Returning to the path of profitable growth SHW 2020 Medium-term planning 1 st /2 nd December 2015
SHW 2020 Medium-term planning Returning to the path of profitable growth > Our strategy in a nutshell > Core questions of our strategic review > Our market environment > SHW Our strengths and challenges > Our strategic priorities > Our strategic roadmap > Financial goals > Your key takeaways 1
Our strategy in a nutshell 1. After years of strong sales growth SHW now enters into a phase of consolidation to pave the way for the next strong and profitable growth phase from 2018 onwards. 2. For 2020, SHW targets a sales increase of around 40% compared to 2015. The EBITDA is expected to almost double. 3. Profitable growth will be driven by operational excellence, an innovative and CO 2 saving product mix and a strong international footprint. 4. Operational excellence and profitability have a strong priority. SHW increases capacity and production lots, optimizes production network and implements lean management. 5. With production sites in all strategic markets (NAFTA, China, Brazil), SHW can further exploit the increasing global demand for mobility. 6. As innovation leader for weight reduction and CO 2 saving automotive parts, SHW is well positioned to benefit from stricter global emission targets. 2
Core questions of our strategic review > Which industry trends will shape our market? > Is SHW well positioned to benefit from these trends? > How can we further exploit these trends? 3
Our market environment Three key industry trends Increasing global demand for mobility Continued demand for combustion engines Higher standards for emission reduction 4
Our environment Increasing global demand for mobility Light vehicle production (< 6 t) (m units) Light vehicle production Europe 18.9 CAGR 2.5% 21.9 North America CAGR 1.7% 18.4 > Global demand for mobility expected to increase on average by 2.7% to 102.5 m. units until 2020 2014 China* CAGR 4.5% 22.5 2020 29.4 16.7 2014 Global 87.4 CAGR 2.7% 2020 102.5 > Increasing production numbers in all relevant regions expected with highest growth rates in China and Europe > In China, accelerated growth rates in production numbers from 2016 onwards expected * Incl. Taiwan 2014 Source: IHS, November 2015 2020 2014 2020 > SHW is present in all strategic markets Mobility demand expected to rise in all strategic markets in the coming years 5
Our environment Continued demand for combustion engines I Engine production by fuel type (m units) Europe 27 24 21 18 15 12 9 6 3 0 2015 2020 2025 China* 40 30 20 10 0 2015 * Incl. Taiwan 2020 2025 Source: IHS, November 2015 North America 21 18 15 12 9 6 3 0 2015 2020 2025 Global 120 100 80 60 40 20 Diesel Gas Electricity Others 0 2015 2020 2025 Engine and fuel type > Combustion engines incl. hybrids continue to dominate > Increasing hybridisation means growing number of pumps per car > SHW products are suited for both solutions > Europe stays most important Diesel market > Diesel expected to remain essential for achieving CO 2 targets in Europe > So far, no perceivable impact by VW scandal Combustion engines (incl. hybrids) remain the dominant engine type worldwide; demand for Diesel engines in Europe continues 6
Our environment Continued demand for combustion engines II Transmission production (m units) Europe 30 25 20 15 10 5 0 2015 2020 2025 China* 35 30 25 20 15 10 5 0 2015 * Incl. Taiwan 2020 2025 Source: IHS, November 2015 North America 17 16 15 14 13 12 2015 2020 2025 Global Automatic Manual Others 120 100 80 60 40 20 0 2015 2020 2025 Transmissions > Global automatic transmission solutions expected to grow on average by 2.3% until 2025 (to 59.8 m units) > Majority of automatic transmissions require transmission oil pumps (primary and secondary) > Limited number of competitors > SHW s prototypes already delivered to OEMs Primary and secondary transmission oil pumps are a further strategic growth segment for SHW 7
Our environment Higher standards for emission reduction I Passenger car CO 2 emission targets (g/km) 1) 2015 2021 Europe 130 2025 95 68-78 - 27%* Worldwide aim to reduce CO 2 emissions > Extent of targeted reduction relatively similar in the three regions Europe, North America and China North America 2015 158 2020 125 2025 97-21%* > Most OEMs have already achieved the CO 2 targets in Europe for 2015 under the NEDC framework China 2015 161 2020 117-27%* > To fulfil 2020 and 2025 CO 2 targets substantial efforts from OEMs and the supplier industry are indispensable Source: ICCT 1) Normalised for New European Driving Cycle (NEDC) * Percentages based on 2015 and 2020/2021 numbers Ambitious CO 2 emission targets require new technological solutions 8
Our environment Higher standards for emission reduction II Technologies for fuel reduction Selected SHW products 1 Variable valve timing/lift 2 Gasoline direct injection 1 2 3 3 4 Reduced engine friction Downsizing Camshaft phaser Vacuum pump 1) Variable oil pump 5 Cylinder deactivation 6 Optimised cooling circuit 4 6 7 7 8 Start-stop Weight reduction Balancer shaft unit 1) Variable water pump E-pump for start-stop 9 10 Electrically assisted steering Dual-clutch transmission 8 8 10 11 Optimised gearbox ratios Aluminium camshaft phaser 1) Composite Brake Discs Oil pump for dual-clutch 1) 1) SHW product is a component of respective technology package SHW offers a broad range of excellent fuel saving and CO 2 reduction technologies enabling OEMs to reach the challenging CO 2 emission targets 9
