Continental AG (OTC:CTTAY) (CON.DE) announced during its earnings call that it plans to separate and spin off its automotive group by the end of 2025, aiming to create two independent listed entities and capitalize on growth opportunities in the tire and ContiTech sectors. Despite a challenging market, the company reported €10 billion in sales for Q2 2024 and a 7% EBIT margin.
Continental also highlighted a positive free cash flow and the implementation of self-help measures to achieve midterm targets, including cost reductions and operational excellence. The automotive group is expected to be listed on the Frankfurt Stock Exchange and qualify for the M-DAX.
Key Takeaways
- Continental AG plans to spin off its automotive group by end of 2025, aiming for two independent listed entities.
- Q2 2024 sales reached €10 billion, with a negative organic growth of 3%.
- The automotive sector outperformed the market with a -2% decline compared to the weighted light vehicle production.
- A 7% EBIT margin was achieved, driven by pricing negotiations and self-help measures.
- Positive free cash flow of €147 million was reported, with various measures being implemented to reach midterm targets.
- The company is confident in reaching a single-digit term on the capital market by 2027.
- Continental has reduced its R&D spending by three percentage points in Q4 and is in discussions with Volkswagen (ETR:VOWG_p) and Carriot about their involvement with Rivian (NASDAQ:RIVN).
Company Outlook
- Continental aims for two independent listed entities post-spin-off, with the automotive group to be listed on the Frankfurt Stock Exchange.
- The company is confident about reaching a single-digit term on the capital market by 2027.
- Continental has slightly lowered its top and bottom line guidance corridors for the automotive and tires sectors due to challenging market conditions.
Bearish Highlights
- Negative organic growth of 3% in Q2 2024 due to weak industry markets.
- Delayed vehicle launches and weaker market recovery expected in the second half of the year.
- Market outlook for passenger cars and light trucks revised down to a decline of 3% to 1%, mainly due to a weakening European OE market and slower growth in China.
Bullish Highlights
- The tire sector saw growth in the replacement market, especially in Europe and Asia-Pacific.
- Continental expects better volume development in the European tire market in the second half of the year.
- Continental is making progress in negotiating pricing agreements for 2024 and 2025.
Misses
- The company reported a 30 basis point decrease in restructuring costs year-over-year.
- Continental has reduced external services on the R&D side and achieved a headcount reduction of 1,300 employees this year.
Q&A Highlights
- Executives emphasized the strategic clarity and openness to partnerships resulting from being a pure play in the automotive market.
- Continental is still exploring growth options in the tire business, particularly in Asia.
- The company did not provide specific details on revenue projections or the impact of the Volkswagen Rivian tie-up on their business.
- Executives confirmed that they are on track to achieve €400 million in cost savings by 2025.
Continental AG's earnings call provided insight into the company's strategic direction and financial health. The planned spin-off of the automotive group is a significant move towards capitalizing on market opportunities, despite current industry challenges.
The company's focus on cost savings and operational excellence, along with its positive cash flow, suggests a strong commitment to improving profitability and shareholder value.
Full transcript - None (CTTAF) Q2 2024:
Operator: Good afternoon, ladies and gentlemen, and a warm welcome to the analyst and investor call regarding the H1 results of 2024 of Continental AG. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host Max Westmeyer Head of Investor Relations.
Max Westmeyer: Thank you, operator, and welcome everyone to our second quarter results presentation. Today's call is hosted by our CEO, Niko Setzer; and our CFO, Olaf Schick. A small reminder 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. So 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.
