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Dear ladies and gentlemen, welcome to the Schaeffler AG Q1 2018 Results Conference Call. At our customers' request this conference will be recorded. [Operator Instructions] May I now hand you over to Mr. Renata Casaro, Head of Investor Relations, who will lead you through this conference. Please go ahead, madam.
Thank you very much, operator. Dear investors, dear analysts, welcome to the Q1 2018 conference call of the Schaeffler Group. The presentation will be led by the CEO, Mr. Klaus Rosenfeld, and the CFO, Mr. Dietmar Heinrich, and the Q&A will follow later on. I leave the floor to Mr. Rosenfeld.
Renata, thank you very much. Good morning ladies and gentlemen. Welcome to our Q1 conference call. We, as Renata said, are doing this together, Dietmar and myself, and we will use the results presentation that is out to the public.As usual, it is structured into 2 parts. I will focus on the business highlights and Dietmar is going to talk about the financial results in more detail.Let me start on Page 4 where you have -- basically have the key messages that we want to convey to you. As said in the headline we started into the year as expected, a solid first quarter. The news really is that we are reporting for the first time the 3 divisions. You see the key figures also compared to the previous year quarter on the left-hand side of the chart.Group sales on sales on an FX adjusted basis was up by nearly 4%, 3.9%. The margin -- EBIT margin 11%. As expected clearly below the previous-year level but exactly the midpoint of our full year guidance, 10.5% to 11.5%.If you go through the 3 divisions you see a heterogeneous picture. Automotive OEM with 3.2% growth. If you compare that with our 6% to 7% full year guidance you can already see that we assume and expect that the following quarters will grow faster and that is clearly supported by numerous new business contracts that give us assurance that these growth rates in the second half of the year are realistic and achievable.If you compare the performance in terms of sales with the market you see that against a negative production number growth in Q1 we outperformed the market by nearly 4%, what from our point of view indicate to you that we are on track with our sales growth.The margin was at the lower end of the range, 9.5%. We are confident that we will achieve this range for the full year 2018. Aftermarket as in the top line, little bit of a temporary issue, a decline, FX adjusted 4.4%. And that is basically due to a baseline effect in Q1 2017 where in the U.S. we had a significant positive effect on [ OES ] [indiscernible] driven sales for one large U.S. customer. That's something that happens during a quarter that could not be repeated in Q1 2018. And that basically explains, you will see this later on, little topline decline.We are also here confident that throughout the year we will achieve the additional target of 3% to 4% topline growth. The margin is slightly above the upper end with 17.9%, clearly below last year. We need to give you more quarters to let you understand also how this margin develops throughout the year.The positive side is then industrial, 10.8% growth. A growth rate even above the third quarter and the fourth quarter 2017. Clearly demonstrating that the industrial division is back on growth track, growing faster than what we expected. The 10.8% growth rate should not be extrapolated towards the end of the year but they are clearly on the positive end.Also the margin has developed nicely in Q1 with 11.4%. Here we need to see how all of this unfolds, but we are also here confident that we will achieve the divisional guidance for 2018.Free cash flow is slightly better than previous year, minus EUR 71 million, little impact on M&A, EUR 2 million is within the EUR 71 million from a little acquisition in the utilization area. That compares to minus EUR 130 million last year, minus EUR 130 million included around EUR 20 million for M&A, so the delta is there. It's nothing unusual. It shows that free cash flow is also on track. We have invested little bit more than EUR 300 million or 8.6% of sales. That is slightly above last year and clearly a number that will continue to grow during the year.We have initiated yesterday a transformation step that is related to our plant. We have, as you know, 72 plants today, some of which are allocated directly to the divisions, automotive, OEM and industrial, [ others not ]. They form something that is -- could be described as an internal supplier for bearings technology, that's also why it's called [ Bearing Components and Technology ]. It's a large sort of shared services group within the Schaeffler Group that was established some time 2013-2014.We now decided after revisiting the success of this unit for 3 years we decided to reallocate the plant and move all the plants directly into the divisions. This move is basically driven by the idea that we need to enhance and should enhance customer focus, that this will help us to raise internal synergies and improve efficiency. And that is very close to my heart, it's also a step to enhance accountability to make sure that costs are allocated more directly to the divisions and also to foster the entrepreneurial spirit of our plant managers but also their direct results and responsibility.So it is major step going forward. It is an add-on to Agenda 4 Plus One. The EUR 60 million improvement in our results should be added to the EUR 300 million that we have already communicated. The EUR 60 million is targeted to be 100% achieved in 2021. The EUR 300 million, as you recall from the full year results conference, is targeted to be achieved in 2022. The move will come together with expected restructuring provisions in the second half of this year, probably in the fourth quarter. That would be a special effect or a special item. So for 2018 this move has no immediate impact on our guidance.It is from my point of view a move that is necessary. It's also nothing spectacular because other companies do the same. It's part of our ongoing activity to optimize our cost base, to continue to improve efficiency, so nothing unusual. We waited with this step until the 3 divisions were fully established because that was a prerequisite. It's part of a long-term plan to make this group more efficient and also improve its profitability. It has nothing to do with the ongoing results. It is again part of a continuous exercise to see where we can improve. It does not also change our financial ambitions. As you know, the financial ambitions are not guidance, they are there as ambitions. This move should help us to achieve or even over-achieve our financial ambitions.Last point here, guidance is confirmed at group and divisional level. We are expecting, as I said, accelerated growth in the second half of the year.So that's the summary. Let me quickly go through the next pages. You have read the numbers, I don't need to repeat all of the this. But -- and then Dietmar is going give you more insight. I want to talk about some of the qualitative things, in particular on Page 5 about the Schaeffler Symposium and our innovation with respect to a new hybrid transmission but also the Schaeffler Mover. Apart from the numbers we have had a very well-received Schaeffler Symposium, Page 6, with 400 customers, more than 100 exhibitions and technical presentations, 12 world debuts, one was and also shown later on at the Annual General Meeting, the so-called Schaeffler Mover, it's a prototype that has our