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Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining the Schaeffler Group Q2/H1 2021 Earnings Conference Call. Throughout today's recorded presentation, [Operator Instructions] And I would now like to turn the conference over to Renata Casaro, Head of IR. Please go ahead.
Yes, Haley, thank you very much. Dear investors, dear analysts, good morning. Thank you for joining our Q2 earnings call. The presentation and the Q&A will be hosted by Mr. Klaus Rosenfeld, CEO of Schaeffler Group, here in Herzogenaurach, together with us, the IR team. Klaus, the floor is yours.
Thank you, Renata. So ladies and gentlemen, good morning, and welcome to our Q2 earnings call. You all received the presentation, and I will quickly go through this and then allow for questions at the end. Please go to Page #4, where you have the key messages for today. I think we can say a good Q2 2021, with strong sales growth, clearly against a low base effect, and a margin that is with 9.2%, clearly solid. On the sales side, I can say that all regions and all divisions contributed to the double-digit growth. So it's definitely a broader growth dynamic than in the previous years. Q2 margin strong in Automotive Aftermarket and Industrial. You will see this later on. And in Automotive Technologies, the margin is impacted by the lower volume, in particular, driven by the supply chain challenges that impact us indirectly. Free cash flow, positive EUR 113 million. We'll come to this later. You saw that CapEx is low and that there is a counterbalancing effect by the increase in working capital. We are, as you all know, very much focused on capital management and capital allocation. Return on capital employed reached a strong 18.7% without one-offs. And that's clearly supported by both the strong earnings and the strict capital discipline. I also, I think, can positively report that our order intake in Automotive Technologies was EUR 5.4 billion. And we are proud to say that a significant portion came from the E-Mobility order intake. EUR 2.1 billion is at the upper end of our annual target for the year 2021, so that was EUR 1.5 billion to EUR 2 billion. That positive trend seems to continue also in the second half of the year. Against all of this, we have cautiously upgraded the guidance for '21. And we are, on the one hand, confident that we can make these levels. On the other hand, we clearly know that there are headwinds in the second half that we need to carefully balance, higher sales growth after the strong first half, a better EBIT margin on the group level for Industrial and for Automotive Aftermarket. We left the above 6% as a sign of cautious for auto technologies and also upgraded our free cash flow before special items to more than EUR 400 million, after EUR 300 million in the last guidance. Page 5 gives you the plus and minuses. I want to do this quickly. I think you saw the outperformance number for the second quarter in Automotive Technologies, a big number. It's more prudent here to look at the full half, 570 basis points is, I think, above what we guided for. And I already mentioned the solid E-Mobility order intake. Automotive Aftermarket is benefiting from increasing demand for individual mobility solutions that had a significant backlog issue in the second quarter that will then also clear, hopefully, in the next weeks and months to come. And on the Industrial side, I think we can say that the growth is much more driven by the sectors overall than by one sector as it was in the previous quarter, so it's broader. And also Industrial Distribution is picking up, would always supports a positive margin development. All in all, I think I can say that the strategy of being an automotive and industrial supplier -- and I acknowledge that all of you are more automotive-focused -- pays off. It's obvious, in particular, in this first half that the 2 smaller divisions that we have contributed nicely to our margin development and also give us some resilience when we think about the headwinds going forward. You have that on the right side, market headwind, clearly, the semiconductor shortage problem has not gone away. It will continue. And you know this from our competitors but also from the large carmakers that we probably have to live with that uncertainty for a while. COVID is also here and there coming back. The supply chain situation has not fully rebalanced, so we have to deal with the second half that has headwinds and is persisting with low visibility. I'm not shy to say that we are used to operate in these environments and that all our plants and, in particular, automotive tech are asked to develop the respective countermeasures where necessary, not structurally but more operationally. Cost for raw materials and transportation are increasing. I will give some more information when we come to the auto section, how that impacts the margin in the second half. You -- I can already say upfront, steel is our main raw material. You have seen record price increases in the first quarter for steel. That are now coming back, and it's a question how this will roll into our margin in auto tech going forward. We'll give more information about this in a minute. And then clearly the issue that we need to deal with is the CapEx is unusually low. In the first half, a 3.8% CapEx-to-sales ratio is not what we normally see. Is there a significant ramp-up to be expected in the second half? The answer is, to some extent, yes, to some extent, no. We want to manage our capital very carefully, and I'm not going to allow for a big hockey stick towards the end of the year. In particular, in auto, we are invested for much more cars than are currently produced, so I don't see any big need for a spike or a big increase towards the year, but it will normalize clearly to a ratio that is higher than the CapEx-to-sales ratio. Let me go to Page 7, and there you have the auto side with the key numbers. I think you all saw them. 8.7% EBIT margin. The first half speaks for itself. The second quarter was 6.4%. And you also saw that we guided for above 6% for the full year. This is clearly our bottom line that we want to secure going forward. Positive, again, strong growth driven by the low base effect. I already mentioned the outperformance in the E-Mobility side, but don't forget our mature business that continues to perform well, with transmission systems delivering the highest absolute growth contribution at the moment. And I said it before, despite the supply chain headwinds, we think that our strong operational performance in our factories and the execution towards our customers will support us also going forward. Semiconductor shortage already mentioned. And the negative sequential sales