Niko Setzer: Yeah. Welcome everybody for the second time this week. That's why I want to start already with a recap, what we have shown this Monday. So that we -- the Executive Board took the very important decision to crystallize as much value as we can by our separation and 100% spin-off of the automotive group, and I summarize this on two charts. We had a little bit longer into on Monday, but the main fact you will find here. As said, after the strategic review, we decided to move on. We are now going into a detailed analysis, which takes until Q4 where we'll then take the decision on the spin-off. And after we have analyzed all structures of the new automotive as well as of the new Continental so to say and the transaction steps are further laid out and if this positive decision will be then taken in the fourth quarter then with annual shareholder meeting in 2025. We target them to execute the spin-off until the end of 2025. In parallel, very important, we already start all necessary preparations for the implementation steps in order to have them already in possible execution phase once we can start and take the decision. So target is creating two strong independent listed players, giving [indiscernible] and his team the entrepreneurial freedom, which is needed in the very difficult market environment in this such high volatility to be fast, agile and making sure that all decisions are fully focused on automotive. We can say that now two days later as well, there have been many webcasts as well on auto. The auto team with Philip, they are extremely excited. And we are absolutely convinced that this is not just crystallizing the best value for auto, where we see a clear catalyst of that decision, but as well for the new co on Continental that helps to clearly focus getting agile and making sure that the sectors continue their strong businesses and as well their strong strategies ambitions, which means on the tire side tapping in the profit pools based on our strategic vision, which we have and we see that in the second quarter. We have been relatively successful with that. And for ContiTech, we have to clearly say the way to get an industry lead and get more focused on the industry side with greater than 80% industry business is going along. It means the OESL, the automotive business within ContiTech is further pursued with the carve-out for that business is further pursued to have them stand-alone and execute this endeavor in 2025. So if we're looking for the transaction summary, you see listing of the Automotive group targeted by end of 2024, I already mentioned this, at the Frankfurt Stock Exchange. There have been lots of questions about the balance sheet. As well in the call, we target, obviously, to have a very attractive balance sheet with very limited debt on the Automotive side. That's clear. That's our target. The absolute design we only know once we decide them for the spin-off and we move forward. Same holds true by the way as well for the new co, it is new Continental, it is today an investment grade and we target this further going forward. So Automotive group is expected based on valuation, which we only know once we are listed is to qualify it for the M-BAC. That's based on our evaluations. And you see on the right-side the company is basically cut in half which is then €20.8 billion sales on the Automotive side based on 2023 including contract manufacturing which phases further out. This is the contract manufacturing for the TASCO and it then still keeps a very strong player with 100,000 employees on the right-side and 100,000 on the left-side. As the nature of a spin-off there is no investment needed into Automotive going forward from the shareholders and no proceeds. On the other hand for Continental simply the shares are in the new company according to the holding of today. And onetime costs will be further worked out. What we see so far is the low to mid triple-digit euro million amount on the onetime and on the tax effect a low triple euro amount. With that I'm coming now to the first half. Obviously, we keep you updated over time. And as said next big step is then until the fourth quarter the decision and further details will come. It is a journey which we started but very important for that journey is as well our performance. It's decisive on the Conti part, but in particular on the Continental part. So you see on the top-line we ended the second quarter with €10 billion sales which is a negative organic growth of about 3% so - which is clearly driven by weak markets on the industry side particularly on ContiTech which is a bit worse than the 3%. Olaf will show the details later on. Tyres has been basically flat. And we already mentioned that there was a swap from March into April which we profited from and we clearly saw replacement markets in particular in Europe more supporting our business than we have seen in the first quarter. And Automotive slightly outperformed the weighted light vehicle production with a minus 2% versus the minus 3%. However, overall we assume that the markets will further persist in a more weakness than we have sawn before. We thought that second half will be more tailwinds for the industry business which is now a bit tempered. That's why we adjusted our guidance according what we see in the markets. And again Olaf will come to that later. However, we reached 7% EBIT margin which is a big step up not just versus last year, but as well versus the first quarter. Where did come it from? On the Automotive side strong improvements first of all, all three sectors contributed to this but Automotive with three quarters now of the pricing negotiations finalized had an effect and lifted the margins. This was still a margin drain in the first quarter and the self-help measures as I come to the details on the next chart they are showing their first effect and we are moving further forward as at more details on the next one. On the Tire side in particular the replacement market helped and supported on the European side where we have a relatively strong business. We could profit from that. And we see in Asia Pacific particularly as well in China for the replacement market for us good growth. So Tires is back in the full year guidance 13% to 14% and we ended the first half at 13.2% and with a strong quarter 14.7% return on sales lifted us the upwards. ContiTech made as well significant improvements very much based on self-help cost discipline, but on the OS on the Automotive side by closing pricing negotiations. So those are done and strongly contributed. And again what I mentioned before is still unfortunately we saw a weak industry market persisting in the second quarter. Free cash flow as last for me to quote €147 million positive contribution. Here you clearly see you mentioned this several times our continuous working capital improvements coming from an elevated level. We know particularly on the automotive side after the semicon crisis however we