement compared to the last year. And if you consider that again for the half year, nearly 30 million including significant one-off restructuring payout of around 150 tells you that the underlying free cash flow generation is absolutely intact. It is driven by the EBITDA improvement but also by effective working capital management. So, we are happy with this number and that also then gave rise to the improved free cash flow guidance for the year. We have updated the guidance, as you saw slightly different divisional mix, industrial margin down and aftermarket margin up, automotive tech margin up, and in total then a slight improvement in the growth EBIT margin 6% to 8% and also free cash flow up by 50 million, while the growth rate for the full group is unchanged.

Let me come to the sales numbers on page number five. As I said, all divisions, all regions contributed to the growth. We all need to be aware of the lower comps in Q2, in particular when it comes to China. There you see the significant growth rates in the column greater -- in the line Greater China. It was 15% in automotive technologies and 12.8% overall, but also industrial already indicates that there is headwind and we are expecting also headwinds going forward. If you want to read these numbers, we should always also be aware that there is an element of external growth in the industrial division, the 7.9% plus, more or less two-thirds of that comes from the consolidation of the Ewellix as of January 1, 2023.

Let me go to the highlights. I think you saw page six already. Automotive technology, solid margin, the 4.3% is an important number because it points to the lower end of our mid-term targets, 4% to 6% and we have always said that's what we are working towards and that is also confirmed. A very strong and aftermarket, high quality of earnings, all the right -- all the levers point into the right direction. It's not only volume, it's also pricing. It is clearly the fact that the performance in [Indiscernible] has improved. It is clear the fact that it again drives this business in a different direction than just selling spare parts. So we're very happy about the automotive aftermarket development. And then together with the strong free cash flow that rounds the three highlights up. As I said, if you look through the printed number and also include the restructuring cash outs that are running off, we think that this issue of free cash flow remains a very important parameter going forward. The two negatives or lowlights is on the one hand outperformance in automotive technologies. Still no outperformance here and that has to do with project phasing and also with the fact that certain of the ramp ups in, particularly E-Mobility, are delayed. We have always said outperformance is something that is not to be judged by a quarter, we have adjusted our outperformance downwards from 2% to 5%, to 0% to 3% and we are confident that that works long term. We have always said that 2% to 5% is on average. Let's see how the year 2023 progresses.

Let me also say here upfront in terms of order intake in E-Mobility, the same logic applies. We have always said 2 billion to 3 billion. Last year we over-achieved to 2 billion to 3 billion significantly; this year, we are in the first half a little bit softer with only a billion order intake in E-Mobility but I can say we are very confident that we will achieve if not over achieve the 2 billion to 3 billion with what we're seeing for the second half of the year. And industrial margin, I already commented on the key here is, from my point of view, this is a temporary situation, we are confident that we can continue to grow in 2024. The second half is a half where we will see further headwinds. China may be one of the things to watch out for. But Stefan has initiated the right temporary tactical measures to counterbalance that situation. These measures are in particular cost driven, but also efficiency driven when it comes to the plant performance. So that's the highlights and lowlights.

Let me quickly go through the three divisions you see on page eight. The main numbers that are already described and I think I don't have to say much more here, Claus is going to take this over. What I would like to say and point out is if you look at the gross profit margin, the health indicator of the business, that is stable over the half year and improved in Q2, and that is clearly also positively impacted by continued price increases. In general, we can say we are on a very good track here to push for the increases and also get this agreed with our main customers. In terms of a little bit more insight in order book. In order intake, you'll see on page nine what I already said 4.1 billion in the first half is lower than what we had in previous years. We are at 1 billion in E-Mobility. Yes, you're all focused on E-Mobility for good reason but let me also say we are making good progress in particular in the chassis area. There are interesting developments in that area also for customers that we have not had so far and there are in the chassis area also significant order intake potential for the quarters to come. Two examples here, you understand that we can't give you the names. The one is a new order intake for a coolant mixing valve for future applications in the heavy duty sector, clearly is something that we are looking at, and the other one is one of these chassis things, a rear-wheel steering order intake with a significant number in China.

Automotive aftermarket, as I said, everything on green, double-digit sales growth, strong demand across the regions. You'll see it here also in the second bullet point 12.5%, Americas; Asia Pacific, 16%; Greater China form a pretty low base, even 60%; and all of that together with a EBIT margin improvement 17%, gross margin improved and clearly something where we are now benefiting from all the things that have been done to bring also our operating performance in line with what we wanted to see. So delivered what we promised and, as I said before, this trend seems to continue also into the second half. Automotive aftermarket, we have given you an extra page on page 11, focusing on the region, Americas. And here you clearly see again, the combination of logistical footprint and expansion of the product portfolio, where we have initiated a specific torque converter initiative across the board and that together also with the regional focus, not only on the US, but also Central and South America, gives us significant further opportunity, plus 14% sales increase in the first half speaks for itself.

