Continental AG (OTC:CTTAY) (CON.DE) has announced its Q3 2024 earnings, revealing strategic maneuvers and financial performance amidst challenging market conditions. CFO Olaf Schick reported an improved adjusted EBIT margin and significant cost savings, despite anticipating lower sales guidance for the year. The automotive sector spinoff decision is pending, with a final verdict expected in Q4 2024. The company is also grappling with weak industrial markets and light vehicle production, which has impacted ContiTech's performance.
Key Takeaways
- Continental AG improved its adjusted EBIT margin by 260 basis points year-over-year.
- The company is considering an automotive sector spinoff, with a decision due in Q4 2024.
- New business intake stood at €3.7 billion, with €1.8 billion from electronic parking brake contracts in Asia.
- Tire sales showed strength, particularly in the replacement segment for passenger vehicles.
- Continental is facing challenges in ContiTech due to weak industrial markets and light vehicle production.
- The company has raised its cost savings target for the year from €150 million to €200 million.
- Free cash flow was affected by increased working capital, but a cash inflow from Vitesco Technologies provided support.
- Adjusted group sales guidance to €39.5 billion to €42 billion, with results expected at the lower end.
- The effective tax rate was revised to 30%, with provisions for Italian tax investigations.
Company Outlook
- Continental anticipates landing at the lower end of its sales guidance, with ongoing market headwinds.
- The company is focused on enhancing operational efficiency in preparation for the future.
- Continental expects strong cash generation in Q4 to support its full-year goals.
Bearish Highlights
- ContiTech reduced its full-year sales outlook by €400 million due to market difficulties.
- Free cash flow was impacted by elevated working capital and restructuring costs.
- The company is facing weak market conditions in the automotive sector, particularly in ContiTech.
- Semiconductor pricing uncertainty and ongoing negotiations could affect future contracts.
Bullish Highlights
- Successful pricing negotiations in automotive, with over 90% completed.
- Strong performance in tire sales, particularly in passenger vehicle replacements.
- Significant new business intake of €3.7 billion, with €1.8 billion from Asian contracts.
- The company is on track to achieve significant cost savings, with a target of €200 million by the end of 2024.
Misses
- New orders of €3.7 billion in Q3 were below expectations due to challenging market conditions.
- The overall volume increase was only 2.0%, despite a 3.5% organic sales growth in tires.
- Raw material costs and labor inflation are anticipated to remain headwinds.
Q&A Highlights
- Continental is monitoring tire sales and manufacturing capacity in the U.S. and plans continued investment in the region.
- Financial visibility for the automotive division is expected to improve around the AGM and Capital Market Days in 2025.
- R&D expenditures are projected to decline year-on-year, with a target R&D ratio of 9% by 2027.
- The company is exploring tire technology innovations but has no specific announcements at this time.
Continental AG remains committed to navigating through the current market challenges, with a focus on cost efficiency and strategic initiatives to bolster its future performance. The company is preparing comprehensive updates on its strategy and midterm targets, which will be shared in conjunction with the AGM and Capital Market Days in 2025.
Full transcript - None (CTTAF) Q3 2024:
Operator: Good afternoon, ladies and gentlemen, and welcome to the analyst and investor call Q3 results 2024 of Continental AG. [Operator instructions]. Let me now turn the floor over to your host, Max Westmeyer.
Max Westmeyer: Thank you, operator, and welcome, everyone, to our third quarter 2024 results presentation. Today's call is hosted by our CFO, Olaf Schick. A small reminder upfront that both the press release and presentation of today's call are available for download on our IR website. And before starting, we'd like to remind everyone that this conference call is for investors and analysts only. If you do not belong to either of these groups, please kindly disconnect now. Following the presentation, we will conduct a question-and-answer session for sell side analysts. To provide a chance for all to ask questions, we would like to ask you to limit yourself to no more than three questions. This will help us conclude the call on time. And with this, let me now hand you over to Niko.