continue to optimize and getting in better structures which support our working capital and which in this case in the second quarter even more than compensated the payment which is linked to the end of fine proceedings. We mentioned at the capital market that we will keep you up to date what -- how our self-help measures are progressing. And you might remember that the improvements towards our midterm targets are mainly driven by those also [indiscernible] because we don't anticipate too much market tailwind on the one hand, on the other hand our operating leverage is then basically is well driven by our own measures. One measure is clearly the pricing parts, three quarters I already mentioned is the one part. The other part is the portfolio management once it comes as well as the performance. So we are focusing clearly on the Chinese market, Chinese OEMs order intake. You referred to this several times in the last three years is on track in the last six, seven, eight months, we launched as well to high-performance compute with Chinese OEMs in China, we chosen, which is a proof point for our strategy towards the software-defined vehicle. And next steps are as well clearly design to cost bringing the material cost ratio to sales further down. Looking on operational excellence, we are further pursuing reduction in premium trade. We profited from this as well in the second quarter and assumed to further profit from this during the course of the year. Inventory times I already mentioned. They increased by orders of 6 and we further see here as well opportunities targeting for the full year that both contribute to a better operations and a reduction of 1% of our cost in terms of sales. Fixed cost reductions, union agreement is finalized. Lots of our adjustments will happen on the German side and those union agreements are signed in the meantime. So you see we will have then the opportunity to enlarge further and the reduction so far which is 1500 headcounts achieved year-to-date will then be further extended. And we will get more towards the safeguarding of our €400 million, which we see targeted then from 2025 onwards. So for 2024, that means that we have realized – we had realized one-third of the 150 already. That's how I should phrase it. For the year we target 150. The rest will come then over in 2025 and you have the carryover effect. So one-third of the 150, we have realized in the first half and mainly in the second quarter. So the other part is still to come once we go into the second half. Looking at R&D. Efficiency here rightsizing is what we are doing. Bundling locations. We have announced high mine [ph] a large area where we have R&D locations we will focus. We will bring locations together thereby increase effectiveness by having engineers working at the same project together, specifically on locations on the one hand on the other hand saving costs which we have already achieved in the second quarter. So our R&D to sales net, so net without restructuring taking the restructuring part out is 30 basis points down versus the second quarter of last year. So the rightsizing already shows its effect and the agility, namely with external services which we still have on the R&D side supporting us, which we strongly reduced. We are moving that in the right direction and 1300 headcounts as we already achieved within this year. And that's why we say that the single-digit term on the capital market which we announced we are now confident to reach this already in 2027. Complexity reduction, we announced the dissolution of SMY. That's where truck business and aftermarket business and telematics business was in for the aftermarket which was integrated into the other business areas and thereby having a more simple setup and less complex setup that worked nicely. This is pursued, great teamwork and we follow that suite. So now and this was announced as well. Yesterday we bring the central software and central technology together with our architecture and networking product. So to create a new powerhouse software and electronic solutions within one business area. Now those are two strongly collaborating but bringing them under one leadership. We see that we are even more effective than delivering on the software-defined vehicles, where hardware needs software and get out of that systematic functions for the OEMs. Portfolio, you don't see on that chart. We announced on Monday that the UX carve-out where we have meantime, a detailed concept is ready with for the time being not being pursued. Only reason that we have to fully prioritize now on the spin-off of automotive, which needs all the attention. It doesn't mean that at a later point in time this detailed concept can be executed. The €1.4 billion bucket, which we announced on the CMD, we further pursue. Portions are in turnaround mode, pricing helps which we see on the chart, so certain parts have been repriced. So this loss-making business, is addressed and is in it's turnaround models and the other portions are still under analysis, and we pursue as well options for the one or the other business out of that. We evaluate them and test them. So we are moving forward on those parts, as they are not jeopardizing our spin off target and they need to be addressed in order to improve our profitability. Looking on the ContiTech side. So, here same structure. We are working on the operating level. Part already mentioned the reprice on the OES part as well as, laser focus which we have on portfolio optimization, particularly on the industry side in the market we have to permanently adapt our organization and move there forward. Operational excellence as well here footprint optimization, in particular as examples here Brazil and US and rightsizing our workforce there, where year-to-date we achieved a minus 7% in headcount so far. This is not only on the fixed side, but as well on the variable side and we are pursuing further rightsizing projects in the current environment, which are combined as well as the smart factory concept means getting as well how optimization levels and smarter factory movements, with less people involved. Fixed cost reductions clearly strong progress on the OSL side. We see again, that having a unit stand-alone and preparing or being in a carve-out for preparing stand-alone is a catalyst for actions. We are moving forward here and we do the same on the organizational setup. We have announced last year, that we changed the organization towards more customer-centric, bringing the industry business together over those three regions. This organization optimization is progressing, and we see as well their results of synergies and additional savings coming in the second half. And last part, I already mentioned complexity reduction, carve-out is on track. We further pursue this and global execution is still planned for 2025 and we follow suit here as well. So with that, I hand over for the detailed results. Olaf, please guide us through.