wheel hub motor for the first time on stage where we demonstrated that chassis and also powertrain is something that is very much linked together when you think about urban vehicle concept. So apart from the optimization of our offering, the whole area of e-mobility and hybrids. You see on Page 6 this new HV hybrid transmission that was very well-received. We are clearly showing that we are up to speed with respect to innovation in the automotive area.Automotive aftermarket, Page 7 has the numbers. I explained the temporary weakness in sales region, Americas, due to the strong base effect, Dietmar is going to expand more on this. And I explained that we are confident that for the rest of the year we will meet our target. What is important, and that's displayed on Page number 8 is that my goal is continuously working on improving its operational excellence and also improving the service quality.you have 4 examples here. We opened a new warehouse in the Lyon. We have expanded the product range with a new repair solution for the LUK GearBOX, customer-focused placement for TEMOT. The guys in aftermarket are very proud about its Asia Pacific. Appreciation was it's part of our continuous move into Asia Pacific and China, building our footprint there. And then efficiency plays an important role as well. We have achieved in the first quarter the full integration of a complex legal entity structure carrying the real brand name in Hamburg that will also help us to reduce cost.Industrial. Here page 9, the numbers, you have seen them. I would like to highlight and you know this industry 4.0 for us is the twin brother of e-mobility, one of our major strategic initiatives where we see significant business opportunities and growth potential, all of this was shown and you see it on page 10 during the Hannover Fair where we focus specifically on Industry 4.0 showed a range of, from my point of view, very interesting use cases, condition monitoring, digital services for gearboxes and corporation with [indiscernible], very successful, but also all in the logistics area with our new EDC Kitzingen that started, had its SOP last week, long awaited important investments to optimize the logistics of our industrial division, a lot of good ideas, a lot of good business and great interest from our customers.Let me come to Page 11, free cash flow. I already mentioned the EUR 71 million reported free cash flow is better than Q1 2017. Again it's a quarter and not the full year, we need to see how the rest of the quarter is though with all the growth coming up, clearly working capital plays an important role. You know that we had sold receivables for the first time in Q3 and Q4 2017, no impact here from further sales of receivables. We have continuously maintained the EUR 150 million level. If you -- and I've already talked about the little impact of M&A, if you look at the breakdown on the right-hand side of the page where we break out the unusual items you will see that the underlying free cash flow was EUR 17 million in Q1 '18, it's even better than in Q1 2017, EUR 33 million were used for nonrecurring items, EUR 90 million same number more or less for the investments into the special investment cases, M&A. And nothing changed on the receivable program side. So I see that -- you can see that the quality of the cash flow line is in line with Q1 2017.Let me quickly highlight then before I hand over to Dietmar this transformation move that we announced yesterday on page 12. You see here a simplified comparison of today and tomorrow with respect to our global plant network, today 72 plants in 61 locations of the plants, 37 plants directly allocated to automotive OEM, 9 plants allocated to industrial and 26 to BCT and operations. The plants are directly allocated, they are part of a sort of end-to-end operations steered by the divisions. BCT and operations should be looked at as a corporate service area where it's clearly more difficult than for the divisions to steer directly. There are certain interfaces that need to be look at, there is a certain level of overhead for this unit that could be questioned. And in particular with respect to the market requirement and driven by the idea that we should simplify the structure and drive it more entrepreneurly we decided to move all the plans into the divisions.And you see here the split. The 72 plants become 80 plants, why is that, because we decided and that it's also best practice market standard at certain very big plants, we have plants that has more than 5,000 people shall be split into two plants residing at the same location. And if there are two plants at the same location we will call these plants campus plants, that explains the higher number and that explains why in future we will have these campus locations. At the campus locations we will also bundle then shared services for those 2 or 3 plants at the location, and that would give us another potential cost synergy.So as an important move we are dissolving the Bearing Components Technology group as a whole. We integrated the whole group into the divisions. We are reallocating the plant to the divisions. We are simplifying the structure, making it more agile and leaner, reducing overheads and also reducing the percentage of allocated cost.And when you see the little pie chart here at the bottom of the page, I think you see something that is describing why I think more accountability is so critical. Today 43% of the overall headcount is allocated directly to the divisions and 57% is not. It's an indication also for the cost side. And in future 80% of the headcount will be allocated to the divisions and only 20% will be allocated. And if something is directly managed by the divisions and is directly part of a earnings response or a results responsibility, I think that should also help us to drive results and to deliver what we promised. So that was an important move here also in terms of steering model, in terms of achieving more accountability, a better business focus and raising efficiency.That's on the next page. You know these pages from CORE simple logic. We have calculated the full run rate of the cost, savings that we want to bring down, our target is EUR 60 million, that should be achieved in 2021 with full run rate, 950 jobs will fall away, 450 in Germany, 500 somewhere outside Germany. These are clearly indicative numbers that we need to further validate, that has now been started. And we think we probably need EUR 50 million of restructuring provisions in 2018. How the impact will unfold over the next years remains to be seen, but probably the CORE experience is helpful here, that this will -- how this will impact then '19 and '20, we don't have these numbers yet because this was announced yesterday. As soon as we have them we will share them with you.The difference to CORE, ladies and gentlemen, is that this will impact automotive OEM and industrial. The indication at the moment, again indicative figures is of the EUR 60 million, EUR 27 million will impact industrial and EUR 33 million will impact automotive OEM.Let me add one more thing, the EUR 50 million restructuring provision as it's a special item is not part of the guidance for this year, so it will not have an impact. We need to see what is happening with other one-offs and how this impacts the year. But we have clearly said that we keep our guidance and we are, as I said, confident for the mid-term that this will help us to achieve our financial ambitions. With this I hand over to Dietmar for more details on the numbers.