Olaf Schick: Thank you very much, Max and to all on the line, thank you for joining us here, and we appreciate your time and being with us today. Yes, I would like to get going with a brief update on where we are regarding automotive sector spinoff. We are still in the details evaluation phase, after which my colleagues on the executive board and I will take a final decision in Q4, whether to go ahead with the spinoff. Next (LON:NXT) steps would then be the supervisory board decision in March, followed by annual shareholder meeting approval in April. What are the main criteria we'll use for this decision here? Our focus is on ensuring that both standalone organizations are fully functional with a good underlying performance and strong balance sheets. Additionally, we aim to ensure to have a clear picture on topics such as tax implications, legal requirements, which are in such a complex undertaking as a spinoff. And I can tell you we are working very hard around clock on these topics. In parallel, we actively started the preparation of the complete - of the spin - to complete the spinoff in time. So, should we decide for the spin, we can therefore complete it, as we said, by the end of 2025. So, we will keep you in the loop. Now, let's move forward to the third quarter results you see here on Page 3. Starting on group level, I'm pleased that despite the persistent headwind from the weak market environment, we have significantly improved our adjusted EBIT margin by 260 basis points year-over-year. A part of that was driven by the €125 million cash inflow from Vitesco Technologies. We made an announcement on that, but the core of it shows that we can actively execute our self-help program even in the most challenging circumstances. Let's look at some highlights from each sector, starting with automotive. The team successfully concluded almost all the remaining pricing negotiations, with just a few remaining topics to close in Q4. The automotive result was underlined by two other key factors. Firstly, we continue to be well on track with our strategic self-help programs, and I have more details on that in just a moment. Secondly, we began to see slight improvements on the outperformance as some previously delayed SOPs and ramp-ups started to gain traction now in the quarter. For tires, our colleagues delivered a strong quarter result. We capitalized on improving passenger vehicle replacement set in our core markets in Europe, North America, and China. In addition, we benefited from the beginnings of stabilization in the European, North American truck tire replacement markets. To ContiTech, our business remains particularly weighed down by persistently weak industrial markets and weak light vehicle production volumes. We continued with our focus on our self-help program, particular in our OESL business area, which, combined with a slightly positive material development, helped to at least offset labor cost inflation. Overall, we have achieved a good set of results, especially in automotive tires, while for ContiTech, I will share with you in a bit later the needed adjustment to accommodate for this enduring weak market situation. And then finally, to free cash flow. Here we had elevated working capital on the back of stronger sales in the months of September after we had soft sales in July and August, and thus higher accounts receivables. Due to lower sales in July and August, which define the cash inflow for the quarter, we are below the prior year’s figures. Further than that, we had faster progress on the restructuring side where we benefited from the one-time €125 million euro cash inflow from Vitesco. As I have done in our H1 reporting, I would like now to share with you our progress now at nine months on our automotive transformation program on the next page. We have made good strides across all our focus fields, starting with operating leverage. Our main instrument here is concluding the price agreements, which from Q3 standpoint, we have more than 90% done. I strongly support our quality over speed approach here, which has enabled us to ensure that the majority of the pricing is now sustainable moving forward. As there remains market volatility in some core component groups and we have new projects going into SOP, it remains in our interest to monitor and adjust again to the reality of the situation then in 2025. But first and foremost, we will of course work hard on closing the remaining 2024 negotiations with our customers. In operational excellence, here it is noteworthy to highlight our manufacturing performance improvements supported by gains in fixed and variable cost reductions, contributing to our target of achieving 1% of sales reduction in the short term. In our fixed cost reduction program, the automotive management has made significant progress as well. Year-to-date, we have reduced over 3,000 employees. On the back of this good result, our previous target of achieving €150 million cost savings this year is so assured that we have decided to increase the target yet again, aiming now for around €200 million cost savings within this year. Looking to 2025, we also confirm that the remaining €200 million cost savings of the program are already to 90% assured. That means we have the necessary exit contract signed or other measures defined. To R&D efficiency, we are making good steps towards our goal of high single-digit R&D to sales percentage by 2027, achieving a 30% basis points reduction in Q3 2024 compared to Q3 2023 on net R&D, excluding restructuring costs, and this ratio improved this by the sales drag. Further to that, we are continuing our focus on the use