If you then go to the next page, you'll see industrial. As I said, the 8.8% is a disappointment. On the positive side, we can say the division grew largely driven by the Ewellix acquisition, still some organic growth. Clearly positive, impacted by price. Volume gets a little softer. And on the margin side, I can basically say it's three things that have impacted here, the margin level, if you take Q2 11.7% to 8.8%, the 2.9% margin drop, again, that should not be extrapolated for the rest of the year, is a function of negative FX and PPA impact. Don't forget, we never adjusted previous year figures, so that's, as you see on the table, 0.5 percentage point on that basis. Then FX explains another nearly 1% drop, and then you have a mix of temporary relocation costs that we are still digesting. That's a function of the structural measures that were put in place, but also impact on the gross profit margin that comes from lower volume and a less favorable regional mix, and to some extent a lower share of our distribution business. Nothing unusual, we have seen this in downturns before. So the real task here for the management team is to put the right tactical cost driven countermeasures in place that's initiated and I'm confident that we will clearly secure the lower margin band from 9 to 11. Stefan is working on this and it's only a temporary issue as we see it.

Page 13 shows you what's happened with the order book. The order book in industrial is a different order book than the one in automotive technologies and that clearly indicates headwind in H2. Headwind comes from also the Chinese region, so we are adjusting for this. As I said before, we see this as a temporary trend. At some point in time, the straight line will turn as it has turned in 2020 and for that we are continuing to invest in new business fields and growth areas. So once again, it's a temporary situation. And we clearly see the growth potential that is there and we'll follow up with it. I spoke this morning at CNBC on the situation in India. India is one of the areas where we will continue to localize more and that also goes for the new sectors like robots or medical applications. So nothing to be too concerned about, it will be a second half with headwind, but we are positive on the outlook for 2024 and we have agreed to leave our mid-term target for industrial was 12% to 14% in place.

Last page before I hand over to Claus, capital allocation. Nothing really dramatic here to report. We are continuing our discipline first half, 0.9% reinvestment rate, 490 million of CapEx. The focus areas are the same as in the past, continued privatization of the industrial division and E-Mobility and that will also continue going forward. In general, I can say the answer to this less globalized word is localization, in particular, the foreign markets like China, India and also the US, and we'll continue that path throughout the end of the year.

With that, I'll hand over to you, Claus, for the detailed look into the numbers.

Claus Bauer

Yeah, thank you very much Klaus. Let’s give the numbers a little bit more flavor. We start on the first page with sales. Most of this was already presented by Klaus. Let me give maybe two additional comments here. You’ll see first, on the left side, that we achieved the fourth quarter here consecutively with sales above 4 billion. And on the right lower side, you'll see the sales contribution and growth by region, which clearly indicates what Klaus already said that we achieved sales growth in every region.

On the next slide, we will talk about gross profit here. I think it will get a little bit more interesting. You see on the left side in the in the waterfall chart, versus the prior year quarter, first of all, what Klaus already indicated, with 136 million, very solid price contribution to the gross profit as well as the top line. You see, then with production costs, with minus 77 million, that's a lower number than the price increase clearly indicating that we are successful in transporting the inflation into also our sales prices. It's a bigger number, the sales price increase also not because we over-recovered the inflation but -- and Klaus already alluded to that, there is also structural improvements in our production costs and, obviously, especially in the automotive divisions, we also have a positive volume contribution in the fixed cost absorption. So in general, from a net standpoint, between price and production costs, a very positive contribution to our profitability. You see, then volume and mix positive, that shouldn't be a surprise here.

And not the largest number in this waterfall chart but I think still very valuable to discuss here is the negative mix with minus 13 that is really also indicative of what happened in our industrial division. We have a lot of lower sales share in distribution, and we have a lower sales share in winter, particularly in China, which are a good monitoring contributors, and therefore have a little bit of a negative mix impact, even visible on a group level, as you see here. And then you will also see the negative foreign exchange impact that Klaus also already mentioned, that's almost 1 percentage point that we are losing with FX and again should then also clearly explain why we are on a gross profit level at the same level as last year but actually would be ahead if we wouldn't have the negative foreign exchange impact. So implicitly, the margin improvement is about 1 percentage point, unfortunately, offset with a negative foreign exchange impact. Everything else on that slide I think I will come to later in my presentation.