development, plus higher input and freight costs will clearly put some pressure on the margin in the continued -- in the second half to come. Let me shed, on the next page, a little bit more light into the order intake. As I mentioned, EUR 5.4 billion for the whole group. EUR 2.1 billion order intake in E-Mobility. That's a good number and an encouraging number. We see that the order intake is broader. Yes, they are always, here and there, also some bigger order intakes. But this is not 1 transaction or not 2 transactions. It's a broader stream than we had before. There is 1 bigger transaction that also covers the truck sector, a sector that we want to build going forward. We also mentioned that, and that is encouraging. Also, the mix between HEV and BEV is well-balanced. And that also gives me a lot of confidence that it's possible in this year to even reach the upper end of the targets we have articulated for '22, where we said we will move the EUR 1.5 billion to EUR 2 billion for this year up to EUR 2 billion to EUR 3 billion. So I think a successful next half year to come, with -- demonstrating that our E-Mobility strategy is on the right track and we're making good inroads into that area. Aftermarket, next page, I said it before, 14.8% margin, I think, speaks for itself. We have to acknowledge here that there was a positive one-off effect that stem from a retrospective reimbursement of expenses from an external service provider that will go away. Still, we think that this margin, in particular, with the demand that we're seeing at the moment, will continue positively. That's also one of the reasons why we increased the guidance in that area. In the Aftermarket, I don't want to extend too much here the whole issue of repair solutions for automotive powertrains becomes more and more a growth driver. That business is performing very well. And in particular, innovation here plays an important role. I can also say that sustainability in the aftermarket becomes more and more relevant. And we will also benefit from that area. We have then on the next page one page that we'll also use on the road show, where we wanted to highlight a little bit about our Asia and Pacific business. In China, we have this whole new platform business. And here, in Asia/Pacific, in particular in India, we have broadened our portfolio, started with a new Schaeffler-branded lubricant and also extended our expertise to expand the business into new product categories. So that's another sign that we are active, not only in Europe, in the U.S. but also building our market share in Asia/Pacific. Industrial, next page. I think a very nice development here, 12% margin in the first half. The second quarter now with a margin at that level, clearly benefiting from the high growth in Asia/Pacific, also in India, benefiting from the broader growth trend that I mentioned, Industrial Distribution coming back. So I think a positive development here. And don't forget there is more to come here because of the structural measures that will start to roll in then in the next quarters. It would be wrong not to say that there's also a headwind in Industrial, also a little bit from the material side. Clearly, the first quarter still benefited from some of the Kurzarbeit areas. But we are showing, I think, with the upgrade in the guidance also here, confidence that this business will continue to perform well and catch up with best-in-class competitors when it comes to margin. Page 13 is your -- the order book figure that you always get from us. And you see here, when you look at the trend, when you see how the 2 curves relate to each other, that this trend seems to continue along the product life cycle. Next page is one page on Asia/Pacific. I will cut this short. But you see here, from a variety of areas, the wind, through local production in India, the whole semiconductor sector becoming interesting in certain areas, customized engineering, NAV projects in 2-wheelers, one of the strongest growing areas, certainly small. But also, robotics is an area where we feel quite good about what we are doing. In robotics, we have, I can say that, won another serial contract that will drive this business forward. And it's one of the great examples for synergies between auto and Industrial that will drive this. There is a robotic gearbox newly introduced from our side that will be an important step for our business expansion in robotics. Now let me, from here, go to the very important page of capital allocation. I already mentioned this, CapEx ratio below 4% is not the new -- that's not the new normal. It clearly has to do also with the fact that there are certain hiccups in the supply chain. Some of the machines that we need came in late, so the payment is, in certain areas, a little bit delayed. However, also being very clear here, we said over the years always around 6%. I don't see that for this year being the right benchmark. It will be below that. If you would assume 4% in the first half and maybe 6% in the second half, you get to 5%. And that, to me, seems, with EUR 14 billion of revenues, not a bad indication. In any case, we will not allow for hockey sticks just for spending money. We will continue to stay disciplined, and that also means reinvestment rate for the year will clearly remain below 1% for the whole group. In Industrial, we'll be above 1%. And also in E-Mobility should be above 1%. But in the more mature businesses, we will make sure that we are not investing in the wrong areas. Once again, CapEx and capital allocation is very key from my point of view. As long as reinvestment rate is below 1, we are basically releasing capital, and that helps clearly to also bring the return on capital employed and the profitability up. Before I come to the numbers section that I want to do short one last word on Page 16 on sustainability. Some highlights here. As you all know, we take sustainability very serious and want to use this not only as a challenge for our processes and what we need to do to cope with all the requirements but also as a major business opportunity. Three things to mention here. We have done a materiality analysis for '21 or we are underway to do this. Feedback from various stakeholder groups received. And that's, on the positive, we are -- have improved or improving our sustainability performance from 3 to 3.7, what shows you that we are on the right track. The energy efficiency program continues. And after the 25 million gigawatts, our efficiency gains in the year 2020 will continue on our way to achieve 45 million accumulated for this year. That's very positive. And we also worked with the rating agencies for our sustainability rating upgrade. And it's good to see that we are scoring quite well in this area. But let me also say it's a long-term challenge and will not be won by marketing measures. There's a lot to be invested here. And we need to also communicate to you, in due course, our long-term goals for scope 3 going forward. But that's in the making and an issue towards the end of the year, beginning of next year. Now let me from here go into the numbers section, and I think I can cut this short to allow a little bit more time for questions. Page 18 gives you the quarterly sales levels. 