30 November 2020
Schaeffler launches Roadmap 2025
Strategic Priorities in the 2025 Roadmap
Opening the meeting, Klaus Rosenfeld, CEO of Schaeffler AG, stressed that the Roadmap 2025 does not contain any radical strategic changes. Rather, it is intended to anchor the current course in areas where consistent work has been successful, to help the company focus on its strengths, and to improve where there is room for optimization. We pass on his words further. We pioneer the motion - This new corporate slogan reflects the company's intention to continue to develop as a diversified supplier with a global reach and to provide the industry and the automotive industry with proprietary motion technology. This will require even more effective use of synergies, existing in the Schaeffler Group. The company's success will continue to be based on its four competitive advantages: innovation, manufacturing excellence, superior quality and a systematic understanding of all processes. At the same time, the company needs to continue its transformation by focusing on existing expertise in key areas and using it consistently.
For Automotive Technology, this means the need to expand its portfolio with chassis and electric vehicles. The auto parts business will prioritize maintaining its current high margins and seizing growth opportunities in the independent aftermarket. The Industry Division will continue to seek new growth areas and consistently increase its profitability.
All these measures will be taken on a systematic basis and in strict adherence to organizational discipline. The main focus here will continue to be on the creation of free cash flows and the competent placement of capital within the group of companies. The long-term goal is a sustainable increase in the value of the company's activities.
Klaus Rosenfeld identified five key future trends that are opening up special opportunities for the Schaeffler Group: 1) sustainability and climate change; 2) new modes of transport and electrification of power transmissions; 3) autonomous production; 4) data saving and digitalization; 5) demographic changes. Based on these trends, Schaeffler has identified five areas in which it wants to further strengthen its position. This includes the products and services of all three divisions of the company, as well as the sectors and clusters of sectors in which customers operate that are common to several divisions.
The Schaeffler Group, for example, sees strong growth potential in sectors such as hydrogen technology, both for fuel cells for vehicles and electrolysis plants for hydrogen production. “The Schaeffler Group sees significant growth opportunities in the hydrogen sector. With our manufacturing excellence and industrial expertise, we are well positioned to offer customers high quality solutions and benefit from the proliferation of renewable energy, ”says Rosenfeld.
Sustainability is of utmost importance to the Schaeffler Group. In this regard, the company promotes an integrated approach in all its divisions, regions and areas of activity. The goal is to achieve zero carbon dioxide emissions at our factories by 2030.
Automotive Technology Division: A Course on Leadership in Electrical Power Circuit Innovation
Matthias Zink, CEO of Automotive Technology, began his presentation with a few remarks about the high level of uncertainty that remains in the automotive sector. Here, the negative impact of the COVID-19 epidemic turned out to be especially noticeable and caused the need for fundamental structural changes, which are currently being implemented. Therefore, he said, a conservative approach to planning is required, in which strict discipline about costs must be combined with a certain amount of flexibility.
On the power circuit segment, Zink extended the company's Vision Powertrain 2030 program for the production of passenger cars and light-duty passenger, utility and commercial vehicles until 2035. The pace of electrification is accelerating sharply: the number of fuel cell vehicles (xEV) is expected to rise to 50% of the fleet in the future, and the number of hybrids (HEVs) and internal combustion engine vehicles will decline to 35% and 15%, respectively.
Schaeffler must take these changes into account when organizing its portfolio and allocating capital. Advanced businesses with less growth potential will need to focus on profitability and efficiency and invest more in promising technologies and new beginnings. However, for the foreseeable future, hybrid propulsion and optimized internal combustion engines will still play a sufficiently important role in stabilizing profit margins and creating free cash flows - in part as a means of increasing investment in new commercial areas. The implementation of efficiency measures and structural optimization in the automotive technology division will continue, according to Matthias Zink.
Dr. Jochen Schröder, Head of the EV Business Unit, highlighted the significant volume of orders coming from this sector, with a total value of € 4 billion in 2019 and € 1 billion in the first half of 2020. According to him, the target annual inflow of orders until the end of 2021 is set at 1.5-2 billion euros, for the next period this figure has been increased to 2-3 billion euros. In his presentation, Mr. Schroeder mentioned the construction of an electric motor plant in Hungary, the location of a state-of-the-art electromobility center in Bule, Germany, the company's success as a supplier of 3-in-1 electric wheel axle drives and the production of components for electric truck motors in the USA. Fuel cells are another promising technology - especially for trucks. According to Mr. Schroeder, hydrogen technology is an area in which the Schaeffler Group is gaining ground in the initiatives of its various divisions.
There are several success stories in the field of self-driving chassis applications. Here, Schroeder cited as an example the partnership with Bosch in the area of rear-wheel drive systems and the joint venture Schaeffler Paravan, which is currently involved in the development of Steer-by-Wire vehicle control technology.
The Automotive Technology Division's medium-term 2025 target is to increase revenues at constant exchange rates, exceeding global growth in passenger cars and light-duty passenger, utility and commercial vehicles by an average of 200-500 basis points. The POC target before special items is 4–6%, with the lower end of this range to be reached no later than 2023.
Auto Parts Division: Business Model Change Needed to Realize Market Opportunity
Michael Söding, General Manager of the Automotive Parts Division, provided an overview of current and future trends in his division. He noted that, according to the latest forecasts, the global car fleet, currently at 1.40 billion units, will grow to 1.55 units by 2025, mainly due to the trends in China. As the car park grows, opportunities will open up in the aftermarket as well, due to the rise in the average age of cars and the trend towards their further technical complexity. These trends mean an upcoming increase in the demand for car repairs.