Let's switch to the next page, overhead expenses. You see overhead expenses are almost flat compared to prior year quarter. That is actually, even if you would adjust for the Ewellix acquisition, which as you know, is consolidated in our group financial since the beginning of 2023. And if you would adjust the prior year for the Ewellix impact on SG&A then actually we would even show a slight reduction here. And if you look at the very bottom right side, you see that is mainly impacting our automotive technologies. That's what we mentioned already in the highlights with structural improvements. Automotive technologies really sees the full scaling effect in overhead expenses with good top line and stable overhead expenses on the other side.

If we then go to the next page to the EBIT margin explanation, the EBIT margin improvement to 7.1% in Q2 and 7.6% for the half year is a very good development. What I also always want to look at on this page is not just the relative EBIT margin development but also the absolute EBIT. And you see with an increase over prior year quarter of 89 million from 200 million to 289 million, that is also an absolute level, obviously a very good development. On the on the right side, you'll see a little bit more flavor in regard to the divisions, however, I will, obviously, come to that in the next three slides.

Let's start with automotive on the next slide. You see on the top left, the sales development, also what Klaus already said, E-Mobility, a little bit weaker growth this quarter, it's very difficult, especially in E-Mobility, where you have big projects to really assess this number on a purely a quarterly basis. There will be significant ramp ups in the next half year and within full volume achieved in 2024, so that number will improve. What I also would like to point out, and we never talked a lot about this business division is chassis systems. Chassis systems, as you know, is our other pillar for propulsion agnostic business and here you see significant growth of 44% to under 121 million and Klaus, not coincidentally, also showed you in his part already two of the order intakes for this year that are also chassis related or at least the one with the rear wheel steering. So let's look at the E-Mobility opportunities for Schaeffler combined between E-Mobility and chassis systems, as reflected in the sales growth here for chassis systems. We think that there's a huge opportunity also going forward for us.

On the top -- on the lower left, you'll see the outperformance that was also already commented on with minus 2.9 percentage points for the first half of the year, definitely not at the level that we have seen in the past. Also here, as Klaus already said, it's difficult to assess this on a quarterly or even half year basis. We will see and we will -- and we are confident as you see in our guidance, although adjusted down, it's still a 0% to 3% outperformance. There will be a significant swing that we expect in the second half of the year with a significant

project in the ramp up phase at that time. The Americas, you might remember, the significant underperformance in America has a more structural reason; firstly, a significant produce in Mexico and then sort of the US market, out of Mexico and transacted in US dollars. And the Mexican Pesos as you are aware has strengthened against the US dollar over the last 6 to 12 months by 20% and that drives very significant transactional foreign exchange impact that is reflected in these numbers; and, secondly, and you also remember me commenting on that the US is the bond region in our automotive business where we have since a long time index based material price clauses in our contracts and therefore had to accept a price reductions as we also pay less for our steel.

On the right side, you see the EBIT development for automotive and here I only want to make one comment, obviously, you see the very significant gross profit impact on an absolute basis plus 70 million but you might also wonder why is others so big here and is really the improvement also driven by other impacts, which would indicate maybe one-time impacts and you might remember I explained that already in the first quarter but we also fully consolidated Paravan, now Schaeffler Drive-by-Wire, for the first time, since the first quarter of this year. Before it was an equity shareholding and equity result was reflected in others and now since we fully consolidated it, the full P&L structure of Paravan is now included in the P&L structure of the group and therefore, it comes to a reclassification effect, if you will, between others, and mainly R&D expenses. Therefore, you see, it's not a one-time impact, it will be ongoing and the other impact will mainly be reflected, also going forward in the R&D section.

And that would leave me -- then let me to industrial on the next page. Klaus already said most of it, you see our automotive aftermarket, sorry -- the automotive aftermarket first. You see that, what Klaus already said, all regions grew. Europe a little bit less, that had to do with a warehousing consolidation, that is now fully in line and operative. So Europe will catch up with the other regions, again, in the fourth quarter, so even more growth potential here. And Greater China, Klaus already commented on a very low basis, significant growth that has to do also with our online business and sales channel in China. On the EBIT bridge side, on the right page -- right side of the page, you'll see obviously nothing super exciting other than the result of 16.3% EBIT for Q2. And you see what Klaus already said, it's fully driven by price and volume in the gross profit line, so a very positive, and as we think, also sustainable result.

So now, almost eager to come to industrial, obviously, now I'm coming to industrial. And here, you'll see that we indeed grew in all regions. On the top left side, as Klaus said, it's also heavily impacted by inorganic growth, due to the consolidation of Ewellix. And there's also, as you have seen, a significant price impact that we transported from our cost structure into the market. Therefore, in conclusion, there is very little organic volume growth in this quarter, which then if you look at the right side, also would explain the gross profit contribution to EBIT, again, very little volume based fixed cost absorption that helped us in our production facility and then what Klaus also already mentioned, the Ewellix purchase price allocation impact hurts us here a little bit with 50 basis points as well. So despite the volume growth, you'll see very little gross profit impact, again, with price effects on the sales side, offsetting inflationary trends on the cost side, and then the Ewellix accounting impact explainable.