Okay, Klaus. Thank you very much. Yes, I would like to skip then Page 14 and go into the details just looking at Page 15, again giving us the point then of our sales development. We got EUR 3.5 billion in sales in the first quarter which is equal to a growth of 3.9%. And as you can see on the lower right side of the chart, actually China was again a significant contributor to that with total contribution of 18.1% and now reaching a level of 17% of our Group sales, so still this is a balance -- well-balanced portfolio. We expect in line with our guidance a further acceleration of our growth in the second half of the year.And with this one I would then like to switch to page number 16. Here you can see the profit development. As Klaus already mentioned, we are close to EUR 400 million EBIT at the end of the first quarter which is equal to 11%. You can also see the estimations on the right side, actually our profit was significantly influenced by negative FX impact on gross profit margin that we saw a decline from 28.9% to 27% and a big portion actually that influence is coming from that foreign exchange impact.In addition when looking to the EBIT development we have increased cost coming from our Agenda 4 plus One as we already outlined when we provided the figures for the year 2017 and also additional cost for the expansion of our automotive aftermarket distribution network especially in China and Asia Pacific. And you will see later on how sales are developing over there.When we look then to Page 17 and we look to the automotive OEM side we can see actually then the growth of 3.2%. And looking or comparing this with the market we can see that we outperformed the market by 3.9% which is inline with what we are targeting. When looking to the upper left side of the chart you can see that not only the region Greater China contributed to this but also America actually we had an outperformance of the market and Asia Pacific was not exactly on the same level but also contributed in that regard.Then looking to the right side of the chart you can see what we have reported for the first time our E-Mobility figures. At the end of the first quarter we crossed EUR 100 million in sales which is an increase of 6.6% from previous year. But we have to keep in mind that this is not just the pure E-Mobility solutions like e-axles and hybrid modules but this is also including products which from our assessment are very closely related to the future of mobility to E-Mobility and this including [indiscernible]. As a whole for the year 2018 we expect to be of a level over EUR 500 million, in the range of around EUR 500 million, EUR 600 million in sales. So you can also see that we expect a further acceleration in results and sales in E-Mobility in the second half of the year.Now we are moving to Page 18, we can see the profit development and here you can see specially the strong impact coming from the gross profit side and this is on one side the foreign exchange impact out of the EUR 66 million negative gross profit impact, EUR 45 million caused by the foreign exchange impact and additionally by the ramp up cost for the tariff ramp up we are doing.Another important topic to mention again is the increase in our research and development [indiscernible] our throughput. On one side E-Mobility but also to support our continuing focus on improving then the gasoline engine or the internal combustion engine. So with these additional expenses that we didn't [indiscernible]. Now our research and development expense within automotive OE increased to 8% of sales. And yes [indiscernible] our EBIT in the third quarter was EUR 217 million which is at 9.5%. So this is at a lower point of the guidance that we provide.In regard to automotive aftermarket you can see on page 19 actually that we reached EUR 446 million in sales. This is a decrease of 4.4%. But this is actually in line with our expectation and we can see on the right side impact that's being caused by Europe and Americas. And the reason for this is that we had an extraordinary strong first quarter in 2017 where a customer of ours opened new warehouses and did an initial stocking so that actually the demand was for this, yes, replenishment. And in addition we had with one customer strong OE sales due to some [indiscernible] in the market in the third quarter, so that actually we also had a kind of [indiscernible] economical positive impact in the first quarter for OES sales in the first quarter of 2017. So actually then summarizing we had a high or strong [indiscernible] which we have not been able to beat. But we are sticking to our guidance for the whole year and so we drove the accelerated growth now [indiscernible].Then looking to profitability of the automotive aftermarket. We can also see basically a slight drop in regards to the gross profit margin and again this is being caused to some extent by foreign exchange impact but also by the lower volume and we have a slight increase in the selling expenses which is actually being caused by the expansion of the distribution network. And on the previous slide you could see that especially the market in China and Asia Pacific are contributing to the [indiscernible] growth.Now moving to the industrial division and looking on Page 21, we reach now a level of EUR 826 million sales which is a [indiscernible] growth of 10.8% and we can see that basically all regions contributed to the growth, again China significant contribution but also our biggest industrial market Europe contributed with a growth of 8%. And when looking to the industrial sectors you can see that basically almost all of the sectors including our industrial distribution area contributed with a growth of around 10% or more percent to this growth of 10.8%.Nevertheless we've guided very positive development. We expect a normalization in the coming quarters as the base impact with having lower first quarter last year and having had a ramp up of the sales development last year during the year then actually normalized. The positive sales impact also had an impact on the profit development.As you can see on Page 22 we reached now in the first quarter a level of EUR 94 million which is equal to 11.4%. We can see that on one side we had also here a real negative foreign exchange impact but with additional volumes that we could realize in the market. We overcompensated that impact [indiscernible] in regards to our two phases of cover in the overhead area and in the plant area. We have been also able to significantly improve in this regard, that is explained by our profitability. Actually in the first quarter it's on such a high level. Nevertheless now as Klaus mentioned that our new European distribution center actually had [indiscernible] during the last phase and [indiscernible] are going to ramp up in addition now during the handover period from the former distribution network into the new distribution center. This will have redundancy costs which we will then finally reduce. And all of this [indiscernible] so this will have an impact in regard to additional costs and on the coming quarters because this can get to the planned efficiency levels.Summarizing all this impact and looking on page 23, you can actually see that our net income is equal to EUR 240 million which is equal to a share of EUR 0.36, that's a decline, the decline is mainly caused by the lower EBIT margin as we explained before. So that explains this [indiscernible]. And then switching over actually to the balance sheet side. And as you can see on Page 24 then we have results of our working capital development. Now an increase compared to the fourth quarter of close to EUR 2.6 billion. But that's a significant reduction compared to the third quarter of last year. And it is also contributed into the positive development on the free cash flow side that was already mentioned by Klaus as well. Our CapEx continues to be strong in line also with our expectation for this year, so we spend around EUR 300 million in the first quarter which is equal to 8.6% of sales.Now moving on then to look to the debt side. Our net financial debt in conjunction with the slide negative free cash flow increased slightly to EUR 2.439 billion which is then equal to a gearing ratio of 89%. Even with a slight increase we further improved our gearing ratio. And with that in fact actually I would like to conclude my report on the financial statement and the figures. I'll hand it back to Klaus then to summarize then --
Well, Dietmar, thank you very much. The summary is on page 26, and I have said it before, so nothing spectacular. We confirm once again our guidance for our portfolio 2018, 5% to 6%, sales growth 10.5% to 11.5% before special items. So excluding the potential EUR 50 million restructuring provisions and a free cash flow of around EUR 450 million. You see the divisional guidance also confirmed and let me also say this loud and clear, we are also after the experience of last year fully committed to deliver on these results. The additional restructuring and reorganization move gives proof of that. It is clearly all about handling and steering a business -- a global business through a challenging market environment but we are not only confident we are fully committed to make sure that this year the guidance on a group level and at the divisional level holds. Thank you very much. And back to the operator and [indiscernible].