50.6%, I think, is already mentioned. You also see on this page the solid development in the various regions, clearly, with China being at the lowest growth rate. Clearly, the reason for that is simply that they had their trough in Q1 2020. And therefore, the growth rate is not as strong in the other regions. The sales mix is balanced, and that's important for us. Gross profit, 24.4% in the second quarter, from my point of view, is a good achievement. We benefited from the strong volume increases. There are some negative price impacts in auto technologies. And as I said before, the material price impact is not already included in these figures, but it will roll in the second half of the year more intensively. If I then go to the functional costs, our overhead side, you see that Q2 was below Q1. We are continuing our discipline here and try to keep the functional cost ratio more or less stable. 16.1% is a solid number. And we clearly want to make sure that there is continued focus on further efficiency gains. Then you see the margin, 9.2% after 11.3%, 10.3% for the first half is clearly much more than in the previous year. And as I said before, you can also see this from the guidance that is not a number that will continue in the second half. We guided for 8% to 9.5%. And that tells you that, if we end up somewhere above 7% in the second half, then that is a number that would be enough to make that guidance range. Let me maybe here give you -- before I come to Automotive -- the view on the steel price impact because that's so critical. Let me start with the market development here. You know that steel comes in a variety of different forms. From a raw material price development, the real important categories are hot-rolled and cold-rolled. And what you see when you look at IHS prices for hot-rolled is that, starting in March and then extending into the second quarter, we had an exceptional increase in prices for hot-rolled steel, being somewhere around EUR 400 to EUR 500 per ton above previous year. That has not impacted us in the second quarter simply because we are typically hedging raw material prices by contracts, by forward prices 6 to 9 months. So that price increase will somehow roll in now in the second half. How do you have to see that? The first very important notion is the market price, since the peak in April and May, has decreased to a much more normal level now. We are expecting something for the end of the year that is maybe EUR 100 per ton above the previous year level. So that's one important thing. It's obviously a temporary problem. How do you deal with something like this? Or how did we dealt with this in the second quarter this year? The first priority was that we need the steel -- we need the material because there is business and the worst that you can do is stopping your business, so making sure that the necessary raw material comes in was our first priority. The second priority was to make sure that no one now buys steel on 6 to 9 months forward basis, so we shortened dramatically the periods for which we fixed prices. That will help us to benefit from the fact that this is an extraordinary temporary impact. And then clearly, you -- we also thought what can we do to compensate this price increase. There's typically the scrap that works against us. From the raw material that we buy, there's always a 30% thing that comes back through scrap. We're also looking at increasing prices. That is in the Automotive area, to some extent, more difficult than Industrial because you have less contracts with flex clauses and a less distribution business. It's more a one-to-one negotiation with customers. That has started. That will not compensate in the second half the effect, but would rather then roll in the first half 2022. All in all, just to give you a little bit of a sense how much that is, in the first half, the price impact from steel was a low 2-digit number. And it will increase to a low 3-digit number. Just to give you a sense, if you think about how much hot-rolled and cold-rolled steel we buy, if you just take that with a delta of EUR 450 per ton, you can easily calculate with a number of additional 150,000 tons cold-rolled or similar number for cold-rolled that this -- can easily be a 3-digit number. Scrap against it, there are other steel-carrying commodities as well. So you can broadly say we're expecting here something that can impact the margin with something around 2%. And that is also the reason why we said we want to keep the threshold or the guidance level for Automotive for the time being at 6%. That's the floor. That's what we are going to defend whatever it takes. And I'm not saying that it will be 6%. But with this uncertainty and also with the market headwinds, we thought that, that is a prudent way to go forward. Now let me go to 22, auto technologies. I already mentioned the outperformance. The margin level is in line with the full year guidance. And if you just think about 8-point-something first half and defending the 6% in the second half, then you see what could be a decent number for the full year. Automotive Aftermarket. I think I mentioned the key points already, and you see from this table that it's -- the improvement here is clearly driven by the gross profit number with this one-off impact that was a low 2-digit number. Industrial. I think I can also cut this short. You see on Page 24 the growth by sector clusters, what is always a good indicator, only railway lagging behind. Wind coming down was clearly one of the champions in terms of growth in the previous quarters. But the fact that it's broader and the fact that there's more Industrial Distribution business is always good for us. Then EBIT reconciliation. You see that we don't have any bigger special items in the first half. That was different in the previous year because of the large restructuring costs. This time, it went to the positive because we released some -- or we had to release some of the provisions regarding Roadmap '25, and that then leads to the effect that the EBIT before special items is slightly lower than the reported EBIT. Net income, EUR 463 million, I think, is a good number. It's EUR 0.70 per share in the first half. That also indicates that the EPS number will be positive this