Olaf Schick: Yes. Thank you so much, Niko. Great to be here with you, and let's look at the group highlights first. As Niko already mentioned, despite challenging market conditions, which hit our top line development you see on the right side of the page across the board on the bottom line, significant improvement year-over-year. So let's look, sector by sector let me start with automotive. Looking at the top line and looking into each business area, you see a mixed result, which simply reflects the different market conditions in the individual parts of the business. Let's start, with autonomous mobility. Here, we were impacted by the ramp down of key radar technology while then at the same time next-generation replacement business begins to ramp up, but not yet at the same pace. Next, architectural networking, we performed strongly versus the comparative period based on the combination of our product mix and customer mix. And here, we see stronger results coming out of Europe. User experience, the business area here, a number of factors played a role in our performance, broader market weakness, slow ramp-ups and new vehicle launches together some key businesses, phaseouts and some customer mix challenges that reflects let's say, the weak performance. Now, let's look at the bottom line. In the middle important here is, the contribution from the new price agreements that Niko mentioned, which brought the necessary drop-through effect on the adjusted EBIT side. Further, we also made progress in terms of sustainability of our agreements though, we still have a lot of discussions still ahead of us. But overall, it's a stepwise -- it is stepwise and improved result that we see here. Finally, we also -- and also Niko mentioned that we continue to see lower premium freights, which has a positive effect. And we see good first results coming in from our fixed cost reduction program, and we of course absolutely continue with the fixed cost reduction focus going forward. If you look at the performance. Overall, the market follow a similar narrative as in Q1, the center of light vehicle production growth remained in China. However, this quarter we saw first steps of recovery also in North America a further weakened. Against this mixed development we achieved a small worldwide 100 basis points outperformance for the quarter. If you look in more details closer let's start with Europe, here we came out ahead of the market with the conclusion of price negotiations played of course a key role. But we continue to be burdened by delayed customer vehicle launches as said, which then also directly affects our vehicle product mix. Nevertheless, we are confident that we have the right focus and are positioned to immediately benefit once the planned ramp-ups that are coming and gain actually speed. Next, North America we have the continued uncertain economic environment that's affecting consumer behavior and the vehicle mix our customers are offering. In addition to that we are working through a significant generation upgrade cycle where all the technology is being phased out while we ramp up the next-generation technology. So we are in this cycle for example in our radar and braking solutions businesses. Next, China. Here the same vertically integrated OEMs are really the engine of this growth as we have discussed in the last quarters. For Continental, we are however now progressing with our strategy to increase the portion of sales with our local Chinese customers and support our international customers with their ambitions in the Chinese market. Against this backdrop of market uncertainties and a very weak Europe, the management team and I, we have decided to slightly lower both top line and bottom line guidance corridors for automotive for this year. I will come back to that later. If you look at the order intake, let's start with our user experience. With the €2.1 billion single customer award fix has proven in -- display solutions are actually very strong in demand, so that's a big step very important for Uvix [ph]. Safety and motion has succeeded to win multiple new awards to the value of €2 billion for our next-generation braking system. A key portion of this is with one important Asian customer where we will support these solutions across their tool legal platforms. So you can see our state-of-the-art breaking solutions are actually in high demand across the globe. And then architecture networking where the team has secured the important platform expansion business for our body high-performance computer, and which is really a testament to our competence in the strategic field. We also achieved awards from our lighting solutions area. Let's go to Tires next. Although our sales as you can see on the left side were basically flat versus the comparative quarter, we achieved a significant improvement on the bottom line. Good Q2 result has enabled us to get back into the guidance corridor for H1. And this result was despite the challenging market environment. So let's look at the details. Top line we face business and FX effects, but could capitalize on the replacement tire market improvements particularly in Europe and from growing market in APAC. But markets globally remain weak except for high imports of Asian tires this ongoing trend combined with negative effects from OEM cost indexation continue to slightly burden our price/mix as we have indicated here on the chart. On the OEM cost indexation topic, we do foresee that this will normalize in the second half of the year. Let's look at the bottom line, we had a positive drop-through from the