Dear investors, dear analysts we are now ready to take your questions.
[Operator Instructions] First question is from Raghav Gupta-Chaudhary from Citigroup.
First one I guess would just be on your automotive growth that you are expecting in the second half of the year. You have talked about high number of product launches in the second half and I guess therefore expecting growth to accelerate as we move through the year. I am just wondering if you could provide a bit more detail on and be a little more specific about the products and I guess this would be the first one. And the second and related to that would be on E-mobility growth 6.6% for business which and I certainly the get impression is growing at a much faster rate, feels disappointing. But I appreciate the guidance that Dietmar has given, the EUR 500 million to EUR 600 million of sales for the year. I was just wondering if you could talk about how that compares to your expectations. Is the 6.6% in line with what you are expecting for E-mobility? My final one would be on the group profitability and just the seasonality of margins. You have reported a 11% margin for Q1. When I look historically, particularly in automotive Q1 has tended to be a seasonally strong EBIT margin quarter. Is that something -- is that a trend that we should continue to expect, i.e. Q1 being stronger or is there something else perhaps that has played a part in that historically. Thank you very much.
Thanks for the question. Let me start with the last one. Again we are giving guidance for full year and I do not think that there is any situation where we can just look at the past and say the margins are always better in the first quarter. We have, as you know, we are in a transformation situation. In the past we didn't have the Agenda 4 plus One. You all know that the Agenda 4 plus One impacts the automotive division and the results of the automotive divisions through the investment in E-mobility. So I think you need to be a little bit careful with any pattern from the past when we say why is it now less -- now strong in the first quarter. Again we are committed to deliver the 9.5% to 10.5%. This is the lower end of the range. We know that. But again this is the full year figure and not a quarterly figure. So let's be a little bit patient here and see how the second quarter goes and how that works together. Again we are confident that the full year will work out. In terms of the growth, you are asking about the product launches, we are not sharing with the public the number of product launches. There are numerous launches this year, never had as many, I can say. And what I could give you maybe as a little bit of an indication, these launches are not only focused on E-Mobility coming across the board, they are significant growth expected in the engine area and that has nothing to do with E-Mobility. Very important customer names also. New engine products, that's an area that will definitely support the growth in particular towards Q3 and Q4.Also in the classical transmission business there is -- there are some very large customer projects that have been originated in the previous years. That will start to produce sales in Q3 and Q4. Also names from across the boards U.S., Germany, China and also the [indiscernible] area is continuing to grow not as fast as we say. When you think about E-Mobility, in terms of growth rates that is clearly the highest growth rate. In terms of percentage it will continue to grow. But also here please do not expect the E-Mobility exercise as a 1-year exercise. It's a mid-term program and we are now I think the first factor here that is giving a booked reported sales figure for such a division, be a little bit patient here we need to think that through on a midterm basis. You mentioned the 500 that I indicated, that is clearly the number we are shooting for in 2018 and this is supported by a range of customer -- booked customer projects.Again not only e-axles [indiscernible] and not only hybrid modules also other things, but we are definitely in business and I can say because that is an obvious question. There are no new customer projects at the moment. That's not because we are not competing for things but that is simply because we have our hands full to handle those that we have on our plates. We have still our [indiscernible] contracts. It's important that we deliver on these contracts and then there are more than 25 other projects that are running [indiscernible]. So we feel very good about this pipeline and it's now time to deliver and see that we please our customers and their customers.
Perhaps ask for one little bit more information in terms of disclosure, E-mobility sales in 2017, what did you achieve?
No, in -- you ask about the full year 2017, I don't have this number at hand. We will share that with you.
Next question is from Christian Ludwig, Bankhaus Lampe.
2 questions from my side, the first one really on your restructuring or regrouping of your, as you call it, internal supplier. Maybe you could come back because you said you just 4 years ago built this internal supplier. What did you have in mind there, what change or what time that you say you have to change again will be my first question. And related that in a sense as you explained I think very well you have a very strong growth track record ahead of you, is this really the best time to do such an internal restructuring at the same time, will that not risk that your ramping up of all these new projects gets delayed. And the second question will be on the industrial business, the 11.4% margin that you posted in Q1 has been the best margin for a couple of quarters now. Is there anything there that makes you worry that the next couple of quarters would be significantly weaker that you stick to your guidance?
Well, maybe I'll leave the second question to Dietmar and I answer the more easy question on the restructuring. You ask first what drove your decision through. We do -- we did the decision from 2013. In 2013 the idea was that we should bundle our competence in the whole bearing production area and at the time we were clear that this a balance between synergies from this bundling and having this under one roof. And on the other hand making sure that we can still steer efficiently, we don't create any double work. People can synchronize the signal they get from the market with the signal they need to do their production. And at the time [indiscernible] let's give it 3 years. It's a little bit of an experiment it was before we became public. And we said after 3 years and ask ourselves has it really brought the synergies we want and the answer was, well, no. Has it created good synergies, the answer was yes, and therefore we said it's now time to do it. We then waited for the three divisions because you can imagine if you do something in that magnitude it changes a lot of interfaces within the company. Always something like this creates a little bit of uncertainty, but -- and that's the second part of your question, that risk from my point of view is manageable because we are not dealing with single job somewhere, we're dealing with four plants that now get allocated. So you basically if you think about this, the 26 plants will be moved from the [ BCT ] internal division into auto or industrial. That as such is not a very difficult move, no. If you think about the overhead, and we're talking about around 1,000 people in overhead that this unit had, then this overhead is not relevant for any of the new products that we are doing or for the product launches. So your question is a legitimate question and clearly something that we have to watch out for, that the execution of this is seamless, very sort of straightforward. But I don't see a big risk that this negatively impacts the business. However, it's a major move and we are clearly committed to monitor what's happening. I would like to add and give it a little more flavor. For me it's important that our business leaders, the plant managers also our people in the functions see this as an important move to increase and enhance the idea of accountability for results and contributions throughout the group. We have seen this last year. We were wildly unhappy what happened last year and this is also something that needs to be seen [indiscernible] as a reaction on making sure the people stand up for the number they promised and can also deliver on this promise with having access and also responsibilities for the cost base that they are responsible for. So it's more than just moving plans around, it's a fundamental step in improving our performance culture within the company.