year. And while it's not going to be as strong in the second half as in the -- in this first half, I do believe that this will be a very good basis for a proper and attractive dividend. Net income, EUR 26 million, is what I just said before, EUR 0.70 in the first half. Return on capital employed is coming back. Capital employed has reached EUR 7.8 billion. And my focus has always been on this number. I think there's more room to further optimize capital allocation. Then CapEx -- sorry, the free cash flow. You see here we reintroduced the table with -- on 27 with the free cash flow details. I think that's important to make sure that you understand and also can compare that properly with the past. The reported free cash flow was EUR 242 million. If I disregard M&A activities, it's even EUR 243 million. Nothing bigger to report here. And that EUR 243 million includes, in the first half, EUR 201 million of restructuring payout. Most of this comes from the first quarter and comes from a previous restructuring program. Space is building up, so we are continuing to expect further restructuring payout for the rest of the year. If I look at the underlying number, free cash flow before M&A and special items, there's a little bit of legal cases and others in there. Nothing on the supply chain financing side. We are at EUR 447 million. I think that's a solid number. And I do believe, and you saw it from the guidance, we guided free cash flow before M&A, that we are expecting continued positive free cash flow in the second quarter -- in the -- sorry, in the second half. So the above EUR 400 million, from my point of view, is a very solid number. You can easily calculate this yourself if you just take the midpoint of our guidance for the EBIT margin, add back the D&A, you add -- and somewhere, add the EUR 2.2 billion EBITDA number. If you then deduct CapEx, that is probably in the 5% CapEx-to-sales ratio or at a 0.25 -- or 0.75 reinvestment rate. Then taxes, interest, let's say, EUR 400 million licensing, then you will see that there is a net working capital impact. The net working capital in the first half was negative, and we expect that in the second half that will, to some extent, come down. On the one hand, we have pretty high inventory levels already. And on the other hand, we had a little bit of prepayment of payables because we were expecting also prepayments from customers, what didn't happen, so that will rebalance in the second half, and that will support also free cash flow generation going forward. So I do believe that the EUR 400 million is a number that we will achieve, even with a little bit more CapEx in the second half. Net debt, next page, is under control, decreased to EUR 2.2 billion. Leverage ratio below 1 at 0.9x. We're sitting on significant cash that brings this number down. And with clearly a positive sequential impact on the last 12 months, EBITDA, EUR 2.4 billion is not a number that will continue with lower profitability in the second half. I feel very good that towards the rest of the year the number will stay below 1. Outlook. Going forward, clearly, based on assumptions, you see Page 30, Automotive Technologies, we have been cautious. As you all know, with our numbers, we never supported IHS with the bigger numbers then and always took this discount, EUR 5 million discount. February '21 was the right thing to do. We then reduced the discount, and we're now at EUR 81 million, without a bigger change compared to the previous guidance, EUR 1 million down, I think, is a solid number. And we think with that we are on the safe side also going forward. I can say the orders on hand clearly show a little bit of volatility, but they're also for -- at least for the third quarter, indicate that this is definitely achievable. So we feel that this is rather cautious than too optimistic. GDP and Industrial production, I think I don't have to comment. That's what you saw already. Then 31 is the upgraded guidance, with clearly the headline. It's -- we are confident on this outlook, but also remain cautious above 11%, 8% to 9.5% on the margin and then above EUR 400 million free cash flow, as I said. And you saw that we left the margin for Automotive Technologies, as a sign of cautiousness, at the previous level, above 6%, increased Automotive Aftermarket and also Industrial. Let me summarize, 32. This is the second quarter of a year that -- it seems to be, again, a very challenging year for all of us. However, I think we can say the performance in the second quarter was strong. We are benefiting from our setup with auto and Industrial. And we're making good progress with our transformation. E-Mobility order intake is a positive sign, but also the fact that our program, the transformation program, the Space program has been concluded in terms of final negotiations with Workers' Council. Automotive Technologies, I mentioned the headwinds, but also the strong and -- earnings quality in Aftermarket and Industrial that is supporting this. Free cash flow generation, one of my core topics, is robust. And we are demonstrating here that we are clearly focused on value and on execution. The structural adaptation of our footprint will continue. And capacity and headcount reduction are progressing according to plan. We're not only defensive, but we are looking positively into the opportunities. And there's a lot to come here in terms of adding midterm and long-term further attractive businesses. Guidance increased. Certainly, external factors, cost inflation but also the whole supply chain challenges will remain a challenge. But I think with the strong team we have, with the proven focus on execution and with a long-term view on things, I think we are on the right track. This is it. We have a little road show tomorrow and on Friday. I think it's fully booked. So if you want to join, please talk to Renata. And we'll then follow up with a meeting with Matthias on the IAA and some conferences end of September. Earnings for the 9 months will be clearly very interesting, 9th of November. With this, I thank you for your attention and hand back to Renata.
Thank you very much, Klaus. We are now ready for the Q&A. We are ready, operator. You can go ahead.
[Operator Instructions] And the first question is from the line of Akshat Kacker of JPMorgan.
Akshat from JPMorgan. Three from my side, please. The first one on the current visibility that you have on auto production and chip shortage. You definitely did a good job taking a discount to IHS expectations. But as of today, when you look at Q3 auto production, do you expect a sequential improvement versus the second quarter? Or are OEMs making use of the summer shutdowns to ease out the supply chain? That's the first one. I'll follow up with the other 2 later.