of AI, especially in the development phase of our projects, to bring sustainable efficiency gains, for example, by expanding its use in requirements engineering, where we can use AI to automatically derive the product requirements from the customers’ tools and documents, which can be hundreds of pages heavy, and then break them down on system hardware and software levels. From the requirements, we can further utilize AI to support the generation of code and test cases. These tasks today demand significant mental work and through AI, we will be able to cut the development time for these tasks by around 20 or by up to 20%. And finally, to asset deficiency and complexity reduction first, this year we already adjusted our CapEx spend, with notable reductions here in Q3 to adjust to the weakening market situation. However, we will not stop here. 2025 will not come as anyone originally expected. Retail production volumes will presumably further decrease in Europe and North America, and as a result, we are ready to consider additional measures. Our next step towards reduced complexity is through merging the two business areas, software and central technologies, and architecture networking, bringing the full architecture and core software capability under one roof to better coordinate how these two core building blocks of the vehicle interact. The new organizational setup of this BA is already done as of November 1. So, we are moving fast and the sum we have now streamlined the automotive setup from six business areas at the time of our capital market day almost one year ago, to now to lean four business areas. So, we are on the move. Now, onto Q3 group sector highlights in more detail, if we go to the next page. In automotive, the top line was burdened by continued weak global production volumes, while our focus on sales measures delivered a strong 140 basis points improvement on the adjusted EBIT side. Notable nexus tires bringing 350 basis points in organic growth, which translated into a 120 basis points increase in the adjusted EBIT margin. And to ContiTech, with a persistent industrial market weakness, coupled with particular weak European automotive production volumes resulted in insignificant headwinds on both sides of the business, which we could only partially offset through our self-help and cost-focused programs. Finally, to this page, the ramp down of our contract manufacturing activities is progressing as planned. Now, we will look now to the detailed sector by sector, starting with automotive. Starting with the top line, we could achieve to compensate some of the market-driven volume drop NFX headwinds through finalizing most of the remaining pricing agreements, which also help directly on the bottom line. But let's look deeper into each business area where we see varying performances. Let me shed some light there, starting with autonomous mobility and safety in motion. Here, we were burdened by sizable volume drop linked to weaker market performance in the quarter for key car lines with our content. For architecture networking, we benefited particularly from the finalization of key price negotiations in the quarter, positive customer mix, and accelerating ramp-up curve of new launches, all of which had a positive drop-through effect to the bottom line. And then to user experience where we have the continuation of ramp-down of older display technologies and delayed or slow start of ramp-ups of car lines with our latest generation displays. The pricing negotiation gains could not offset this persistent volume and content situation. Despite a difficult market environment, our bottom line results underpins our ability to successfully execute our self-help programs even ahead of schedule, as you saw on the scorecard. We are ensuring our automotive group is in the right shape for its future. Looking to the full year and knowing that multiple headwinds will persist in the automotive market, we expect to land in the lower end of the sales guidance corridor. Due to that, we expect to come out in the lower half of the adjusted EBIT margin guidance corridor. Now, let's look at the regional view. It was again a difficult quarter, with all key market volumes well below the comparative period in Q3 2023. However, it's important to note that even against this backdrop, we still achieved a notable worldwide outperformance of 200 basis points due to our strong performance in Europe, as you can see here. We beat the market with a sizable 8% outperformance stemming from pricing and some ramp-ups finally getting underway. To North America, our performance here is very much tied to the persistent challenges that will not resolve themselves in the short-term. Effectively throughout 2024, we are burdened by customer mix, technology change cycles, weaker mix favoring lower options versus versions being produced, and higher inventory levels at some customers delaying production. And finally to China where the well known situation burdened our sales growth versus the market also in Q3. Now, let's look to our future and our quarterly order intake results on page eight. Our new orders of €3.7 billion lifetime sales in the quarter were below our expectations, reflecting the challenging market environment of our customers, resulting in delays in their new project and sourcing decisions, something I think we have seen throughout the reporting period so far. Nevertheless, I would like to highlight a notable achievement from our safety and motion team who secured €1.8 billion worth of new business, with major awards from Asian customers for electronic parking brake, as well as contributions from our