And on the industrial business, the margin.
Dietmar is going to [indiscernible] on the industrial business.
[indiscernible] yes, in regard to the industrial margin you could see in the indiscernible] actually that some contribution was done by the gross profit development, operating leverage that we are having there. I explained that we actually expect the sales growth normalization during the remainder of that year, so that strong impact in regard to profit that we had in the third quarter [indiscernible] continue to see. But [indiscernible] to our guidance of 9% to 10%. Then so this is explaining [indiscernible] slightly we have weaker quarters and probably [indiscernible].
And maybe one additional information to Mr. Gupta from Citi. We need to find -- get the exact number, but according to what I have in mind the full year 2017 number for this E-Mobility division that we have not disclosed so far it's close to EUR 400 million. So from 400 to somewhere 500 plus, I mean that's the growth rate that we're expecting there.
Just as a quick follow up, is it fair to assume [indiscernible] for the industrial division that you'll probably rather end up at the upper end of the guidance for the industrial business from the lower end?
Well, with a gross rate of 10% something and a guidance of 3 to 4 I think that's a very fair assumption. But let's see how it unfolds. We are not changing guidance, to be clear, but we need to see what the second quarter brings and then we will revisit where we are. But it's definitely a positive development on the Q1.
Next question from Victoria Greer, Morgan Stanley.
And 2 on the automotive aftermarket business please. It was clear when you talked about the one-off impact of North America and OES in the quarter but Europe organic growth was also dying, independent aftermarket was also dying, can you talk a bit more widely about what's happening in the topline for aftermarket? And then staying on aftermarket, the margin 17.9% in Q1 has still been above the full-year guidance range, and so what costs are you expecting to come in and for the remainder of the year. But I guess there you probably have the opposite effect that you have in industrial in that probably the top line should get better and so we might expect a bit of leverage there.
The results of the top line development [indiscernible] been that one of our customers [indiscernible] that was a special, yes, development in the first quarter of last year. So this is the reason why actually the sales [indiscernible] in the first quarter dropped. And, as said, on the OES side this was also that one of our customers had a special demand and that result during the first quarter of last year which actually did not [indiscernible]. In results to probability we are working on enhancing our network in Asia-Pacific and in China, and we will have additional logistics costs from strengthening our distribution network there. So that is actually why our margin was a little bit better than actually the full year guidance [indiscernible].
But the one-off you talked about with the one customer with the new warehouse, but that I guess is all in North America and in OES or it's across the board?
The OES was North America and the new customer was -- or the customer was in Europe.
Next question is from [ Marc Tonn ] [indiscernible].
2 questions from my side, one would be on the automotive E-business [indiscernible] [Audio Gap]just my question would be year, is this the ratio we should also expect for the year [indiscernible] and the years ahead or are you expecting this ratio to go further up or to come down from that level? And the second question would be a bit on the profitability of the automotive E-business, I think you mentioned EUR 45 million negative in the gross profit from FX. I think at least part of that being compensated by the others through the hedging. However, this is just plus 21 year-on-years so either it was not, let's say the hedging was not sufficient to cover that up or is it anything -- or is that something which is offsetting that. That's would be [indiscernible] let's say some more granularity and perhaps how much of the year-on-year effect we have from Agenda 4 Plus One in terms of costs or earnings burden and from the ramp ups I think which also played a major role here.
Maybe I take the question on the Agenda 4 Plus One and again we gave you for the full year a little bit of a split. In fact EUR 150 million was the impact from all the 20 initiatives in 2017. We also said that's a ballpark number that for 2018 positively again to be expected. And in the first quarter it is not sort of just the same number as in the previous year but it's in the ballpark of the quarter of what we are expecting for the year. So if you take the EUR 150 million from last year, that sits at the moment in the numbers. And if you take the 11% and then compare it to the 12.2% of last year you have the underlying profitability, it's clearly there. If you think that through from a divisional point of view, don't forget that what we said in the -- for the full year is still relevant for the first quarter. The negative impact in terms of profitability is clearly something that goes predominantly into the automotive OEM part because that's all the ramp up costs, the investment into E-mobility while on the other hand the positive impact on the Agenda 4 Plus One come trough to CORE and CORE is really starting to pay off as you as you all know from the 2 initiatives. So that's the impact on the divisions. Again we have decided not give any more numbers and make it even more complex to do within a quarterly basis, but that is clearly something that impacts at the moment the automotive OEM number and we need to see how that unfolds throughout the year. I can say Agende 4 Plus One it's fully on track. We are monitoring it week by week, month by month and it is also improving in terms of delivery. We don't give you in the first quarter now more detail because we did this restructuring, but it's clearly something that we want to explain to you in more detail during our Capital Markets Day in [ December ]. Dietmar, do you --
-- to the let's say profit related part, there is a performing part, research and development expenses. Actually we expect them to continue in a range of around 8% during the course of this year, but also looking forward our intention is to stay in that range. Of course it can be influenced in case further unexpected project are coming in so we will need to see. But first of all we're going to stay in that range of 8%. In regard to the profit impact we talked about it or on change impact on the gross profit side which was negative. Yes, it's compensated, but only partially compensated by the hedging and that's related to the fact that actually we are doing a cash flow hedge and that then basically means that certain portion [indiscernible] is also caused by inflation and transactional impact. So that's why only part of this is compensated. And in regards to the ramp-ups, due to the [indiscernible] expecting significant increase in the second half of this year but also already additional ramp-ups taking place in the second quarter of the year to increase the preparation in the factory, that this is also one of the reason why we have additional ramp up costs right now in the first quarter.