Well, again, what I say -- what I can say is we are monitoring our orders on hand, our call-offs on a very frequent basis. And at the moment, I don't see any major hiccups or any major changes. It's more or less in line with forecast at the moment. And it will not be materially different than Q2. That's the view at the moment. There is here and there summer vacation that needs to be taken into account, but we have not heard about if anyone who now extends this into an unusual manner. And again, it's very heterogeneous. One of our big customers, U.S., came back stronger. Others are a little bit more cautious. It's difficult to say. You need to manage this more or less on-site. And I think we are, as I said, confident that the second half in terms of growth will not be very difficult but rather on the positive side.
That's helpful. The second one is on the E-Mobility order intake. Is it possible to share how much of this order intake was for pure BEV? Or if not, in the first half, do you have a total order backlog number for BEV up until now? And also interested in understanding if you can share what is the share of the business that you're winning currently as a part of the RFQ process on BEVs or overall E-Mobility.
Yes. So far, we have decided not to disclose more details of the order book. As I said before, it's a healthy mix of BEV and HEV. As I can say, it's also a healthy mix in terms of regions and customers. As I said, there's one very prominent order in terms of BEV that makes a significant part of this order intake. And significant means here more than 1/3. There is an interesting one that's more on HEV one that comes from the truck side. So it's well-balanced, a good mix. And I can extend there, if you look at the projects that we are competing with at the moment, the new projects that are coming, it becomes even more interesting in terms of the BEV area, be it now e-motors or also things like e-axle systems. So don't judge it by a quarter. Judge it more in a long-term manner. I feel that we are in a much better position here than we have ever been before.
The last one, on CapEx. You do have a lower CapEx guidance for the full year, close to 5% of sales. Is this just a timing impact or a result of a delay in OEM investments? Or is there something structural we should expect that has changed going forward in terms of CapEx as a percentage of sales?
Well, again, the first half was clearly impacted also by time delays, as I said. And the 5% is more to give you something that is more realistic. If you think about EUR 250 million in the first half, and if I would stay with the EUR 800 million, you would say, where should all this money come from? That's not possible. So the around EUR 700 million means, just to give you a ballpark figure, something like EUR 70 million per month, and that is in the second half a good number. That leaves us enough breathing room. I'm not saying that this is every year the same, but there may be a little bit of impact for 2022. We need to see. But the key message is not that we are restrained in one area or that we are not able to invest. That's not the point. We're investing enough. We have invested enough, and we are very capital-conscious. And I want to make sure that the company optimizes its capital base going forward and doesn't invest in the wrong areas.
The next question is from the line of Gabriel Adler of Citi.
I've got 3 questions as well, please. My first is on the free cash flow guidance. I wanted to understand the moving parts behind the free cash flow guidance a little better because you raised guidance by about EUR 100 million, which looks to reflect that lower CapEx that you've spoken about. But then in addition to this, you're also now expecting better profitability. So I'm just trying to understand why the free cash flow guidance isn't also reflecting the additional earnings as well as the lower CapEx. Are there other offsetting factors? Or would you agree that the free cash flow guide just looks quite conservative now at this point?My second question is, again, on the E-Mobility division. We're having lively debate with investors around vertical integration as a topic, as you well know. But it looks like your E-Mobility division is successfully accelerating order intake. So it would be really interesting just to get your views on whether you anticipate a tougher market in the future than when you initially established the E-Mobility business given the increased risks from vertical integration by your customers. And then my final question is just on the management changes that have been recently announced. Could you elaborate on the reasons behind Dr. Patzak's departure announced last week and your plan for announcing a successor?
So let me start with the last one. We have agreed internally that we're not disclosing any reasons. And I think that's good practice. You saw the press release. You saw the history, and I can't say more here. The successor is in the making. I couldn't present it today. It's a Supervisory Board topic. Our Supervisory Board has been very busy in the last weeks and months, as you saw, so the decision has not been made, but I'm expecting a quick decision in the next week so that we can continue to work. That's it on your third question.Let me then tackle the E-Mobility one. For sure, there is competition from the carmakers. We know this, and we're used to this in the field of E-Mobility, but we also see that everyone talks about more and more BEV. Everyone talks about accelerated growth in that sector. And that opens, from my point of view, also new opportunities for us. For me, the key point, and I've said this several times before, is competence and not size. It's the quality of the order book that counts and not the sheer number. To some extent, we may have even been lucky that we didn't make the mistakes at the beginning that others may have made, but my key focus is and that's what we're doing in our project reviews with Matthias, that we are building a well-balanced lucrative long-term order book that is in line with what we can do and what we can deliver for our customers. And yes, we may here and there lose projects to in-house. But also, my answer here is also not new. Some of our components are components that even an in-house competitor would like to have because they can't do them themselves. So sometimes we don't get the full system, but we then get the component package. We can do the systems, and that's good, but we don't have to be only a system provider. And that position, from my point of view, is something that gives us a very good foothold. I've participated myself in the last weeks in several rounds with CEOs of big companies to understand their electrification strategy a little bit better. And I think they all acknowledge that Schaeffler is a key partner when it comes to technology, quality and innovation.Free cash flow guidance, a very fair question. If you, again, try