And then as you go through the waterfall chart here, you'll see a significant increase in SG&A expenses, that is also due to Ewellix as we explained already last quarter. Ewellix being for the first time fully consolidated since the beginning of the year, obviously also impacts the entire cost structure in the P&L. And you'll see the negative foreign exchange impact of minus 12 million, it is about 1 percentage point that was also -- or is also reflective of our hedging strategy. Unfortunately, sales volumes and didn't quite match the hedge, Klaus said. The China volumes were a little bit different than we expected, so also explainable but not a permanent situation and definitely room and space for improvement going forward.

You see the significant positive impact of others. Again, the question is, is there a big one-time impacts in there. It's actually mainly driven due to our adjustments in EBIT. The EBIT adjustments in our P&L structure are reflected in others, and that are mainly space restructuring costs that we are trusting for. That also are reflected and included in the gross profit development and then adjusted here in others. So lot one-time impact, also a permanent positive situation. As long as we have restructuring costs, as we also indicated, the cost impact of the restructuring is now significantly facing off with H2 2023 already, and then definitely in 2024.

Maybe one little comment still on the left side; on the bottom, you'll see here reflected in the growth numbers by industrial market clusters. Clearly the impact that I already mentioned on group level is a mix impact. You see with renewable, actually statement -- actually a little decrease here with minus 1.7%. That is, as you know, the wind business and also, particularly at the wind business in China, the installation rate in China, based on their own expectation of China and our Chinese customers. Actually half for the entire year, instead of 120 gigawatts, the installation might only achieve around 60 gigawatts for the year that is also the reason that we already discussed that we are a little bit careful with, Klaus called it headwinds, but a little bit careful in forecasting, especially the Chinese market and here, especially the wind sector in China.

On the next slide, we are coming to the net income. Net income obviously followed completely what I already said. And on the right side, you see the ROCE and Schaeffler value added ROCE on an adjusted basis you'll see with 13.2% here clearly in our mid-term target range of 12% to 15%. On the next slide, free cash flow, I mean, you heard it all very significant increase, here you see it also graphically very clear minus 219 million in the prior year and plus 103 million this quarter. Clearly, if you remember, last year, driven by the significant investment in working capital, especially inventory; here we are in a much more effective situation, as we said also in the headline, effective working capital management; that is not just true for inventories but also receivables. And you see it actually in the waterfall chart on the right side on the top with net working capital changes despite the volume, our top line changes in sales, actually a positive contribution to free cash flow, which is definitely a good result. Is there still opportunity also for the second half of the year to get better in that regard? There's no question, there is, and we will obviously do our utmost to exploit any opportunity in that regard.

CapEx, a little bit higher this quarter than it was in the prior year quarter, but clearly within the expectation that we shared with you also in connection with our guidance, and then others -- maybe others, you see a little bit of the explanation also down in the table but it's heavily driven by restructuring and payouts still for the second quarter with 52 million included in our cash flow. And Klaus already said, it’s 157 million for the first half year and restructuring payouts is three quarters of the total year anticipated amount and therefore, of course, pretty much front loaded, and also a structural improvement pillar for the second half year free cash flow. Last comment on that page is in the very lower corner on the right side, then kind of our underlying cash flow and generation power before especially restructuring payouts and that is now almost 180 million improved versus prior year quarter, and obviously satisfactorily positive with almost 170 million.

And that leads me to my last page, where we show a little bit on the balance sheet strength and structure. You see the leverage ratio at 1.5 times, which is as expected. And as we said all year, actually already at the end of last year, it's increased over last year due to the financing of the Ewellix acquisition and then obviously a slight increase, but only a slight increase between first quarter and second quarter due to the dividend payout of 295 million. It's only a slight increase obviously, because we also on the other side contributed to equity and EBIT -- contributed a significant EBIT to the formula here. And last but not least, you'll see in the numbers below the bars, our continuing strong liquidity situation that, obviously, is unchanged, and especially for the CFO, in pretty good basis to drive the performance going forward.

With that Klaus back to you.

Klaus Rosenfeld

Thank you. Ladies and gentlemen, let me now finish the last two or three pages quickly. You see on 27 that we slightly changed our market assumptions. You all remember we have always been cautious on the global LVP numbers and we have now with the numbers also from IHS improve this a little bit and think we'll get to 85.6 million cars. It's a million less than the IHS numbers. What is also interesting in that table, if you look at the HS numbers and compare H2 2023 expected with H2 last year, you'll see no significant production volume growth. So the growth of the market was more or less in the first half. For us, it's even more important than to deliver on our outperformance promise. I think aftermarket industrial was already said, I'm not going to comment in detail here. I think we all know this environment clearly requires a hands-on approach and very proactive performance management.