Our environment Higher standards for emission reduction III Discrepancy between emission test cycle and emission reality Regulative change alignment of test cycle and reality Change from NEDC to WLTP test procedure as of 2017 > Full conversion until 2020 > Key parameters will be changed Additional pressure on the automotive industry to reduce its vehicle fleets CO 2 emissions Introduction of WLTP increases SHW s market potential 10
SHW Our strengths and challenges Our strengths Our challenges Unique exposure to megatrends Investments necessary to exploit megatrends High quality customer base Operational execution in Pumps division to be improved Market and innovation leader in engine oil pumps and composite brake discs Limited horizontal diversification; no electrical control resources Operational excellence in Brake Discs division International sites still to be ramped up Solid and conservative capital structure with further room for leverage Investment strategy ties up resources 11
Our strategic priorities Enhance operational excellence 12
Our strategic priorities Enhance operational excellence I Lean management Production excellence > Shorter cycle times in Powder Metallurgy > Press tool optimisation in order to achieve higher process stability > Modification of material for more precise shape > Automation of crack detection and visual inspection > Release of temporary workers from Q4 2015 onwards Organisation Procurement & supplier excellence > Further development of process and matrix organisation > Close integration of business critical departments (e.g. procurement, sales, R&D) within the production network of Aalen-Wasseralfingen and Bad Schussenried > Reorganisation of the purchasing and supplier management > Centralising of certain functions in one location Leadership > Shopfloor management and low levels of hierarchy > Successful implementation of continuous improvement process > Cross-functional teams Execution of measures increase production efficiency and trigger performance improvements 13
Our strategic priorities Enhance operational excellence II Capacity and production lots increase Demandcapacity imbalance > Investments of 20 m (2014 2016) in Powder Metallurgy business Powder Metallurgy > Sufficient capacity and flexibility for bigger, economical batch sizes in Powder Metallurgy > Less freight services and logistics costs > Reduction of third party expenses Pumps Assembly > Positive effects on Pumps Assembly division > Operations can run smoothly; no capacity or logistical constraints Investments improve efficiency and profitability of Powder Metallurgy business, positively impacting also pump assembly division 14
Our strategic priorities Enhance operational excellence III Production network optimisation Eastern Europe Relocation phase Production phase H1/2016 > Evaluation of target locations > Legal set-up and building of infrastructure H2/2016 > Relocation and commissioning of first assembly line 2017 > Partial start of production > Further relocation of assembly lines > Sales expected to amount to a double-digit million euro amount > Low single-digit million infrastructure investment costs > Annual sales in Eastern Europe to be expected above 100 m in 2020 > Further added value potential by increasing vertical integration Earnings improvements should reach high single-digit million Euro range by 2020 15
Our strategic priorities Drive internationalisation I Toronto Canada Aalen-Wasseralfingen Germany Bad Schussenried Germany Tuttlingen-Ludwigstal Germany Neuhausen ob Eck Germany LongKou China Shanghai China Sao Paulo Brazil SHW is present in all strategic markets 16
Our strategic priorities Drive internationalisation II Pumps & Engine Components NAFTA 2015 2016 2017 2018 2019 2020 Re-entry into the market SOP for North American OEM China Start of operating activities SOP for North American OEM SOP for Chinese OEM (transmission pumps) Others Production capacity shift to Eastern Europe SOP for North American OEM in Europe SOP Eastern Europe Brazilian subsidiary and ramping up of production First equity investments Further expansion of production network Phase of competition and penetration Enhanced international presence as catalyst for further international growth 17
Our strategic priorities Drive internationalisation III Brake Discs NAFTA 2015 2016 2017 2018 2019 2020 Development of market entry strategy Market entry SOP and ramp-up China SOP JV for unprocessed Brake Discs Switch to production of processed Brake Discs Others Ongoing evaluation of further cooperation possibilities First equity investments Further expansion of production network Phase of competition and penetration Enhanced international presence as catalyst for further international growth 18
Our strategic priorities Leverage innovation leadership I > SHW s prototypes delivered to OEMs and Tier 1 suppliers Two stroke vane pump > R&D experts were able to optimise performance of two stroke vane pump: > Weight reduction > Efficiency increase up to 85% > CO 2 emission reduction in NEDC of up to 2g per CO 2 /km > Electrical double stage oil pump combines two pumps in one solution Scalable power pack for electric transmission oil pumps > Offers two pressure stages: > High pressure stage enabling gearing > Low pressure stage serving as coolant and lube oil pump > Savings in space and thus weight reduction Primary and secondary transmission oil pumps are a further strategic growth segment for SHW 19
