Schaeffler AG outlook revised to negative on weak profit, cash flow

Investing.com -- On Jan. 21, 2025, Germany-based auto and industrial component supplier Schaeffler AG (ETR:SHA_p) announced preliminary figures for 2024 showing an operating profit margin of 4.5%, a downturn from its previous forecast of 5%-8%. According to S&P Global, this change primarily reflects a weak performance in the company’s Bearings & Industrial Solutions (B&IS) segment and at recently acquired powertrain components supplier Vitesco.

The profit warning indicates that Schaeffler’s industrial segment and parts of its automotive product portfolio will continue to face challenging conditions in 2025, leading to slower leverage reduction than previously expected. As a result, the outlook for Schaeffler AG and IHO Verwaltungs GmbH has been revised to negative from stable, although the ’BB+’ long-term issuer credit rating on these entities remains affirmed. The ’BB+’ issue credit rating on Schaeffler’s unsecured notes and the ’BB-’ issue credit rating on the senior secured notes at IHO Verwaltungs GmbH are also affirmed.

The ratings on IHO Group and Schaeffler AG could be lowered in the next 6-12 months if weak industrial and automotive end-markets, or higher costs for restructuring, potentially worsened by geopolitical risks such as new U.S. import tariffs, only allow limited improvements in IHO Group’s funds from operations (FFO) to debt and debt to EBITDA in 2025.

The B&IS segment’s profitability slump in Q4 2024 suggests a slower-than-anticipated recovery in 2025. The EBIT margin before special items for the B&IS segment is estimated at about 4% for 2024, compared with 7.6% in 2023. This decline in profitability is attributed to weak demand in industrial and automotive end-markets, cost-saving measures falling short of expectations, and a variety of smaller operational issues.

A profitability shortfall at Vitesco, grappling with declining auto production in 2024 and lower volumes on battery electric vehicle programs, further compounds the weakness in B&IS. With flat global auto production and continued sluggish demand in B&IS’ industrial automation, machinery and materials, and renewables end-markets in 2025, any profitability improvement in the B&IS segment is expected to be severely constrained this year.

Earnings weakness will likely prevent Schaeffler from improving credit metrics before 2026. The forecast for FFO to debt and debt to EBITDA for the IHO Group is about 13% and 4.9x in 2025, respectively, after about 9% and 5.3x on a pro forma basis for 2024. This is below the downside thresholds for the rating of 15% FFO to debt and 4.5x debt to EBITDA at the group level.

Potential U.S. import tariffs could further exacerbate difficult operating conditions this year. Tariffs carry the greatest risk for Schaeffler’s and Vitesco’s auto supplier business, for parts that go into vehicles ultimately sold in the U.S. market. The exposure of the North American auto supplier business is estimated at about 15% of group sales.

The negative outlook reflects the risk that weak automotive and industrial end-markets, combined with high restructuring costs and cash outflows, may delay the company’s leverage reduction after completion of the merger with Vitesco.

Ratings on IHO Group and Schaeffler AG could be lowered in the next 6-12 months if weak industrial and automotive end markets, or higher costs for restructuring, potentially worsened by geopolitical risks such as fresh U.S. import tariffs, only allow limited improvements in IHO Group’s FFO to debt and debt to EBITDA in 2025.

The outlook could be revised to stable if improvements in end-market demand and quick realization of synergies with Vitesco support FFO to debt for the IHO Group well above 15% and debt to EBITDA decreases to well below 4.5x.

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