28, I think we have said this now several times, so I'm not going to say this again in detail. But you see we recalibrated the guidance, it’s led to an increase in the guidance on EBIT margin and free cash flow and the composition was already explained to you. So let me summarize again on 29, you see the text here. I'm not going to read the text but just once again the judgment, this is a decent robust Q2 in a certainly challenging environment. We decided to recalibrate the guidance and raise it slightly up, I think that is more than prudent. It is driven by the strong performance and aftermarket by the solid performance in Auto Tech with all the challenges that were described and clearly in industrial, it will now be even more important that after industrial was always the star performer in the past that we get these self-help measures initiated and executed and Stefan is totally on it. What gives us a lot of comfort is the continued cash flow generation strengths and from our point of view, really counts also for action going forward.

I finished with the financial calendar, we will be available tomorrow and on Friday for road shows here in Europe. We will then go after IAA on a road show in the US where the timing still needs to be finalized, it could also that we start on the 12. And then the next earnings release is on the 8th of November. As I said, we look with a realistic optimism into the second half, knowing that there are headwinds and knowing that you can also use headwinds to improve your mid-term delivery.

With that I hand over back to Renata for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Akshat Kacker from JP Morgan. Please go ahead.

Akshat Kacker

Good morning. Yes, Akshat from JP Morgan. Three questions from my side, please. The first one on Auto Tech and pricing versus inflation in general. Could you just talk about the growth and net impact of inflation on the P&L in the first half for Auto Tech and your expectations of how that evolves going into the second half, please? The second one is on the E-Mobility order intake. We know order intake numbers can be lumpy on a quarter-to-quarter basis but I just want to ask on this call if you're happy with the current offering to the OEMs or would you like to make some bolt-on acquisitions to improve the product portfolio overall? And the third one is on the industrial business. The order book indicates quite a meaningful slowdown in the second half but I'm also looking at your full-year revenue guidance and it doesn't imply a big slowdown in the second half revenues, even when I adjust for Ewellix. How do I square that, please? Thank you.

Klaus Rosenfeld

Maybe I start with the E-Mobility question. We are happy with what we have. I don't see any need to acquire something. We have always said we're building on the competences we have. And what we have in the order book is, from our point of view, a success. There's a big order book to be delivered and we want to deliver our things with proper profitability, and also in best-in-class quality, so there's no reason to acquire anything at the moment. The focus must be on operational excellence and delivery. This is a long-term game and not a short-term optimization. In terms of industrial, you rightfully said, yes, there is headwind in the second half to be dealt with. We reduced also the top line guidance by 3 percentage points. That is not so much Schaeffler-driven but market-driven, to be on the safe side. That's also then clearly driving the margin expectations slightly down but please see this as something that, from our point of view, we'll turn that into sales in 2024 where we think the structural positioning of Schaeffler in the new growth areas, think about hydrogen, think about industrial automation will continue. Claus alluded to this, we are at the moment a little bit more soft on wind in China, but also that is a temporary weakness and not a structural problem. Claus, do you want to add to this one?

Claus Bauer

Yeah. I mean, I can only emphasize the China comment, the Klaus just made. The impact, as I said, of the reduction in installation forecast in that sector in China by 50% is significant, but I think we all agree that that doesn't impact the longer-term installation need that is there also in China. So I think it's clearly a temporary situation that is also reflected in our order book in a significant way. Let me come to your first question that was about pass through of inflation, especially in the automotive sector, we are -- automotive division, we are clearly at least at the same recovery level, as we have been last year, actually, even catching up a little bit of maybe remaining gap from last year. And from a timing standpoint, I said it clearly in our last call, that maybe other than with other peers, and market players, we have not started all the negotiations new at the first of January, and kind of reset to zero and started, then and we continued all the or the most of the accomplishments of last year into this year. We negotiated from the beginning or one of the negotiation targets from the beginning was to have sustainable price increases, and not just the temporary ones so that there is still, of course, because there's also different composition of the inflationary cost side. So for example, wages instead of raw material, therefore, there is still negotiation elements in that and therefore there is a slight increase of recovery over the year. But it's by far not as significant and extreme as it was last year. You will remember last year that the main recovery portion in the P&L was reflected in Q3 and I really want to manage expectations that that will not be the case this year. It's a much more smoother phase-in of the prices this year than it was last year and especially because last year's negotiation results were mostly sustainable.

Akshat Kacker

Thank you for the clarity.