improving replacement markets. While we also worked hard to ensure the slightly negative price/mix effects were compensated by cost efficiency measures. And we benefited from the support of raw material costs, you can also see that. Maybe as additional transparency this slightly negative price/mix here was the result of a weaker regional and customer mix in particular with regard to Americas, but this should improve in the second half of the year. Looking forward to the second half, we think that our H1 adjusted EBIT performance should also be a good indicator of the overall H2 performance. Q1 was impacted by some negative one-offs, Q2 had some positive ones, so overall H1 is a good indication. Also in Tires, we anticipate that the recovery of the market in general will be weaker than previously thought. And on that basis, we have reduced our top line guidance down by €500 million. On the bottom line, we keep our original guidance corridor of 13% to 14%. Next then ContiTech. Looking to our sales and the negative organic growth that you see here, this was due to continued weak industrial markets. Some submarkets such as off-highway construction, printing industries remained a challenge. We work like in automotive very consequent on our internal sales measures to ensure that we improve the bottom line and this was successful. 60 basis points improvement on the adjusted EBIT side. There you can see that here for the comparative quarter came from positive results out of commercial excellence program and Niko indicated that and the closure also of price agreements. [indiscernible] measures which you saw in the scorecard just some minutes ago positive mix development also supported. So overall, you can see the focus of our organization is really to adapt quickly to a very challenging market environment and this was done successfully. Looking to the full year, we are taking the step to slightly lower the guidance corridor on the adjusted EBIT side from approximately 6.5% to 7.5% to now 6.5% to 7%. So we're narrowing the corridor. And this is mainly due to the weakness on our industry markets. The sales guidance I believe I touched, so this will stay at €6.6 billion to €7 billion, but we do anticipate here that we actually will likely land at the lower end of that corridor. Let's go back to the group level. Cash flow, in summary, we achieved solid results on the working capital side. Niko mentioned that and strictly managed our investing in line with our strategy. We are back into a positive cash flow position for the quarter. As a note and Niko also said that but I want to repeat that, we made a €100 million payment to enter the deal fine proceedings in June. So that was a cash out. Looking to the second half of this year, we are slightly adjusting down our free cash flow guidance due to the lower sales guidance that I mentioned. So the new corridor is around €600 million to €1 billion. Let's look at the markets we talked a lot already about the challenging behavior in the markets. We made revisions in line with our messages today. So starting on the left with the passenger cars and light trucks, legal markets we adjust to the further weakening of the European OE market. China continues to grow, but not at the same pace as previously thought, leading to a worldwide adjustment down to minus 3% to minus 1%. So that's worldwide. On the truck OE side, we reflect the worsening European and North American markets with the new corridors that you see particularly Europe, it's a bit dramatic actually this development. On the replacement tire side, we're just down by 100 basis points for North America passenger and light truck volumes and that's due to uncertainties that we see in the market. Of course, it's clear we will closely monitor the developments. Now, let me sum up, as I indicated before, the key adjustment that we had made to our guidance. Q1 was the necessary step in the right direction. But the market situation has led us to reduce the top line for Automotive and Tires with a direct follow-through effect then on the group level. For ContiTech, we maintain as I said. However, with the weak industrial market situation, we will likely land at the lower end of this quarter. On the adjusted EBIT side, the market weakness and delayed ramp-ups will continue to impact our product and customer mix in Automotive and as mentioned industry weakness for ContiTech and therefore we have adjusted the corridor accordingly. You will note here that we did not adjust on the group level. For Automotive, with this guidance update, we are reflecting the market uncertainties and weaknesses particularly in Europe. Finally, I also want to have a last statement here to our spin-off plan for our Automotive group sector that we announced two days ago. I would also like to reiterate what Niko has said. This is very exciting. We see positive momentum in the organization highly strategic, and important, next step to unlock the full potential of Continental and I really look forward to sharing next level of details with you as they become available. And you can be sure that I also personally stand fully behind this further evaluation and will -- and in parallel, as we said, we will prepare the implementation already. I want to thank you. Today was a bit more lengthy presentation. For us, it was important to go more into the detail in the presentation. But now, I think we can open up for questions and go to the Q&A. Thank you.
Operator: Thank you very much. [Operator Instructions] First question comes from Horst Schneider, Bank of America (NYSE:BAC). Over to you.