airbag and wheel speed sensor portfolios. I'm pleased to note that it includes new awards with four key Chinese OEMs, further growing our position as reliable partner of safety solutions in the market. Certainly, a positive sign for future growth, especially considering the current Chinese market dynamics. That completes auto. Now, let's move to our group sector tires on the next page. Starting with the top lines, our tires team achieved good organic sales growth of 3.5% versus the comparative period on the back of solid passenger vehicle replacement, market sales, and truck tire business improvements. Although global OE passenger car market remains globally very weak, our overall volume development for the quarter was a positive 2.0%, and this was possible due to stronger replacement volume worldwide, particularly in APAC and in Europe, especially good replacement volumes in winter, and also the all-season tire business in Europe was very important, not only for the sales development, but also for the bottom line as well. Further, sales price mix finally turned positive at 1.3%, supported by the end of indexation effects, as well as an overall positive channel mix and product mix. However, slightly negative impact from regional mix in APAC and Americas. Looking to the bottom line, the momentum in the passenger car vehicle replacement business contributed positively, as well as overall positive mix where we capitalized on the good start to the winter and all-season tire business in EMEA, and has overcompensated the fact that raw materials started to turn into a slight headwind, something that we expect to be even stronger in Q4, as well as persisting labor inflation effects. In addition, we are carefully observing the North American market where one of our key customers in the replacement market is going through chapter 11 proceedings, but it is too early to determine the comprehensive findings of this process. Looking at the full year, we are confident that for tires, we will achieve at least the profitability level of H1 in H2, and now with a good tire quarter in the books, there may even be some further upside to that depending how the markets continue to develop. Now let's look at ContiTech. The persistently weak industrial and automotive markets heavily burdened ContiTech this quarter on both top and bottom lines. First sign of recovery we're seeing only in the aftermarket and construction home markets in almost all other key markets and where in fact we are much more prominent, for example, energy, off-highway, and manufacturing, we do not yet see any signs of recovery Against this backdrop, we continue to double down and focus heavily on our self-help program where our OESL team here particularly steadily improving the bottom line results. With OESL now in a stronger position, we have decided to pursue the start of M&A actions already within Q4 this year, with the target to start the transaction phase at the beginning of 2025. In addition to that, we are investigating additional measures across ContiTech to safeguard our results for both the short and the long-term. Looking to the full year, however, we do need to adjust the guidance to reflect a little or no recovery expected in our key markets for ContiTech. For this, we'll reduce the outlook for the top line by €400 million Euro to the new guidance corridor of €6.2 billion to €6.6 billion. And on the bottom line, we need to take out 70 basis points from the corridor, with the new guidance now 5.8% to 6.3%. Now, let's switch back to group level and look at free cash flow. Despite the improved operational results, operating cash flow was down due to higher working capital from strong September sales and lower cash in from the weak months of July and August. Cash outs for restructuring were faster, as expected, as you saw in our scorecard today, of course, resulting in higher cash outflow. On the positive side, as mentioned, we benefited from the one one-off cash inflow from Vitesco Technologies. As you can see on the investing cash flow side, we continue our strict path of cost management and investment decisions, further adjusting to the weak market situation, and this resulted in significantly lower CapEx versus the comparative period. We remain confident that we will achieve our full-year guidance given our typically strong cash generations in the fourth quarter. The revisions we have made to our market outlook on Slide 12 online with our messages today, with our Q2 update in August, we already reflected most of the changes that we are currently seeing in the market. However, North American passenger vehicles production is still developing below our expectations. So, today we lower our outlook. On the truck OE side, we reflected the further worsening European and North American markets with the new corridors where we adjust to a more optimistic corridor for the North American truck replacement market. And on the industrial production side, demand persistent weakness, particularly in Europe, is now reflected in the update. Now, let's look at the adjustment we have made to our guidance. Our Q3 performance showed our considerable resilience against a challenging automotive market, while the persistent weakness in our industrial markets could not be compensated any longer by internal measures alone. It is on that basis that we adjust down our ContiTech sector outlook, as I mentioned, on both the top and bottom lines to the new corridor for sales from €6.2 to €6.6 billion, and adjusted EBIT margin between 5.8% to 6.3%. Given that change, we have adjusted the group sales line down as well to €39.5 billion to €42 billion, where