Operator

And the next question comes from Horst Schneider from Bank of America. Please go ahead.

Horst Schneider

Good morning and thanks for taking my questions. I have got three, two related to automotive again. The first one is I see that your production guidance, basically is still pretty cautious as you highlighted versus S&P. On the other hand, I see that your outperformance guidance seems to assume that your performance picks up significantly in H2. My feeling at the moment would be that maybe production is stronger and your outperformance again, weaker. The impact on your business would be then zero, so that's fine. But maybe you can explain what makes you so optimistic about our performance in H2? What's going to be the drivers?

Question number two is a follow up to Akshat’s question. You have explained the assault on pricing but can you maybe explain a little bit what are the bridge elements for H2? So some more details, basically, what is driving the volumes? Is it a cost advantage? Is it pricing or is it all of these drivers? And the last the last question -- sorry for that, little bit longer, when we look at what BorgWarner did basically in July, they completed the senior spin-off of the auto aftermarket business. I just want to know if maybe you would also consider such a step or what are the reasons why you would not consider that ever? Thank you.

Klaus Rosenfeld

Okay, Horst, let me take the last one and the first one. We are not considering a breakup of our automotive business that would be counterintuitive to the logic that we have put in place. That doesn't mean that we are not distinctively managing the different parts and you know our model with the mature business on the one hand and the new business on the other hand, new is not only E-Mobility, as Claus said, it is also chassis. That's the model we have put in place. You know that we have super disciplined in terms of capital allocation. You also know that this is a mid-term challenge that at the end of the day depends on maintaining good relationships with long-term customers. So our setup is as it is, and we believe that this is the right answer to that development in, in particular, the propulsion business. Others do it differently. Let’s see what that means for them, but we feel good about the structure that we've put in place.

In terms of Auto Tech production guidance, yes, let's see what's happening. For sure our outperformance was reduced. It's also a back ended, as you said. Why do we believe that that is possible? We have nearly two hands full of ramp ups this year. They are delayed in certain areas, delayed because of reasons that are not in our hands. And if they come, as we know from our customers, that outperformance number is possible together with the structural points that Claus made. So, yes, there is an element of back ended here but the operational information that we have point clearly to a 0% to 3% outperformance being possible for the full year. And the pricing one I give to Claus.

Maybe I was at mistake, were you asking about the senior spin-off or were you asking about the aftermarket spin-off.

Horst Schneider

The aftermarket.

Klaus Rosenfeld

Oh, the aftermarket. On the aftermarket, we don't intend to spin that often. Again you see, Horst,in this quarter, in particular the benefits of diversification. And yes, you can always say you want to have the diversification at your end but we think that with all what we have to think about structures, regional structures, there's there synergies there. Yens [Phonetic] can run his business as a separate division. The way to a legal separation and a carve out is still cumbersome in terms of all the costs that come with this. We would at the time not go for a legal full carve out of the aftermarket business.

Horst Schneider

Can I maybe follow up with one more question? When you made the statement about outperformance and you say it's back-end loaded, you make a statement on industrials that you are pretty confident that the business can recover again next year. Can you make this statement also for how to take this weakness in outperforms, it's just temporary for unknown reasons and that you are going to recover and next year this model ramp ups?

Klaus Rosenfeld

It's a function of ramp ups. The business is totally different situations, so one is suffering from headwind in particular in certain sectors; that is the industrial part. I don't believe that these headwinds will continue forever. I think when these recessionary trends that we see at the moment across the world will mitigate it, will become then the there is market growth in particular in the sectors where we have strong winds, industrial automation, all of what you know. So I think it's a temporary weakness that Stefan needs to tackle with countermeasures. On the industrial side, it's one thing on the Auto Tech side, it's more a question of how do the long-term trend of E-Mobility will continue in the next years. And here it is, from my point of view, a question of operational excellence and delivery on the on the ramp-ups that we have in our books. Yes, you can always say why don't you have even more orders and my answer to this is we want to deliver the orders that we have. We are proud of what we have today and, from a customer point of view, it's most important that you get this properly done.

Horst Schneider

Okay, thank you.

Claus Bauer

Maybe I add one comment to that from a CFO perspective. I mean, with E-Mobility projects, as you know, they tend to be much bigger projects and then you are also much more dependent on the success of the platforms that you're in or how successful are platforms that you're not in. BYD as the top example in the drive train, nobody is in because BYD produces it themselves. So in -- but it depends whether you are in that. So I think that, as the CFO, I have to be much more concerned, not are we growing more than the market in these areas or better than the market but are our projects that we are in profitable or not and that's I think we're very diligent in selecting and really going after the projects in E-Mobility.