Horst Schneider: Yes. Good morning. Hope you can here me. It's Horst here from Bank of America. A couple of questions please. The first one quite simple. When you talk about positive raw material effect in tires in Q2. Could you maybe quantify that? And could you also maybe provide an outlook, how you expect the raw material prices or how going to impact you in the second half of this year. I think there's going to be a slight drag on this is -- especially versus Q2. Question number two, a little bit more complicated. It's on automotive. So I think that the midpoint of your new automotive guidance range implies still something like 6% margin. So maybe you can outline what are the levers basically towards the 6% margin and also if we should keep some downside risks in mind? If I maybe could add a third question then it's on the outperformance, because I perceive that this is probably the main problem still in your business in automotive that outperformance is a little bit lower than you would expect driven by U.S. and China. What are again the drivers that you can return back to the 3% to 5% outperformance track in the next few years? Thank you.
Niko Setzer: Thanks Horst. Starting with the first question I mean, the material effect itself, we don't highlight or quantify. However, you've seen we have made good progress on the tire side with the margins. And you see clearly that as well year-over-year, there has been a positive tailwind coming from the material side net pricing. That's why we moved as well year-over-year as well as quarter-over-quarter. Moving forward that is supposed to diminish over the course of the year. Suppose how this will come remains to be seen. The market right now for raw materials is relatively mixed. In the last months, we've seen already see natural rubber has come down a bit. On the other side it goes up. So this is a very mixed bag and we follow suit here. We expect our main effects on the tire side coming from how the markets play out. You have seen OE and truck we hope that truck is coming back. But clearly from a volume side standpoint we have seen a better Q2, which we hope then follow suit in the second half. On the Auto, 6% margin, or 6% or 7% what you mentioned in order to come in our guidance. Yes, that's right. Those are still the same levers, which we mentioned after the first quarter. Clearly, there is still pricing to come. We referred to the three quarters, which we have now that implies that another quarter still has to come. We target to close this in the third quarter, but for sure has mentioned in the second half. We still see operational improvements coming. Will have referred as right to the premium freight part where we still had first quarter certain hiccups as well with the launches, which we have which are implying then helping on the outperformance part which was still -- we've been 1% better than market in the second quarter. But still we had a drag with the launches, which have been volatile in terms of volumes and partly delayed, which were related then to additional ramp-up costs which we assume to get down in the second half and contributing then on the operations side. The other part was the fixed cost. I Mentioned one-third of the €150 million which we planned was basically in the second quarter. This is the other one to come. And the last bucket which gets us then to the higher margin is the R&D reimbursements which we typically see in the fourth quarter. And this is the typical lift which you always see in the fourth quarter. If you add this all together, you get to the guidance which we were giving.
Horst Schneider: Niko, just a quick follow-up, when we look at the Q2 margin that includes already all the labor cost inflation that you also expected for the full year. So when I do the forecast for Q3, Q4, I don't have to add additional labor costs versus Q2. Is that correct?
Niko Setzer: We don't expect additional inflation on the labor cost or increases for the second half versus the first half. That is correct.
Horst Schneider: Okay. Okay. Excellent. Thank you.
Operator: Thank you very much. Then we are moving on to next question. Next question comes from Tim Rokossa of Deutsche Bank AG (NYSE:DB). Please go ahead.
Tim Rokossa: Yeah. Thank you very much gentlemen. And good to talk to you again this week, I'm sure you guys are really busy this week. My questions refer primarily to understand the underlying business of the Automotive Division. Can you help us understand Olaf or maybe you Niko, I don't know how much of the improvement that we're seeing. And that is very good to see, is self-help really from the restructuring? And then also when we think about the progression in the second half, I'm sure there's a lot of R&D reimbursements that you're probably expecting in Q4. Will the Q3 margin be in line with Q2 and then Q4 be much stronger? Or how should we think about the cadence here? And is there any sort of quantification on the reimbursement side that you can help us with? And finally for my discussions over the last two days with investors, I think the overriding upside for the case from your stock from here is crystallizing the value of tires to the spin-off. Autos we need to see how the market looks like, how much progress you make on the restructuring and so on and forth. Niko is there anything on tires that you believe could have been done in the past that prevented these guys from being even stronger? Can you give us any examples there why that would be better on a standalone basis? Or will it just continue to be as good as it is? Thank you.