Our strategic priorities Leverage innovation leadership II Standard casted ventilated disc SHW Patent Weight reduction about 2 kg/disc High end casted wave disc Weight reduction > 2 kg/disc Weight reduction, improved comfort + performance > SHW is innovation leader for weight reduction of automotive parts > Composite brake discs with aluminium pot reduce weight > Weight reduction of unsprung masses improves driving performance The megatrend weight reduction is a key driver for the Brake Discs division 20
Our strategic roadmap Phase I: Consolidation Phase II: Strong profitable growth Operational excellence Impact of internationalisation on sales Innovation 2015 2016 2017 2018 2019 2020 After a phase of consolidation SHW will get back on the track for profitable growth 21
Financial goals SHW Group Phase I: Consolidation Phase II: Strong profitable growth SHW Europe SHW International 570-600 630-660 ~ 470 440-460 440-460 480-505 Sales ( m) As of 2018: 14% 13% EBITDA ( m) 42 46 43 47 EBITDA margin 12% 12% 11% 10% 9% 2015E 2016E 2017E 2018E 2019E 2020E Profitable growth driven by operational excellence, innovative product mix and internationalisation 22
Financial goals Further financial upside potential Electrification > Horizontal diversification based on M&A activities Vertical integration > Expanding degree of value added by insourcing machining operations New market entry > Exploiting NAFTA market region with composite brake discs Consolidation > Potential full consolidation of brake disc JV as of 2018/2019 Current medium-term planning does not reflect upside potential 23
Financial goals CAPEX and depreciations Phase I: Consolidation Phase II: Strong profitable growth 29-32 32-35 32-35 26-29 27-30 29-32 CAPEX ( m) DEP 21-23 21-23 25-27 26-28 31-33 31-33 ( m) 2015E 2016E 2017E 2018E 2019E 2020E Investments in the consolidation phase trigger a strong and sustainable sales and profitability growth from 2018 onwards 24
Financial goals Strong balance sheet Capital structure > Sustainable and strong capital structure with a balance sheet equity ratio of at least 30% to 40% Debt ratio > Leverage potential to increase net debt / adj. EBITDA ratio to a maximum of 2.8 Liquidity > High flexibility in terms of financial and strategic headroom: syndicated loan facilities plus additional baskets Free cash flow > Focus on optimising operating free cash flow Dividend policy > Results-oriented dividend policy with a pay-out ratio of 30% to 40% of the net income for the year taking into account the financing requirements of SHW Management board evaluates the proposal of a scrip dividend scheme at the AGM in May 2016 25
Your key takeaways We identified our strengths and weak spots and have started to tackle our challenges and further exploit our strengths We prepare the ground for SHW s return to strong, sustainable and profitable growth On our way to 2020, we will enhance our operational excellence, drive internationalisation and leverage our innovation leadership With our focus on CO 2 saving and weight reduction technologies, we have an excellent exposure to fundamental industry trends As members of the management board of SHW we are committed to a transparent and continuous dialogue 26
Contact Investor Relations Michael Schickling Head of Investor Relations & Corporate Communications Telephone: +49 (0) 7361 502-462 E-Mail: michael.schickling@shw.de Anja K. Siehler Senior Manager Investor Relations & Corporate Communications Telephone: +49 (0) 7361 502-469 E-Mail: anja.siehler@shw.de 27
Disclaimer No offer or investment recommendation This document, which has been issued by SHW AG (the Company or SHW ), does not constitute an offer to sell, or the solicitation of an offer to subscribe for or buy, any shares in the Company, nor shall it or any part of it nor the fact of its distribution form the basis of, or be relied on in connection with, any contract or investment decision in relation thereto. The contents of this presentation are may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose. Neither the Company nor any other party is under any duty to update or inform you of any changes to such information. In particular, it should be noted that financial information relating to the Company contained in this document has not been audited and in some cases is based on management information and estimates. This material is given in conjunction with an oral presentation and should not be taken out of context. Certain market data and financial and other figures (including percentages) in this document were rounded in accordance with commercial principles. Figures rounded may not in all cases add up to the stated totals or the statements made in the underlying sources. For the calculation of percentages used in the text, the actual figures, rather than the commercially rounded figures, were used. Accordingly, in some cases, the percentages provided in the text may deviate from percentages based on rounded figures. Future Oriented Statements Certain statements in this presentation are forward-looking statements. By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward looking statements. These risks, uncertainties and assumptions could adversely affect the outcome and financial consequences of the plans and events described herein. No obligation to update the information The Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by applicable laws and regulations. You should not place undue reliance on forward-looking statements, which speak as only of the date of this presentation. Statements contained in this presentation regarding past trends or events should not be taken as a representation that such trends or events will continue in the future. 28