Next question is from Sascha Gommel of Credit Suisse.
The first one would actually be on working capital. You had a significant improvement on a year-on-year basis. And when I look at the seasonality last year Q1 was kind of the high point in terms of working capital [indiscernible] basis. So should we expect a similar pattern this year or is the significant acceleration of growth in the second half kind of a negative we should keep in mind? And then secondly, on industrial maybe you can update us on potential bottlenecks considering the high growth rates we're seeing and also how pricing is doing on the industrial side? And then last but not least on chassis systems, the organic growth rate was much weaker compared to the other divisions in the first quarter, was there any specific reason for that and how should we think about the growth rate in the coming quarters?
Let me start with the working capital part. What we [indiscernible] we actually did an initiative to improve the working capital and what we did when we think of the accounts payable side we are looking to the payment terms, but also look into the way how we are [indiscernible] already implemented the related measures during the course of last year, so we see an improvement there, but it already took place in the second half of last year. So that's why actually especially compare Q1 last year Q1 this year we see positive impact. And then you might recall that actually we did an asset back commercial payable program in the third quarter and it's actually fourth quarter of last year that we ramp up basically to a level of around EUR 150 million. It was now amounting to EUR 156 million at the end of first quarter and we're targeting to keep that level payable. But that was not in place in the third quarter of last year so that also helped to improve then the working capital on that side. As I said, we are not yet planning to extend that program right now, we are planning to keep that on a stable level. Then in regard to growth, shall I continue? Turn your page. On the industrial side you talked about the bottlenecks and we faced the strains in supply chain. Last year we established a special investment program amounting to close to EUR 200 million [indiscernible] which actually we initiated in the third quarter of last year. So depending on the delivery time for machinery which is normally longer for, let's say machine compared to assembly lines, this improving of the situation kicking in [indiscernible] that we see improvement. We still have a strain on the supply chain. We still have [indiscernible] issues that we need to -- I have special [indiscernible] to compensate and [indiscernible] in the expected delivery time, but we expect that is further improving, improvement of the situation. In regard to pricing we do not comment on this specific [indiscernible]. Okay, then on the chassis side we had, yes, indeed some ramp up then also in the first quarter of this year then and we see the positive development. [Indiscernible] more ramp up specially in [indiscernible] coming from the other 3 divisions in the remained of that year.
Next question is from Julian Radlinger, UBS.
So 2 from my side. Number one is on the E-Mobility revenue that you expect for the full year, EUR 500 million to EUR 600 million. Mr. Rosenfeld you just said last year you had around EUR 400 million, so that implies an increase of EUR 100 million to EUR 200 million, that's quite a substantial portion of the organic growth that you're expecting for the full year in the automotive division. I mean certainly a double-digit percentage amount of the organic growth you're expecting. And so assuming, and please correct me if that's wrong, that E-Mobility revenues will come along with a lower margin at least over the next 1, 2 maybe 3 years as volumes ramp up and the value add in these products is much lower than in your bread and butter traditional business how should we think about the margin dilution impact specifically from these e-axle and hybrid module revenues which are really going to start kicking in now this year, second half of this year and next year? And then the second question I have is on overall automotive OE order intake. Last year your order intake declined year-on-year. I acknowledge that there was a difference in the semiannuals, but on a year-on-year basis it was lower, it was even lower than your 2015 order intake altogether. So maybe if you could, I know you're going to -- you don't want to give us a quarterly indication, but maybe if you could give us some color around how order intake has developed since the start of the year, if you're looking for a flattish order intake this year or another decline? More about that that would be really helpful?
Okay. Let me start with the last part. You said it, we have committed that we do this on a half-year basis, so I can't you any numbers. We saw that this number came down a little bit compared to the previous year from 1.4x to 1.3x. [indiscernible] and I think we should not overestimate a 0.1x dip there. What is important to understand that the trend as such is pointing at the right direction. And I think that is definitely also what we see at the case. In terms of margin, yes, we're not reporting margins on a division level. We are breaking up the E-Mobility number. You are right, it will grow. If you take EUR 100 million over EUR 2.3 billion it is certainly not the biggest part of our revenues. And if I think about the automotive business, business of EUR 9 billion to EUR billion business and something like 400 going to 500, we're talking about 5%. That doesn't really make a big difference in terms of the margin. Even if the margin will be 0 it can be clearly compensated by the other divisions. So once again we have said 9.5% to 10.5%, that's what we have committed and that's what we want to deliver.
Next question is from Tim Rokossa, Deutsche Bank.
I would have 3 questions, please. The first one is on your restructuring charges, another EUR 50 million this year now, last year it was I think EUR 39 million, in 2016 it was EUR 45 million for CORE, EUR 13 million for streaming the portfolio. Given that you are in this massive transformation process is there just the usual EUR 30 million to EUR 50 million now that we should assume going forward. And I agree with you that you adjust for it but then the money is gone so it probably still does make a difference to our EPS estimates, for example. The second question is just on industrial [indiscernible] on the margin side. Is that mainly because of the strong organic growth that we see right now? I see the selling expenses improvement, for example. And is the majority of CORE still to come or do we already see material impact from CORE? And a final question just on the growth and margin outlook for the coming quarters. I appreciate that you don't want to guide us on a quarterly basis and I would generally share your view of not being too short-term, but the problem is that your automotive OE guidance is very backend loaded this year. You also talk a lot about ramp-ups and you don't really have the best track record in achieving your guidance in the last couple of years. So I think for investors it would therefore be quite helpful to really understand if you are on track with your planning as early as possible rather than having to wait until the end of the year to see if that is the case. Will it therefore be possible for you to give us some sort of feeling what you should expect in terms of ramp up which too already be much better be in line with the full year guidance or slightly below that, something like this? Thank you.