Olaf Schick: Maybe Niko I start with the first question, Tim, thank you for the question. We see in the second quarter first results of the cost efficiency measures. So over €150 million that we target for this year, there is one-third were realized already major part of that in the second quarter. The headcount reduction out of -- from the, 7,150 to 1,800 were already reduced by -- within the first half of the year. On the R&D side, the operative cost, were more efficient than before. However, in the R&D cost you see right now and also the restructuring costs that's included. That's why it looks higher, but the operative cost will get down over the year. And then also the reimbursements that Niko mentioned will come later in the year. So Q3 will be stronger than Q2 and Q4 will be the strongest quarter in this year.
Niko Setzer: Thank you, Olaf, fully agreed. Coming to tires, that is a difficult question, Tim. So first of all, let me say, -- and I let the Tire division, I read during the time where in automotive they have been some in the dependencies, let's put it that way. So there could not have been done in terms of expansion or M&A or something else. Nothing was holding back Tires in terms of capital spend. But being the more -- that is as well true for ContiTech being self-steered having a management team which is fully sealed on this, being having as well a fully focused part than on the NewCo is obviously as well for partners for the outside world how to go forward, how to be seen in the market, how to steer the strategy is an advantage of the pure play with the disadvantage of the synergies typically you have in a conglomerate or being a company commonly. So you cannot quantify, but from the strategic and the focus and being open then for partnering going forward, there are advantages of being more focused and being more clear being a rubber or a tire player.
Tim Rokossa: Thank you.
Olaf Schick: You can see Tim really this positive momentum and excitement on the Tires colleagues already two days after the announcement.
Tim Rokossa: I can imagine. Thank you guys.
Operator: Thank you very much also from my side. We're moving on to next question from Michael Aspinall of Jefferies. Please go ahead.
Michael Aspinall: Thanks. Hi Niko, Olaf and Max. Michael here from Jefferies. I'll just add one on the pricing in automotive. I think you mentioned it in the prepared remarks but can you elaborate just on how enduring the pricing agreements are into FY 2025? And I'm just trying to get a sense of if we're out of states where you don't need to get extraordinary pricing next year like we did again this year? That's the first question.
Nico Setzer: So, overall -- and we mentioned this we are targeting obviously sustainable pricing moving forward. And we progressed there. We did larger steps. There are still some pricing to be closed as I mentioned before and there are still elements which have to be negotiated or renegotiated for good and for bad going in 2025, but looking how we entered in 2024, 2025, we are definitely much better prepared. We have a higher level of clearly sustainable. And depending how the market closes, then as well on the cost side, this is an advantage to start. But there are still parts out, which we have to negotiate for the second half and there will be as well start out once we start to 2025.
Michael Aspinall: Okay. And then -- that’s great. Thanks. The major part of the €400 million cost savings in FY 2025, you've kind of guaranteed those. How much should we expect to see a net benefit in 2025? I'm just thinking if you delivered €50 million in the second quarter it sounds like €100 million in the second half. Is FY 2025 an incremental €250 million then? Or is it incremental €400 million?
Nico Setzer: No, the total will be €400 million. So, there's only incremental what's the difference between the €400 million and the €150 million. That's for sure. And how much really we are then able to generate for 2025, it's still too early so we will update on that. So. we have now the agreement with union agreements. We are following further suit. We see how far we can get. And then once we know clearly what is the carryover effect from 2024 how much further to expect, then we update on how much of the €400 million or then the difference between the €400 million and €500 million will be already met in 25%. Too early to tell. We target to have it obviously as early as we can. We gained good traction and we clearly see now -- and that's where the potential spin-off helps as well. So, we can align our organization clearly for an automotive pure play in all areas so we can review each function only take those on boards which is efficient and effective going forward.
Michael Aspinall: Okay, great. That's awesome. Just the last one for me. Are you still assessing growth options in tires, especially in Asia I think that was kind of the capital allocation priorities the growth near-term? Or should we think about that as just kind of on hold until you get through the spin-off process?
Nico Setzer: No, we still pursue all options which are there. So, we're continuously looking for that. It's the same as I told before, nothing holds us back on the tire side. And once there are opportunities there to catch each sector has the right to be successful. So, we clearly look up and monitoring and what we can do is not on hold no.
Michael Aspinall: All right. Thank you.
Operator: Thank you very much. The next question comes from Harry Martin of Bernstein. Over to you.