we anticipate we will likely land closer to the bottom end of the guidance while leaving group adjusted EBIT untouched. I would like to reiterate my previous comments for automotive and tires. Firstly, on automotive, where the volume situation will lead us to likely land at the lower end of the sales guidance. Due to that, we expect to come out in the lower half for the adjusted EBIT margin guidance also. For tires, Q3 has shown there could be some upside to our current assumption that for H2 we anticipate a similar margin performance to H1. Finally, to this page, we have an update on our tax rate, adjusting it to 30% rather than previously assumed 27%. The increase compared to the previous assumption is mainly due to the allocation of the group result for the various countries in relation to the overall result. Tax burdens that are not directly dependent on earnings also have an impact. This include foreign minimum taxes with a different assessment basis and foreign withholding taxes that cannot be offset in Germany. Dimension effects will be put into perspective once the earning situation improves, meaning that we do not anticipate the sustained increase in the group tax rate. Furthermore, we’ve built provisions within Q3 for tax risks in connection with investigations by Italian tax authorities. We highlighted that last topic already in the annual report 2023. As a precautionary measure, we have recognized provisions in the low to mid double-digit million euro range for probable financial charges. The subject of the investigations is the possible failure of the Continental companies counsel to comply with declaration requirements vis-à-vis the Italian tax authorities. The opinion of the tax authorities, Continental should have paid taxes for the activities in question in Italy, which the company paid in other European countries in the period 2016 to 2023. So, after that detour into tax accounting, let me reiterate, overall, Q3 was a good quarter for us and we are confident that we will achieve our guidance as we have laid out today. So, with that, I'd like to hand over now the rest of the time to you. Operator, could you please open the line for Q&A? Thank you.
Operator: [Operator Instructions] So, the first question comes from Horst Schneider, Bank of America. Horst Schneider, your line is live.
Horst Schneider: Yes. Hello. Good afternoon. Hope you can hear me. I have got a few questions on automotive, please. First one relates to pricing. When you say that most of your pricing has been done by now, could you maybe tell us what proportion of the contracts have been now permanently repriced and on what percent you need to do again, negotiations also next year? That would be number one. Then number two would be, on this €400 million cost-cutting target, and you still aim for the €200 million then in 2025, and if I got it right, you're saying there could be more savings. So, could you maybe remind us, what is included now in this existing plan of €400 million and where you see scope for more savings? I always struggle with how I accommodate these savings in R&D because you also reduce employees there. But I think these savings are more considered in this R&D ratio that you are guiding for, but maybe you can clarify that. And last but not least, on your auto guidance for this year, because you say the EBIT margin could be in the lower end of the - or the lower half of the guidance range, that means that Q4 could be even stronger than we think. So, I want to understand what now, Q4 basically depends on what kind of visibility do you have. Does it just depend on production schedules, or what could make you basically not meeting the guidance? Thank you.
Olaf Schick: Yes, thank you, Horst. Let me start with the first question, pricing. So, as I said, 90% successfully closed. A good portion is sustainable. So, with regard to 2025, the uncertainties in the market remain. It's not normalized yet. That also means further rounds will be needed. Up to your second question, maybe let me start, we have said that we reduced headcount. We will target to reduce headcount 7,150. So, so far end of September, we have reduced on the administrative side more than 4,500 to date. That was back to end of June, 2,800. And on the R&D side, we reduced so far by end of September, 1,500. So, that's 3,000 again on the administrative side, 1,500 on the R&D side. And that is together 4,500. That means we are on good track as we have scheduled actually a bit faster. So, that means now if we look at our savings, we have achieved so far €100 million savings year-to-date end of Q3. And we target to save €200 million by end of the year 2024. And we have, as I also mentioned, most of the measures already signed and clarified. So, we are on good track to fulfill the additional €200 million - to achieve the additional €200 million then in 2025. To the guidance, yes, we have adjusted it - sorry, yes, we have - we will end up in the lower half of the auto guidance. What it’s depending on, on the one hand we see after very weak production volume, we see better volume in Q4. We see - we make improvements - further improvements on the cost reduction, R&D efficiency and we will see R&D reimbursements coming in in the fourth quarter. That's why we believe we will end up in the lower half of our guidance corridor.
Max Westmeyer: Yes. Horst, maybe just to add on what Olaf just said, the $400 million are really on administration alone, right? So, for R&D, we've laid out a separate target to bring it into high single-digit figures by 2027, but the $400 million savings per se, are purely related to the admin functions.