We want to safeguard a minimum threshold for gross profit and then trust our overhead cost structure over time in our transformation to the value addition and vertical integration that you have in this area that's different than in engine and transmission and, therefore, I think it is very much important that you have sound tools in place to be able to choose profitable projects, and then win profitable projects, and maybe not anymore the volume impact that you clearly have seen also in engine transmission, but engine transmission, you have hundreds and hundreds of projects that are smaller and based on statistical measures. Obviously, if you're less successful in one and more successful in the other, you have the chance to have that equalized. I think that is different with E-Mobility and, again, maybe the outperformance to the market is not the main driver anymore going forward.

But now to your other question, and I think it went a little bit beyond just the price impact. It's more the entire growth or profitability levels in automotive technology and you kind of answered itself or is it all three of them, I think it's all three of them but with maybe different dynamics. I think volume will -- and we also said we will grow moderately this year. So I think as much as our visibility is for this year in automotive, volumes will stage and will stay where they are, we might be from an everyday global production volume, a little bit conservative, but we have relatively good visibility, obviously, with our orders on hand, at least for the next few months. And so I think volume will be a positive contributor for the entire year but at the same level, as you have seen in the first half. Price, I think I already said there will be a slight positive impact on top incrementally for the second half of the year, but not that much. And then lastly, you obviously have been production performance driven and overhead performance driven. I think we have proven in the first half of the year that we are serious about structural improvements, you know about our restructuring program that we announced in November of last year that is heavily impacting structural improvements of our automotive and so that will continue, however it will be a more continuous phase in mainly the next year, not this year, but there's definitely for the improvement potential that we are going after. And from a production performance standpoint, as you can imagine, with such a big production footprint that we have, there's always pockets of improvement, and these we will go after as well, however, also not revolutionary, but evolutionary.

Horst Schneider

Thanks for the detailed answer.

Operator

Next question comes from Sanjay Bhagwani from Citi. Please go ahead.

Sanjay Bhagwani

Hello, thank you very much for taking my question also, and as always a very comprehensive presentation. So I've got three questions as well. My first one, sorry to come back on the outperformance on the automotive, so maybe looking at the China, that's seems to be H1 organic growth, 5 percentage point underperformance. So can we expect this to come back in H2 or this could this could probably come back more like let's say, in 2024? And the same for the Americas, how much of this 10 percentage point underperformance is, let's say, driven by currencies and the indexation and when can we expect this to reverse? That's my first question and I'll just follow up with the next one, if that is okay.

Klaus Rosenfeld

So I start maybe with Americas and as you heard me explaining it, this is structural and as long as this structural impacts are not completely phased in, and then you have in next year, obviously a different basis. I think we will see, for example, the Mexican peso the US Dollar transactional impact continuing, we will also see the index price impact structurally continuing, obviously, it's all subject to change both the FX impact as well as the material price impact. But as long as that trend is not turning around, I think you'll then only see the outperformance normalizing, when you are in the next year and then comparing to the basis that we have right now. In China, I think we explained that also in the past we -- obviously it's -- and it is going back a little bit to what I said before, if you are in platforms that are gaining market share, then you're automatically also outperforming and there we have a weakness in platforms that we are in China, especially a ForEx market, but we are we are also in domestics that are very successful, but we also have clearly the ForEx market impact in China from an outperformance standpoint, and then you have the big impact that I think every supplier has that's the BYD impact. As long as BYD is gaining 4% to 5% market share -- I mean, it's 4% to 5% market share every year, it's difficult for a drive train supplier to outperform the market there because BYD has a very high vertical integration. So I think at some point, also BYD gets to the limit of growth, I think we internally think there's still quite some growth ahead of them but, at some point, it will slow down and then you also will see a normalization of that market share shift to BYD effect, if you will. And on top of that, and we explained that also in the past, we clearly are gaining a market share in new projects and as they phase in -- and that's with pretty much all significant domestic players in China. And as they phase in that will also normalize them again. But it's not a matter of months or quarters, I mean, it's a matter of base effect and then looking into next year.

Claus Bauer

And maybe I can add to the next year. If you just look at IHS figures, you'll see that at the moment, the latest forecast is 86.7. We'll slightly weaker and for next year, the number at the moment is around 88, 1.4% growth. You’ll see that China grows next year stronger than Americas and Europe is at least projected at the moment more or less flattish. Now if I look at the forecast for this year and just take China, China for the full year 2023 is 1.2% after 7.4 in the first half, that clearly means and it's logically because the first half 2022 was impacted by the COVID crisis. It's a function of how we develop there against market but there won't be 7.4% market growth in China, it could even be that this is reduced market growth compared to previous year when you had the big swing back and that all needs to be factored in. Similar situation in the US, so let's see where we get to. Our calculations at the moment point to, as we said, 4.3% outperformance for this year and mid-term, we have no reason to change the overall logic of 2% to 5%.