At the same time, however, opportunities for profitability in the aftermarket are diminishing due to consolidation and the emergence of new players in the market. In addition, digital platforms and e-commerce are changing consumer behavior.
Söding emphasized that Schaeffler will have to respond to this complex of challenges on many levels and change its business model. Here he cited as an example the expansion of the range of technical solutions and services offered by the company. For example, as part of the transition from component supply to system and integrated solution supply, Schaeffler is expanding its portfolio with data-driven services and innovative, ready-to-install repair kits. Another main focus is industrial partnerships as a basis for the development of complex solutions, including access to data from vehicle systems.
Söding also mentioned the creation of digital distribution channels for high-tech products for engines, transmissions and chassis in China, which have become a one-stop-shop in a fragmented market with high growth potential. The REPXPERT information portal also uses digital channels.
As a further measure to improve efficiency, Mr Söding cited the opening of the Aftermarket Kitting Operation Europe, which began operations on 12 August 2020. By 2023, this center will handle at least 60% of the company's product inventory. By combining digital and non-digital solutions, this center will provide sustainable growth in the flexibility and efficiency of supplying auto parts to the aftermarket. Also, the center will ensure a 20% reduction in carbon dioxide emissions from the supply of products by reducing distances.
Thus, the medium-term goals for the auto parts division for 2025 are revenue growth at constant exchange rates, exceeding the growth of global GDP and PAP before special items at the level of 13-15%, the lower limit of this range must also be reached no later than 2023.
Industry Division: Increasing Margin in New Business Areas and Operational Action
Dr. Stefan Spindler, General Manager of the Industry Division, noted that his division expected global production to decline by at least eight percent in 2020. Growth was negative everywhere except China. Now, a return to pre-crisis growth rates is not expected until 2022. In the long term, growth projections for the eight sector clusters are generally positive. There is particular potential for growth in the wind energy and rail transport sectors.
The business is able to drive growth in its core business by leveraging key future trends such as sustainability and demographic change. However, as Mr. Spindler pointed out, growth can also come from the sale of innovative systems and services. Schaeffler has a strong position as a component supplier and its growth is the result of decades of development in production technology and product innovation. Investments in high-performance products and cost-effective commercial products are carefully tailored to meet customer requirements. In line with these requirements, the division is increasing its market supply of systems, mechatronic components and service solutions.
In the area of components and systems, Spindler named the following six initiatives for growth: components for wind turbines and rail vehicles, rolling bearings for agricultural equipment, new robotic systems, the OPTIME condition monitoring system and the first steps in the development of components for hydrogen production.
Overall, the Industry division plans to strengthen its technology leadership, complement its customer service portfolio with e-commerce solutions, achieve sustained performance gains through the FIT program, and continue the incremental implementation of the September structural changes.
The industry division's medium-term 2025 targets are revenue growth at constant exchange rates, exceeding the growth in global industrial production and POPI before special items at 12-14%, reaching the bottom of this range by 2023 at the latest.
Orientation of management in the Schaeffler group of companies to increase value and free cash flow
The final presentation at the Investor Day was made by Dr. Klaus Patzak, Chief Financial Officer of Schaeffler AG. He provided an overview of the company's medium-term goals, which are part of the revised financial development agenda. As he explained, the multi-year plan for the divisions was the decisive factor in setting medium-term goals. And this fiscal year is the first in the medium term.
The goal of the multi-year planning is to ensure that Schaeffler has the opportunity to invest in new and promising areas, to take a leading position in the market, to focus the developed business on profitability and free cash flow, and to reduce floor space and overhead costs.
The main indicators of value creation at the level of the group of companies are the return on capital employed (ROCE, calculated according to the declared ROC) at the level of 12-15% no later than 2023 and the conversion rate of free cash flow (the ratio of free cash flow before accounting for incoming and outgoing flows in connection with mergers and acquisitions to the declared PDPN) at the level of 0.3-0.5 also no later than 2023.
These two metrics highlight the key importance of profitable growth and targeted and efficient capital allocation for managing a company to create value and turn POC into free cash flow.
In addition, the Board of Managing Directors announced the parameters of the capital structure and the procedure for the distribution of dividends. The Schaeffler Group's net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) and before special items in 2021–2025 should be in the range 1.2–1.7. With regard to dividends, the policy remains the same: as before, the goal is to distribute 30-50% of net profit to shareholders after special items.
Roadmap 2025 paves the way for future success for the Schaeffler Group
The 2025 roadmap is focused on the future success of the Schaeffler Group. Summing up the meeting, Klaus Rosenfeld said: “The 2025 Roadmap is a forward-looking strategy with which we want to make the Schaeffler Group even more competitive and prepared for the future. We want to make even better use of opportunities for growth and synergy within the group of companies and create sustainable value. Our new slogan, We pioneer the motion, describes everything we do. In this slogan, we also declare our intention to remain the priority technology partner for our customers in the future. "
Forward-looking statement and projections
Some of the statements in this press release are forward-looking. By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions that could materially change actual results or events from those foreseen. Such risks, uncertainties and assumptions could adversely affect the financial results of the plans and events referred to in this press release. When revising forecasts due to the emergence of new information, developments, etc., we do not undertake the obligation to publish the results of such a revision. We also do not recommend relying entirely on forward-looking statements as they are relevant only at the time of this press release. The description of current trends or events in this press release should not be taken as a guarantee of their future development.