to connect the dots, let me try to put this a little bit into perspective. I said before, if you take EUR 14 billion of revenues and take the midpoint of the EBIT margin range, then that's EUR 8.75 billion. If you just take that and calculate an EBIT number and do the same for the second half with the implicit EBIT margin for the second half, that would somewhere be around or slightly above EUR 500 million. If I add back the depreciation that comes on a pro-rata basis, we normally have EUR 970 million, EUR 980 million depreciation. You can add back another EUR 500 million. Let's take that number and say EBITDA is then EUR 1 billion, if you go from the EUR 270 million CapEx to up the EUR 700 million, you need to deduct EUR 430 million. Taxes and also interest is typically also more on a pro-rata basis. EUR 300 million, EUR 200 million for the full year would mean, let's deduct another EUR 200 million. Leasing is EUR 30 million, also half of the EUR 60 million for the full year. But then the question is what's happening with net working capital. And I don't see that there is another big increase in net working capital. As I said before, there is a reversal effect that will come in the second half that will -- may even turn the net working capital to the positive. And if you just think about this, then EUR 350 million is definitely doable. And if I then think about how much is then needed for restructuring payout, we indicated to you that the -- it's probably something in the area of EUR 300 million, EUR 350 million. Let's take half of this, then you can also assume that there is a little bit of restructuring payout already included in these numbers. That gives you then EUR 350 million minus whatever -- EUR 150 million, EUR 140 million. And you see that the EUR 243 million of the first half and the number that I just derived for you gives you a solid base for the above EUR 400 million. But it's basically lower EBITDA, for sure. It is higher CapEx and it's then a net working capital impact that would somehow counterbalance this. That would make us confident that the above EUR 400 million is doable.And if you then turn this around and say how much is that on an underlying free cash flow, again, that number was missing for quite some time. You see that this is an EUR 800 million or something. And if just to think back what happened in Q -- 2020, there this free cash flow before M&A and before one-offs was also in that range. So it's all about sort of understanding the drivers of free cash flow for this company. And again, we are determined to make the above EUR 400 million and make sure that cash flow is not driven by extraordinary movements.
The next question is from the line of Sascha Gommel of Jefferies.
The first one would actually be on the Automotive gross margin. I think you touched a bit on it in your remarks, but I just wanted to understand a bit better why there was such a significant drop from Q1 to Q2 of the Automotive gross margin. I think you said a bit of pricing, but it looks a bit harsh going from 24.5% to below 21%. Maybe you can give some details what happened there, given that we probably only see the raw mats coming in the next quarters.
Yes, you're right. I mean there is some -- this is a variety of things. So on the one hand, the first signs of raw material. What I explained is more the general direction. That's the one end. There were 2 or 3 things on the quality side that -- where we added a little bit that have not been adjusted because there were too small. We've written off a machine that was not necessary. And then there's also a little bit of more on the overhead side. So yes, it sounds like a big drop, but it's explained by a variety of smaller things. And going forward, some of this would not come again, so I would stick with my message above 6% is what we want to achieve for the full year. And I would also indicate that this is not the point that we want to deliver for the full year, but it needs to be rather above 6% for the coming quarters.
Okay. Very clear. My second question would be on kind of the longer-term strategy because we hear a lot of proposals coming out of the European Commission, but also in the U.S., the government is clearly pushing clean mobility. Does that have any impact on your transition strategy in Automotive?
I would say very directly, these announcements don't have any immediate impact on the strategy, because this is not something that is erratic. It's a midterm execution plan that we have. And we've always said, if there is some changes in the environment, we will adapt to this, but I don't see any reason now to accelerate massively and do something radically different. We are in the lucky situation that we have this strong mature business, and that will help us to finance the way into E-Mobility. I said it on and on. E-Mobility is not just something that governments like to discuss. At the end of the day, the auto business is a consumer business. And how people and when people buy cars remains to be seen. And therefore, I don't -- even if everyone is marketing at the moment their e-mobility strategies, we need to stay the course, and we need to make -- get things right. This is a midterm transition. And with any radical move, I think that's not the answer.The answer lies with competence. It lies with execution. It lies with clearly adding where we can add, but I don't see any need here to deviate from our course. We're monitoring the environment very carefully. And the key at the end of the day is trust and competence also from our customers. And here, as I said before, being part of several meetings with large customers, I feel very positive about the outlook for Schaeffler. Let me also add, in terms of our transformation path, you all have seen that we participated in a bigger auction for the Industrial side. And if I think about margin, if I think about return on capital employed and a step to strengthen the Industrial business further, to further diversify to make sure that this company is resilient and able to conquer the future from the various sectors we are serving, with also generating synergies in powertrain solutions across all in industrial, that's more on my mind.We didn't won the auction. I think you all [indiscernible] for good reason. Because at some point in time, we set the price, and you saw the EUR 2.9 billion for Dodge was simply too high. And for us, something where we said that's above the limit, we're not going to lose our discipline here. That's why we didn't participate -- sorry, that's why we didn't won the auction. Let's see what happens there. The positive thing is here that has created a lot of positive spirit about this strategy in the Industrial side. And the learnings from this auction process are clearly learnings that we can build on for the next steps to come. Sorry for the long answer but Dodge fitted so well into your question that I thought I'd bring it in here.