Sanjay Bhagwani

Thank you very much. Actually, you already answered two of my equations. Thank you for that. So just one last from my side is let me talk about the [Indiscernible] and sorry to ask this question again because what we saw is one of your US industrial peers, they actually monetize some of their stake in the Indian subsidy. And then when we, again, look at Schaeffler, for example, if I look at market cap of Schaeffler India, that's, I think, ahead of what market cap of the European parent company is and you own significant chunk of that. So do you see -- is there a possibility of, if you could monetize some of the steps, that is basically you still maintain the majority ownership, but can monetize some of the valuations that Indian market is appreciating the [Indiscernible].

Klaus Rosenfeld

Thanks for the hint because the question was asked last time already, it was asked frequently, we have no plans to change the setup. We are proud of what we have in India, it's an investment area, part of our strategy dialogue this year. Some weeks ago it was focused on India, it was focused on the US and China of more localization. So I cannot comment on this on what you've just alluded to. What I can say the company is in a good situation when it comes to free cash flow, there's no need to monetize anything. We’re not traders in participations in India, we want to make sure that our operational business runs and, again, so there's a, no plan and b, no need to do anything like that.

Sanjay Bhagwani

Thank you. That's very helpful.

Operator

And the next question comes from Michael Schmidt [Phonetic] from Oddo BHF, please go ahead.

Unidentified Participant

Yes, thanks. Thanks for taking the questions. Just one on the March 2024 bond maturity. I guess you will come to market in H2 to address this or and this is the question that could you opt for other financing options, for instance, promissory notes, because the cash interest impact would be about 20 million, I think, for the time being, if he would stay in the bond market. So is there any preference on your side which route you want to take and at what point in time?

Claus Bauer

Yeah, of course, we are clearly focusing on the refinancing of that bond since quite some time. I can tell you that we actually closed a term loan yesterday and that's financing part of it. But we are also thinking about a capital markets transaction in the second half of the year, and more to come, and more to come soon.

Unidentified Participant

And then could you disclose what the amount was, what you concluded yesterday and at what interest rate?

Claus Bauer

Interest rate not amount, 125 million.

Unidentified Participant

Okay. Yeah. Great. Thank you very much.

Operator

And the next question comes from Tom Smith from Morgan Stanley. Please go ahead.

Tom Smith

Hi, guys. Good morning. The question on the bond has already been answered, coming back. But I guess on top of that, in terms of counter measures, especially for the industrial businesses, does that imply potentially more cash restructuring to come. That's the first question please. And then the second question is, can you just talk about the difference in cash flow profiles between the Auto Tech and the industrial business please, specifically, the working capital profiles? Thank you.

Klaus Rosenfeld

Let me do the first one. As I said, the countermeasures for industrial at this point in time are tactical or operational ones, so there's no restructuring cost. Linked to this is not a restructuring program, it is the normal performance management type of things, saving costs being diligent with production variances and these kinds of things. And on the cash flow profile, Claus you want to want to say something there?

Claus Bauer

I mean, cash flow profile is indeed different, especially inventories because in industrial and automotive aftermarket, you have significant finished goods inventory, that from a reaction time to market trends is much slower than in automotive technologies as an OEM supplier, and therefore automotive aftermarket with a very good demand situation is, I would say, at the lower end of inventory, that we would see and industrial on the other side, based on the slowdown on the demand now has a little inventory above our target range that now reduces over months. But as I said, you cannot react within days or weeks in industrial, especially in the distribution to a weaker market signal and, therefore, you have always a little bit delay. Whenever there's a swing in the demand, up or down, you then have the opposite effect in your inventory for some time until you adjust it back to the level that reflects the demand level. So in other words, yes, it's different, automotive technology is pretty much correlated also with profitability and sales, top line. Industrial and automotive already always a little delay to what you see in the top line.

Tom Smith

Thank you

Operator

The next question comes from Jemma Permalloo from JP Morgan, please go ahead.

Jemma Permalloo

Hi, good morning. My questions have actually already been answered. Thank you.

Klaus Rosenfeld

Super, then. I think that's it from our side. There's no more questions. Ladies and gentlemen, thanks for your for your interest. Again, road show starts tomorrow. Hopefully you all have some holidays with all the rain that we have here in Germany. We are again closing now here and look forward to seeing all of you soon, if not at the road show then at the IAA where we will exhibit our latest technologies, so please feel invited. We look forward to staying in touch. Thanks a lot and enjoy your holidays if you have any. Bye-bye.

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Schaeffler AG (SFFLY) Q2 2023 Earnings Call Transcript