Olaf Schick: Yes, yes, you're right. That was also your question. Thanks for the clarification, Max. Yes. Just for the administrative side.
Horst Schneider: But Olaf, if I got you right, then you eventually you aim to upgrade the cost-cutting target for 2025. I got that right or not?
Olaf Schick: No, no, no. We are keeping it. We are just saying we are making good progress, that we signed the contracts with the measures defined for us to show that we are on - I mean, this is now beginning of - this is now Q3, right? So, we are on good - we are making progress a bit faster than planned. But we are on track to achieve the additional €200 million we need in 2025 to achieve the target of starting from 2025 to achieve the €400 million target on the administrative side.
Horst Schneider: Okay. That's great. Thank you.
Operator: Next question comes from Christoph Laskawi, Deutsche Bank (ETR:DBKGn). Your mic is open.
Christoph Laskawi: Hi, it's Christoph Laskawi here. The first one, actually a follow-up on what Horst just asked. You highlighted that you're progressing faster than initially expected on the fixed cost savings. In the process of that, did you discover more scope to do more potentially next year and sort of have a second round of that program, or is it too early to comment on that yet? The second question would then be just on tires and the US import share. Could you give us a rough outline, how much is local for local in the US in terms of volumes? How much do you import from Mexico and what's imported from the European Union? And then lastly, probably you don't want to comment or can't for now, but it seems that the braking issue with BMW (ETR:BMWG) is progressing quite okay. Is there a final timeline when you expect the claim to be settled and when we would have the clarity around that issue? Thank you.
Olaf Schick: Thank you, Christoph. Again, for us it’s important now that what we have announced, that we implement and achieve our saving targets, and we are making good progress. Of course, we always look at the sales development and then the markets, and then we will see whether further measures are needed. But currently, the focus is on executing what we have announced, and there's nothing else to communicate at this stage. To your second question regarding tire sales in the US, a portion of our sales in Americas is covered by European production. This helped us over the past years to make optimum use of our existing capacities in Europe. In addition, tires from South America are partially also sourced to the US. We are now of course, carefully monitoring the situation, but US cannot supply itself exclusively via the domestic market, as the capacities in the US are not sufficient for this. And I think you also asked about Mexican imports. Look, I mean at the end, the Mexican market is of course very, very relevant for us. So, we need to monitor the situation and then investigate potential measures. On the brake issue, look, important with the agreed and implemented measures, the vehicles can be delivered with the brakes to the customers. That is important. And everything else we clarify with BMW. There's really nothing else to communicate. Obviously, we have reviewed the provision that we had built up already in the first and second quarter. We have reviewed. We have adjusted that. That's of course normal process when you do - when you conclude financials for the quarter, and that's it.
Christoph Laskawi: Understood. Thank you very much.
Operator: And the next question comes from Monica Bosio, Intesa Sanpaolo (OTC:ISNPY). The floor is yours.
Monica Bosio: Yes. Good morning and thanks for taking my question. The first one is on Conti tires and on the 2% increase in volumes, which was due basically thanks to the better trend in replacement in Europe. And I was wondering, do you expect a similar trend also in Q4 and above all entering 2025, or do you see sign of a slowdown in replacement in certain areas? And my second question is a follow-up on the manufacturing footprint in USA. Maybe it's too early to answer, but are you planning some capacity addition into USA for tires, maybe changing some manufacturing footprint assets existing now in Europe? And the third question is on the third quarter performance in automotive in USA. I fully understand that you were impacted by the inventories, high inventories from some customers, and the situation is still challenging. So, should we expect some improvement by year-end or it would be more likely in the first part of 2025 also on the back of the launches? Thank you.
Olaf Schick: Thank you. Yes. And in Q3, it’s correct, we had strong replacement business in particular in Europe and in APAC. Also, our performance business competition is strong. And so, our focus is on increasing our premium business, in particular on the ultra-high performance tire segment. For Q3 - for the fourth quarter and then 2025, it really depends now how the rest of the quarter is going after - the winter season started well, as I mentioned, and that really depends now on the outlook for the year 2025. But if you look for example, to China, we expect in 2025 over-proportional growth in the region. And we also want to stabilize our premium and UHP share. Second question on capacity addition to the US. Look, of course, we have - basically we operate and we produce in the market for the market, but of course for tires, we just talked about it. There’s also import business needed because overall in the US, there's not sufficient capacity. We have in the last 10 years invested around €3 billion in the US, and we plan to continue to invest on that level going forward. We plan long-term and we continue to do so. Everything else, we now need to - we need to now investigate and monitor the situation. About US affected customer inventories, I'm not really sure.