But that was the restructuring cost. I mean restructuring cost at this stage when you initiate something like this are always an estimate and we have gone to 2 of these similar programs, slightly smaller in size. And don't forget we have also end of last year initiated another one that has not really got any feedback from the market, that's our share services initiative. And Dietmar, maybe you want to talk about this for a moment. So this is not just a figure that is calculated in my office for a rule of thumb, it's -- there was an external consultant that helped us getting all of it together, the details [indiscernible] it is really a ballpark number because we will now go through line by line and plan by plan and see what's happening and what is committed what is not committed. But that's at the moment the number we are expecting. [indiscernible] not only some HR related costs in there. I told you that we are going to split in certain locations plans and that requires some sort of work with respect to IT systems. So this is not only just taking the number divide it by 950 and saying that is your average rate for getting rid of people, it is a more complex calculation. And while parts of this in the plant and plant people are typically less expensive than overhead people, it is a mix of all of those. I feel good about the number. We will validate the number as we speak --
Sorry, if I may just interfere. Then I may have misphrased my question. I didn't question the EUR 50 million for this year, my question was much more hinting to the fact that it's again EUR 50 million this year, it was EUR 39 million for shared services last year and it was like EUR 45 million for CORE and EUR 30 million for streamlining the portfolio in 2015. So is EUR 30 million to EUR 50 million something that we should just assume as normal restructuring costs given you are in this transformation process going forward every year?
I can't say anything about what we're going to be next now we are -- the first thing I can say is we are continuously optimizing. I have said this, by the way, for those of you that follow us in 2015 that if you assume that there is a one-time restructuring [indiscernible] that's not the case, it will be a continuous exercise. We're just now delivering on what I'm saying. It could well be that in 2019 we see another exercise like this to become due and then it could be something else. I am not excluding anything but I can also not say anything about this for the time being because there's no comparable initiative in the making. Now as we did [indiscernible] it's now relevant that this is executed well. Okay? Tim?
Yes, absolutely.
But what you can assume that I'm very committed to deliver on my financial ambitions. Now I said 12 to 13 and we will do what is necessary to get there.
It looks like in on industrial for example you are making good progress with CORE anyway already, so.
Sure. And on CORE, again it was the first time ever that we closed the plant, it was the first time ever that we did 500 jobs, what was a new experience for Schaeffler. And we, I think, CORE I, it delivers. CORE II is on a very good basis, the colleagues are handling this on month-by-month basis. So execution strength has also something to do with experience. And with that experience we are going into the next round. I don't have the final number here to say how much of CORE II is delivered. But if that's an interesting figure for you we're happy to show the slide. There is definitely --
I --
-- month-by-month we follow up as part of the Agenda 4 Plus One, and that is tracked on a monthly basis. So I don't have the figure right next to me, but the colleagues will be able to share that with you. How much of the intended improvement of our result is already achieved.
Tim, in that regard [indiscernible] for Klaus. From CORE I [indiscernible] I think of around EUR 4 million. For this year we see the full year impacting [indiscernible] and in regards to CORE2 I think it fell around EUR 40 million that we are going to add as a positive impact this year coming from the closing of the factories that actually was done at the end of last year. So that's -- then the second contributor actually to your contribution that we are getting in regards to the profitability of industry coming from the organic growth [indiscernible].
And then in terms of the quality of the industrial results, clearly this is a margin that is strong. It also has to do with the factors, how those factors are performing. And I think Dietmar said it and you see it also on the page later on. We see that the industrial distribution sector was one of the fastest growing sector. And it, as you know from the past also a significant part of the business. If that's growing faster than other sectors, that also provides profitability. So while we had in previous years a situation where wind was going fast, wind is one of the lower-margin sectors. The industrial distribution part clearly drove in the first quarter the good results. In terms of backend loaded automotive, yes, certainly you always want more information, but here I understand your concern. We are fully accepting the notion that we have to deliver quarter-by-quarter, but let's wait for the second quarter. I think this first quarter is definitely in line with consensus, is definitely in line with what we said, give us the time for the second quarter [indiscernible] on the 7th of August and you saw that we postponed the Capital Markets Day [indiscernible] September. So we are now in the middle of May. I think let the numbers do the talking and wait for the second quarter, that's I think the best communication strategy for the time being.
Next question is from Henning Cosman, HSBC.
Please can I just clarify about the [ BCT ] resolution and the impact. I think I still haven't fully understood is that's more a defensive move? I mean you talked about accountability and protecting the targets and being fully committed, so I appreciate that. But is it more like positive move, if you like? And if I modeled say a 100 before for my target number, should I now have a higher number because you have additional EUR 60 million positive windfall profits there or would there be the shortfall if you wouldn't have reacted? That's my first question.
Well, to some extent not to worry how we look at this. I mean, we -- we have our guidance for 2018. The first priority is to make sure that we need [indiscernible] this year. And again I can only say it again, we are fully committed to that. The more long-term view is that we have clearly a goal to optimize our [indiscernible] to make sure that the company is now generating the right level of profitability. And the current profitability is overlaid by Agenda 4 Plus One. And this move with the relocation of the plants was not primarily driven by generating EUR 60 million of cost improvement, it was primarily driven by making the structure more customer-focused, more efficient. And in terms of optimizing interfaces and being able to deliver our products in a better and more customer [indiscernible] way, that was the main driver. It was not driven by we need urgently EUR 60 million to please in the result, no. That's not the way we look at this. This is a part of a continuous cost and efficiency improvement exercise. We have to wait for the decisions that we go for 3 divisions, that will happen. We now went fast into this, that's the right thing to do because if you do something like this at the beginning of the year then you have a much better execution probability during the rest of the year than if you do it in September or October. And it's -- the EUR 60 million will certainly help us to achieve the financial ambitions. The financial ambition is the 12 to 13. If you take the EUR 60 million EBIT improvement potential across the whatever revenues we will have by then, it will clearly help to achieve these financial ambitions but not because we are desperate that we are not achieving them, it's simply something that you put in place as an entrepreneurial measure to make this company better.
The second question is on the visibility in the industrial business. You're not showing this chart where you have the 3 months rolling order book against the revenue growth this quarter because you obviously are not showing the order intake but could you just clarify for me because I think in the press release you were saying you were surprised or it was a positive surprise because the market grew stronger in industrial, you were surprised about this, but clearly if you look at the order, the 3-month rolling order book that you have shown with the last release we would have expected some very strong growth? So could you just remind me how you look at this leading indicator there and how accurate that is, and then if there is pent up demand, so how are we thinking about the next few quarters then?