No, that's fine because I actually wanted to ask about that, too. So that's done. So my last question would then be on the Industrial side, where the functional costs came up a little bit. And I was just wondering if this is a trend or just a 1-quarter situation.
It's more a 1-quarter situation. Don't forget, we also had some runoff effects from Kurzarbeit there. I think Stefan is pulling all levers at the moment to handle this cost situation. You will also see a little bit higher material prices. We are expecting also going forward a little bit of extra production costs. Don't forget he has a lot of movement at the moment because of the transfers of businesses. That's natural in such a situation, then production costs come out a little higher. Give you an example, we have moved production from Kysucké to Vietnam. That makes easily EUR 2 million or EUR 3 million. We're moving production from Wuppertal into Schweinfurt. And these effects will be there in the second half. But in general, we want to make sure that our overhead stays in this 16% range. And that would also then help the margin progression going forward.
The next question is from the line of Christoph Laskawi of Deutsche Bank.
It's really more follow-up questions to what was asked. The first one on the production volumes and visibility. Did I understand it correctly that you would see the volatility of the cost to smooth out a bit, so it's a bit more stable, which is then easier to manage? Or does it remain fairly volatile? It's just the overall volumes for the quarter you wouldn't see deteriorating massively? And then on E-Mobility, with a strong order intake, could you comment on if those just reflect higher win rates than you initially thought? Or is there some pull forward of the OEMs as well? And discussing the quicker ramp-up of E-Mobility overall, would you see that allowing you to scale up quicker than initially expected as well, which would be helpful on the margin side?
Let's first talk about the orders on hand. You saw a quarter now with -- on the auto side, that was quite good with revenues, not as strong as we expected because there were clearly a little bit of hiccups in -- on the auto side in the second quarter. July, to talk a little bit about current trading, was a weaker month. August started okay. If we make, let's say, EUR 700 million a month, then that is a good threshold. July was below this. August seems to be higher. And as I said before, my order -- so the orders on hand show at the moment that they are, week by week, pretty stable. There's less sort of movement at the moment, and that indicates that some of the volatility has gone. But we need to see. I mean it's something that is still a situation with many uncertain -- with much uncertainty. But again, my orders on hand at the moment indicate a quarter that is of Q3 more or less in line with Q2.Now on E-Mobility, again, a quicker ramp-up. Again, the answer is similar to what I said before. I mean this is not about quick ramp-ups. This is about building an order book for the next years. We are well-invested in the area. You know that we are building an e-motor plant in Szombathely. We're doing all the right things that are necessary to train people to get the right people on board. There's always a shortage when it comes to specialists here and there. That's something we deal with. But I don't see it that there's a big difference and everything is now ramping up tomorrow. You have to see this over the next years. And there, again, my statement is the same as before. I feel that we are in a much better position than we have been 2 years or a year ago.
I think I have to rephrase my question a bit. It was more related to you've already made your target for the full year essentially in H1. And with that...
Okay. Sorry, I meant...
I think you can prove some success already. And my question will be, is the win rate you see currently with being essentially above the full year order intake target by now, can you expect it initially? Or it's just more business in the market and you make use of that?
It's a good -- sorry, I misunderstood the question. It's a good question. I think we're seeing, in general, more acquisition projects coming than we expected. I can tell you there are at least more than 2 handful of projects we are working on at the moment. That doesn't mean that we have won the projects. And they are all in the right areas. They are all e-axle systems. They are -- most of them have some sort of a BEV angle. They're coming from the different areas, even Asia/Pacific is now catching up. So I think we -- the pipeline in terms of projects is strong and also, as far as I read it, getting stronger. And it's just simply a function of everyone looking at this as a major opportunity. If you saw yesterday, one of our big customers, Stellantis, talking about this. I don't know any customer who doesn't talk about its electrification strategy. And not everyone -- they can't handle all of this themselves. So they all come and see who's willing to do it. And then it becomes a competition issue. You saw what others said about this. We have so far not talked about the order backlog that we have. But the numbers that you saw from Vitesco and also from Valeo are not very different from what I have in front of me. And let's see what the second half is going to bring. We will, in any case, continue with our strategy to be selective and do the things that make sense for us and also makes sense for the customer.
The next question is from the line of Michael Punzet of DZ Bank.
Yes, Michael Punzet. I have 2 questions. First one, can you give us an update for the expected special items in the second half? And the second one is on -- once again, on electro-mobility. After all the announcement by big OEMs, do you feel comfortable with your scenario to 2030 with the engine mix of 30/40/30? Or do you think it could be reached earlier? Or do you think you have to change your scenario?
Well, we just had our strategic dialogue, and I think, for the 2030, that's probably still globally, and you have to differentiate between the different markets, still, not a bad guidepost. What I have to say is, in the past, we thought that this would be an aggressive scenario to push also the organization to that direction. At the time when this was decided, everyone said that's probably a little bit too far off. Now it's a normal scenario. And I think when you talk about E-Mobility, we now have to think about, again, globally, not so much 2030, but 2035. And there, we have not finally articulated this, but there, the share of BEV will increase. And we'll definitely adapt to this as we speak. But so far, no new scenario communicated. But clearly, a further increase of the share of BEV is expected, maybe also to the detriment of the HEV area because we all know and have discussed it that HEV is a bridge technology. It's an important bridge technology, and the customer will decide whether -- how long he's going to drive these kinds of cars, but the BEV share will, from my point of view, towards 2035, further increase.