Max Westmeyer: I mean, what we see there in the US is let's say somewhat of a persistent trend that we've seen throughout 2024 that maybe the versioning or say the - well, all the products that you can bring into the vehicle, it tends to be at rather the lower end, maybe a bit of an affordability issue as well, that we see there. So, that's something that we do not expect to change really quarter-over-quarter.
Olaf Schick: It depends on the consumer behavior, right? So, also now, let's see what happens in the US. Yes.
Monica Bosio: Okay, got it. Thank you.
Operator: And the next question comes from Thomas Besson, Kepler Capital. Your mic is open.
Thomas Besson: Thank you very much. I have three questions as well, please. First, I'd like to have a bit more on the transactions you're planning. So, I think you'd mentioned in your opening remarks that you were hoping to see the beginning of the ContiTech transactions in early next year. I mean, clearly the dynamic of ContiTech margins and revenues is not very favorable right now. Does it change anything to the plan for the timeline of the sale, because the proceeds might actually be lower than expected? And can you say as well a few words about the taxation and overall cost of the automotive plant spin. Second topic, can you talk about tire pricing? You've mentioned that you face higher raw materials and labor costs in Q4 and in 2025. What can you say about the pricing environment today? And would you expect the industry to follow its usual path and potentially raise prices in some regions at least to offset input and labor cost? And final question, you've talked a lot about the savings that are planned in various businesses. Can you say a few words about what automakers are trying to get out of these savings? So, I know that a lot of suppliers have engaged into more aggressive restructuring, and notably as the European production and environment has been dreadful, but don't you fear that automakers are going to try to grab part of these gross savings as a kind of participation and kind of retro commission of what they've compensated you for over the last two, three years? Thank you.
Olaf Schick: Thank you. For ContiTech, we see weak industrial automotive markets that have significant impact, right, that had a significant impact on the top and bottom line, low demand, in particular in energy, off-highway, manufacturing, areas which are very relevant for ContiTech. We do not see signs of recovery in the fourth quarter and in the first half of 2025. So, actually, there are some American competitors who see faster recovery, but we are cautious. And that means we are looking at countermeasures, fixed cost reduction, best cost share needs to be improved. We are also looking at variable cost optimization. On the spin, the tax cost for the auto spin, look, I mean we are looking at - we are right now finalizing, yes, the detailed analysis that all property includes spin-off costs that includes potential to synergies of a spin that includes tax cost. Everything is in the normal range, what you would expect for such a transaction. And I don't have exact figures for that to communicate right now. On tires, raw material indexation, slightly positive effect, slight headwind now on the raw material side that we see in Q4, will be probably stronger in 2025. We also see labor inflation effects. We always look at these raw material increases, and then we take our independent decisions on whether we need to come forward with a price increase on that. That's not because of business. To your last questions, are OEMs trying to capture part of our savings? Well, look, I think for - in the supply industry, cost saving measures and cost pressure is normal cause of business. That's nothing new. But in particular, in these times of the transformation, our customers can expect from us that we are even more cost efficient. And we are doing that and we are making progress. And actually, for our customers, that's important to see. But then it's important to conclude our price agreements. And we are doing that as we show, right? So, we do both, right, achieving price agreements and lowering our cost base. I actually believe lowering the cost base is a conditioned to achieve price agreements with our customers. They need to see that we turn around every euro and we are doing so. Maybe let me come back to the question the spin on the tax load triple digit million euro amount and one-off low to mid million triple euro amount as a follow-up to that. Thank you.
Operator: And the last question in the queue right now is Edoardo Spina, HSBC.