Well, it's a very good question. I think it's the same question with respect to the automotive order book. And we have said we are going to share that indicator with you on a half-year basis and we'll do that in -- with -- on the 7th of August. But you're absolutely right, it came in quite nicely. We have never said that you can out of this indicator predict exactly what your revenue growth is because this is driven by customer demand and the orders coming in. We always know that in a situation where there is significant growth potential, orders are insulated to some extent. So this indicator is not there, different maybe than in the order intake logic from automotive to just calculate a figure and say it must be 11%. We were happy with that. Let's say, let's break it this way. It didn't come as a total surprise. The growth is 2 digit. Don't forget in the fourth quarter 2017 the growth was also 9%. So it's a continuous growth. And that I think is important. And also the quality of the growth is there. And that what makes us confident that we are right on track, we're catching up with our competitors. The margin is clearly above expectations. We now need to see how this is going to balance out. Don't forget we're not managing by quarter, we're managing the full year. And we need to do that. This gives us a very good basis to achieve our targets in industrial. In terms of the market one more sentence there, the market is still heated. There is a lot of demand coming in from people. We are happy that we have our logistics center now up and running because the supply chain challenges that we still have also with respect to special freight are still there. We talked about capacity utilization, it's still high in certain areas, more than 18 [indiscernible] so handling this is one of our key operational challenges [indiscernible].
And just finally, if I may, and I'm going to try it in a different way, if you don't mind, on the automotive growth. I was actually quite pleased with the almost 4% outperformance in the first quarter, seeing that you've also in your speech at the AGM talked about these very strong accelerations in the course of the year. So of course your full year guidance only implies about 4% outperformance for the year. And I'm just wondering how that compares with the acceleration. Now, wouldn't we expect a much stronger outcome then for the full year?
Well, this year we have -- once again, to be very clear, the outperformance 4% is not part of our guidance. It's an indication that we have giving you in 2015 when we started that this historically, that has always been something that we can achieve. So [indiscernible] it's an indicators but it's not that in 2018 we want to achieve an outperformance of 4%. It is well possibly that overachieved that, but don't forget it's also a function of what's happening in the market. The market will fluctuate. We said and then we gave you our guidance, it's somewhere between 1.5% and 2%. If you compare that to our growth rate in terms of guidance, 6% to 7%, it already indicates if that comes in as the market sort of indicators tell us, we will be better than 4%. But let's use that as a -- not use it as a guidance. It's for us it's indicator. We want to see what the second quarter brings. As I said, let the numbers do the talking and make sure that we are delivering what we promised.
Next question is from Edoardo Spina, Paribas.
I'll try to ask you 3 quick questions. First one follow-up on restructuring charges just to understand that if it's going to represent free cash flow outflow this year. I appreciate you do not change your full year guidance on that. So I wanted to understand that first. And another question on the below EBIT lines for financial results and for tax rate, if you give an indication whether they could be below last year both or maybe one of these items? And the very final one on the raw materials. Some competitors of yours flack that there is a lot of volatility in there and they feel some pressure. I just wonder -- was wondering your take on that, if you look at them with, say, as a risk or if you can update on the pass-through clause, et cetera, from your side.
Let me take the first one and then hand over the second one, second and third question to Dietmar. In terms of the restructuring provision, the cash outflow, we are not final result planning there. As I said, it's a indication at the moment. But we -- I can say that we will be fast on certain decisions when it comes to organizational -- leadership structures. There may be some of the levels that we are flattening where people go, in particular the more expensive people. That could have an outflow impact but it will not be a major part of the EUR 50 million and it doesn't need to change anything in our free cash flow guidance. Dietmar, you may want to continue?
Well, Edoardo in regards of the net income to the below EBIT line, if you could see [indiscernible] deviation or the decline in EBIT is almost equal to the decline in the net income. So, yes, we had a slight impact on the tax side being compensated by the financial cost [indiscernible] also a development and a decline in the net income is caused by the decline in the average.
On the raw materials, I don't know if you could comment at all on the front, but otherwise thanks.
Share price is okay, the general situation of share prices is certain a challenging environment with all the protectionism that is under debate in the world. In our first quarter I can say we are absolutely in line with expectations. And how the rest of the year unfolds we need to see. We are not so much dependent on aluminum. We are not very much dependent on the oil price. We are very much dependent on steel. And in steel we see that, as we forecasted that there is an increase for that part of the margin guidance. At the moment I don't see any sort of big deviation from what we budgeted and what we forecasted so far. So we need to follow this but there is no dramatic headwind at that level that we could not cope with.
And now last question is from Kai Mueller, Bank of America.
Most questions [indiscernible] by now, but just to follow up on your restructuring, the way you realign the group, understand basically the sensual plans are now being allocated to the subdivisions and I understood back in the days that the company was very much integrated having this internal supply business. Is that possibly a precursor on doing something more around the structure that you have two businesses, the industrial and the automotive business that they are much more independent than they used to be before? I understand obviously you've highlighted before that you're one company, you never think about separating into parts, but is that maybe something that would make such a step more easy?
Thank you very much for the question because I forgot to mention this. So you see it's not all on my agenda. The answer clearly is no. We're not [ divisionlizing ] this group further. We have internally clearly that the technological -- we call it umbrella or you can call it [indiscernible] -- is still something that we want to keep whether you allocate a plant through division, the central function doesn't change the logic that our plans are very much linked to each other. It's one plant network, it will be further optimized by our new head of operations in a sort of holistic manner. So there is no intention at all to separate industrial from auto. This is something that I said on and on, and we want to stay as one group and not to start to break up the group to two pieces. We would think that would be materially wrong. It's definitely not part of our strategy. We think the group belongs together and there are synergies from running this under -- from one platform even if the plants are fully allocated to the divisions.
Thank you. There are no further questions. I hand back to the speakers.
Thank you very much, dear operator. Thank you very much, dear analyst and investor. As usual you will have a document slide, they are loaded up on the website in a couple of days [indiscernible] see some of you in the forthcoming road shows starting tomorrow. Thank you so much and goodbye.
Bye-bye. Thank you.
Dear ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.