And with regard to the special items you expect for the second half?
Special items, sorry. I don't expect any major special items in the second half. We have, as you know, done our restructuring provisions last year. The program is being concluded and finalized. We will revisit certain provisions. Certainly, you saw that we released a little bit. Could also happen that this is the case in the second half. But again, that's premature. Any other extraordinary cases, legal cases or whatsoever are not expected so far. So that should not be a big impact on the net income figure.Again, you need to differentiate here between the adjustments for EBIT and the adjustments for free cash flow. As I indicated before, the underlying free cash flow will be certainly reduced by continued restructuring payout in the area that I mentioned, whatever it is, EUR 130 million, EUR 140 million in the second half of the year.
The next question is from the line of Sanjay Bhagwani of Bank of America.
This is Sanjay Bhagwani from Bank of America. So I've got 3 questions. My first one is on the raw material price inflation. I think I missed your point. What sort of margin headwinds are you budgeting for in H2? And yes, is that the gross impact or net impact? And how should we think about the raw material price headwinds for the H1 next year, given that most of the peak prices, which were in April and May, are going to be likely to flow into next year? Is that fair to say? That's my first question.
Okay. Let me -- sorry that I didn't bring this across in a way that you could understand it. My first point is here, if you look at the market price, the market price dramatically increased towards the end of Q1 and beginning of Q2. We're talking about, if you take hot-rolled steel in Europe, we are talking about something in the area of EUR 400 to EUR 500 per ton, what is a number that we have never seen before. That price is already coming down, and we're expecting that it normalizes towards the third -- end of the third, beginning of the fourth quarter, somewhere maybe EUR 100 more in total. So if you now look at and ask yourself what's the impact of such a price increase of such a spike on us, you first always have to acknowledge that we try to buy steel on a forward basis. So we lock in prices normally with a 6 to 9 months' tenor. That means the prices that were part of our production costs were prices from the past and didn't have this big impact that I just mentioned from the market in Q1, Q2. That will roll in then in the second half. And I also said the net impact, so after scrap and after price-mitigation aspects, in the second half will be somewhere in the 3-digit-million number starting with a 1. If I translate this into a margin, that can easily make 2 percentage points in gross profit for the half, and that's a fact that we cannot really deal with. What is very important in such a situation that you don't lock in these prices again for 6 to 9 months. That was my second comment. We have stopped then doing forward-price strategies for these kinds of periods and have said we lock in that at a very shorter period and that will also then help to mitigate the impact in the first half 2022.On top of this, again, most of -- some of our contracts, nearly 1/3 to 40%, have price-flex clauses. And the colleagues have been told that they need to negotiate now with the OEMs price increases for material. That is also an impact that you cannot fully synchronize with market price increases, and that will also somehow help to mitigate price increases and higher material costs in the first half of 2022. So it's a temporary impact. It will hit the second half. It's part of our forecast and our guidance at a certain level. And we have our countermeasures in place to mitigate the impact as far as possible.
This is very helpful. My second question is on -- as a follow-up on the Aftermarket. If you could provide some color on the one-offs that you recognized in Q2 in Aftermarket.
Yes. I mean the Aftermarket, as I said, had a one-off -- a positive one-off. We simply got from this AKO project a reimbursement payment with a smaller 2-digit-million number that clearly helped to improve the EBIT margin, then it will not happen again. But even apart from that, the business is running well. It's also running well into the third quarter. There's a backlog of orders that we need to work through. That's also why availability of steel was so important for us. And we raised guidance here because we think that this impact will also help us in the third quarter.
Okay, okay. And my final question is, again, a follow-up on the M&A. If you could please update us on your M&A plans going forward?
Well, again, as we always said, the M&A strategy as such is unchanged. We've always said selective bolt-on acquisitions that make sense from a technological point of view in the smaller areas. We have not changed it, but we have also demonstrated with the Dodge auction and our participation there, if there's something interesting, if there's something that makes strategically sense, if it's affordable and fits into our parameters, then we definitely will look at this again.There's a lot going on. The fact that we participated there has obviously stirred interest from a variety of parties. So we get more inquiries than we ever got before. But again, we will remain selective. And I'm only going to support things that are robust and solid enough to support our strategy. Again, I think, for Schaeffler, it's important to have this resilient mix of auto and industrial sectors. And that's the strategy going forward. And if there would be a second Dodge, we would certainly look at this, but it was a rare asset, very profitable. And we will continue to look at opportunities, but certainly not at any price.
And there are no more questions at this time. I would like to hand back to the speakers for closing comments.
Okay. Then thank you very much. We made it in time. Again, interesting times. The summer break is, hopefully, for all of you not over but starting. And the second half will be interesting, challenging but also something where we can show our strengths. I think with this first half, we are very well-equipped to deliver a solid result for 2021. We look forward into the years to come. I'm optimistic that with our setup we will have a very fair chance to continue our path to turn Schaeffler into a high-class company. Many thanks for your support, for listening. And we'll all see you soon for either meetings at the road shows or at our next earnings release. Thanks a lot. Enjoy your summer breaks, and stay tuned. Thanks. Bye-bye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.