MESSAGE FROM THE CEO

In my message to you one year ago, I indicated that 2016 would be a challenging year. At that time we expected the North American truck and trailer market to normalize in 2016 after three record years in a row. As you know, there was more than just a correction: the North American market, measured by the production of heavy Class 8 trucks, suffered a sharp decline of almost 30%. Other important transportation markets, such as those in Australia, Russia, Brazil, and Turkey in the second half-year, were also weak in the 2016 financial year for very different reasons. Given the difficult market environment, we are satisfied with our business performance. Taking into account the sale of our Aerway product line and excluding currency effects, we managed to maintain our level of sales. With an adjusted EBIT margin of 8.7%, we not only reached our target for the 2016 financial year, but our performance set us apart from others in our industry. We want to ensure that our shareholders participate appropriately in the company’s success and are therefore proposing a 10% higher dividend of 0.44 Euro to the Annual General Meeting on April 27, 2017.

What is the key to our success? For years, SAF-HOLL AND has consistently focused on cost leadership and structural growth by positioning the Group in the market early on with solutions such as axle systems with disc brake technology, lightweight construction and special solutions such as SAF TRAK all with the intention of steadily expanding our sales per vehicle while gaining market share at the same time.

Step-by-step, we are also optimizing our internal processes and structures. After successfully completing the consolidation of the European plant network in the previous year, our focus in 2016 was on implementing the Group’s new structure by region and the bundling of the Group’s purchasing activities. In addition, our better management of working capital, among other measures, allowed us to significantly increase our free cash flow and reduce our net debt to less than EUR 100 million, despite the takeover of the Brazilian specialist for suspension systems KLL and the payment of a 25% higher dividend for the year 2015.

In last year’s message, I also introduced our “Strategy 2020” which includes our goal to expand sales to around EUR 1.5 billion by the year 2020. A key element of this strategy is generating external growth through joint ventures, collaborations and acquisitions. Last year, we made a takeover offer for Haldex AB, the Swedish supplier of brake systems and modules for air suspensions. The aim of this offer was to create an integrated champion for chassis-related commercial vehicle components. Shortly thereafter, two more bidders appeared with significantly higher offers for Haldex. We decided to maintain our financial discipline and refused to participate in a bidding war. We choose not to increase our offer and eventually withdrew it entirely. This decision was an expression of our strong conviction that takeovers should not only be appropriate in the strategic sense but also pay off from a financial perspective. The fact that we were not able to acquire Haldex is unsatisfying but will not stop us from reaching our 2020 targets. We took our first step in this direction with the aforementioned acquisition of KLL in Brazil – and there is more to come. We will continue to diligently work on these steps in 2017. I can assure you that, in any future acquisitions, we will not lose sight of our M&A principles and will continue to act in the best interests of our shareholders.

Another focal point of our activities in 2017 will be the restructuring of our activities in North America. We want to be more efficient, more flexible and, above all, in closer proximity to our customers to improve our delivery times. To achieve this, we will be centralizing our structures and consolidating the production capacities at our seven existing production locations into five production locations. With the completion of the restructuring measures already under way, we will reduce our direct cost base by a mid-single-digit million US dollar amount annually, thereby ensuring the long-term competitiveness of the North American production network.

In 2017, we expect vastly different market performance on a regional basis with some markets being dominated by political uncertainties that are difficult to assess. The market environment in North America, Brazil and parts of the Middle East should continue to be challenging in 2017 with an improvement expected only in the second halfyear. The tax cuts and infrastructure packages currently in discussion in the United States government could certainly have a positive effect on our business. In Europe, we expect the solid development to continue. All in all, we are confident that we will be able to grow the Group’s sales this year to between EUR 1,060 and 1,090 million based on constant currency rates and no change in the scope of consolidation supported by market share gains, the introduction of new products and the start of some interesting large orders. The EBIT margin adjusted for special items should again be within the range of 8% to 9% in the 2017 financial year. However, from today’s standpoint and in light of the anticipated upfront investments necessary to achieve the goals of our “Strategy 2020”, we expect the margin to tend towards the middle of this range.

On behalf of my colleagues on the Management Board I would like to take this opportunity to thank our shareholders and bondholders for their confidence in our company. I would also like to express our sincere gratitude to all our employees and employee representatives and especially to our customers, suppliers and technology partners for the good and successful cooperation, which makes SAF-HOLL AND’s long-term success possible. We would be very pleased if you would continue to accompany us on the road ahead and in writing the next chapter of the Company’s history.

Sincerely,

Detlef Borghardt
CEO / Member of the Board of Directors