Edoardo Spina: Thank you. Good afternoon. I have three questions as well. First on semiconductor on the pricing, if you could discuss how the semiconductor pricing you are seeing right now compares to last year. We understand it's probably flat, but is it actually flat year-on-year? And then secondly, still on semiconductor, but more in regards to the new contracts, the new pricing that you negotiated with the OEMs. Do the new contracts include a pass-through clause for the semiconductors, or will you have to negotiate, or will you be able maybe to keep any future price decline? And finally, on tire technology, your competitor, Pirelli, has spoken recently about the cooperation with Bosch (NS:BOSH) to develop what they call the cyber tire. It may be a long-term project, but I understand it's moving on at the moment. So, can you discuss if you're developing anything similar to that product with or without Conti Automotive or somebody else? Thank you.
Olaf Schick: Thank you. To your first question on the semi cons regarding potential price adjustments, overall this is currently still too early to talk about semiconductor pricing in 2025, since we are currently still in price negotiations. From a market capacity, we are expecting some trends that point in different directions where we may see some inventory reductions, especially in the first half of the year. H2 might see higher demand also from a trend towards AI. How all of this will balance out, it’s actually too early to tell. For the pass-through, there's no auto - for the pass-through in the contracts on the semi cons, there's no automatic pass-through. And there are no indices for semis, right? So, it depends on the negotiations. On the Pirelli cooperation with Bosch on the cyber tire, I have to admit, I need to get back to that. I don't know too much about that Bosch-Pirelli cooperation. So, but I will look into that now after the call.
Edoardo Spina: Okay. Thank you.
Operator: And the next question is from Jose Asumendi, J.P. Morgan.
Jose Asumendi: Thank you very much. I just had one question, please. Olaf, to gain more, a better understanding of the potential of the automotive division, it would be great to gain additional visibility behind the financial targets within each of the subdivisions and understand a bit better the potential of the business maybe two to three years out. When do you expect to sort of be able to revisit this topic and gain a bit more visibility behind the underlying divisions within auto, the other backlogs and the margin potential behind them? Thank you.
Olaf Schick: On the individual BAs, we don't break it down. Now, let's look at the auto. For me, what is important is we made a step forward in the second quarter. Now we need - we made the next step in the third quarter, and we will make the next step for automotive in the fourth quarter, only for the reasons actually that we outlined in this call and answered in some of the questions before. Next year, we will make further progress for automotive results. There will be the right time to come where we will then - around the AGM, yes, it will be followed by Capital Market Days. And then in particular for the automotive division, ahead of the listing in the second half of 2025, there will be then more announcements on the strategy, but also on the midterm targets. But again, right now it's important to really make progress quarter by quarter, step by step, and execute all the measures that we have announced.
Jose Asumendi: Very helpful. Thank you very much.
Operator: [Operator instructions]. There is one question, an additional question from Horst Schneider, Bank of America. Your microphone is on.
Horst Schneider: Yes. Thank you for taking one more from me. Just specific question on R&D, because you made this good progress in Q3 and R&D dropped year-on-year, can we expect the same trend also in the fourth quarter, R&D comes down year-on-year in absolute terms?
Olaf Schick: That should be the expectation. Obviously. Q3, we had the effect of the restructuring provisions. But yes, we need to improve step by step, quarter by quarter to achieve our target of the R&D ratio of 9% by 2025.
Horst Schneider: Okay, that's great. That was all. Thank you.
Horst Schneider: Sorry, 2027. Oh, sorry. 2027, right.
Horst Schneider: Oh, okay. Got it. Yes. Thank you.
Operator: So, there are no further questions. So, back to Continental for the closing remarks. Thank you very much.
Max Westmeyer: Thank you very much. And Edo, just let me quickly reiterate or come back to that question. I mean, obviously I think the Pirelli cyber tire is a lot about sensors in tires, which is something of course that we have explored for a long time already. So, also here we will certainly look into further innovation to see what's possible. But of course, you have to consider multiple facts like technology opportunities, costs, benefits that you can see from there. Also, depends very much on when you look into fleet versus let's say private solutions for replacement out there. So, maybe just quickly to come back to that as a statement. Again, something we're always looking into on tires innovation side, but nothing to announce directly here from our end. And with that, also thank you, operator, for guiding us through, and thank you very much for in participating today’s call. As always, the Conti IR team is available if you have any remaining questions. And with that, we would now like to conclude today’s call. Thank you and goodbye.
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