Harry Martin: Yes. Good morning everyone. The first question is on the automotive guidance and the revenue range. At the low end, the €19.5 billion effectively assumes the same quarterly sales run rate from Q1 and Q2 carries on. And that seems quite reasonable actually given vehicle production is worse in H2 year-on-year and regional mix and FX continues to be a drag. I find it harder to understand the upside case. So, could you explain what in the order book or any other visibility you have that would explain how it would be possible to still get that €20 billion, €21 billion revenue scenario which would imply that significant increase in content share outperformance? The second question is a follow-up on R&D reimbursement. So, we can see in the income statement the €454 million of other income, which was up €80 million year-on-year. Can you confirm that that primarily relates to R&D reimbursement? And if so, would you expect a similar full year increase? Or is it simply reflecting an earlier phasing of reimbursement this year versus last year? And then the final one is a strategic one. I wondered if you had any comments or thoughts about the Volkswagen Rivian tie-up on EE architecture. Just in the context we've had plenty about you about wanting to become a leader in software-defined vehicles. This is a high-volume OEM going with a new carmaker who does central compute and the underlying software in-house rather than using their one supplier base. Do you have any comments about that impact your opportunity set in areas like HPCs or central architectures? Thanks very much.
Olaf Schick: With the first one very quick. Of course, we're looking at -- we are expecting further ramp-ups in architectural networking user experience but also autonomous mobility. So a lot depends on the market development, but also on the ramp-up. So that's the reason why we have guided and adjusted the sales corridor.
Nikolai Setzer: Yes. Just to add to what Olaf said, you could see that UX was in the second quarter 18% organically down. This is supposed to get better going forward. Let's put it that way. There have been many larger ramp-ups there as well on certain platforms which have been postponed, which we see now moving upwards and which will list them later on and customer mix is as well something in the second part. And the pricing which we finished in the first quarter and Olaf already mentioned has helped in the second quarter for a certain outperformance and further pricing to come help obviously as well then on the top line to move further forward. With regard to R&D reimbursement, I mean look on our net R&D in the fourth quarter and you can see whether it was 2022 or 2023 you see that net R&D is substantially down versus year-to-date. So we typically had two percentage points even a three percentage point lower R&D net in order in the fourth quarter versus the year-to-date run rate. So this gives a certain orientation how it -- it depends obviously how much on the gross side we have a net but that's where you see that the leverage roughly which happens in the fourth quarter commonly. Looking for Rivian again, too early to judge for us. So we've seen what the move was coming. And we are in discussion with Volkswagen, with Carriot, and so on. We are relatively strongly involved there as well with our HPCs. We have been the ones that's where we with ICAS launched our first high-performance compute and we are strongly there. And we are more than happy to support as well as our platforms going forward which consequences this has for us and for Volkswagen and this JV we cannot judge right now. But we are fully in there. We try on the one hand to understand how we can contribute on the other hand than see what that means for us and for Volkswagen.
Harry Martin: Thanks very much.
Operator: Thank you. [Operator Instructions] Monica. It was I guess. Yes. Thank you, Monica Bosio from Intesa Sanpaolo (OTC:ISNPY).
Monica Bosio: Yes. Good morning and thank you all. And thanks for taking my question. I have three questions on the tire business. You guided for flat plus 3% replacement market in Europe. Should we see the second half moving toward the upper part of this range? And if yes, can we expect positive -- more positive volumes in the second half for Conti Tires? And my Second question is on the dealers' inventory situation. Can you give us a flavor on the stock dealers' inventory situation? And any color on the winter tire dealer stocks? Thank you very much.
Nikolai Setzer: Yes. As I mentioned the last months have been more encouraging for us in particular as well in Europe. So we assume a better volume development for the second half than we have seen it in the first half, in particular in Europe. However, that depends that the market continues on a way like we've seen it. So far for winter, it's obviously too early to judge. So we have already some orders, which look okay but that really depends then coming later. Dealer inventories here. We deem as okay-ish. So we don't -- we had last year a relatively good winter sellout and the market, so dealer inventory should be fine. Overall, we can say that Europe on the dealer inventory is fine. On the US and North American market, we still saw higher inflow from imports over time. This weighs on the dealer inventory parts. However, here the same we saw at least in the last month, a bit better situation for the market in particular, than there for us. And we assume that the second half year will provide as well more tailwind than we've seen it in the first half. I hope that answers all questions.
Monica Bosio: Yes, indeed. Thank you. Yes, indeed, thank you.
Niko Setzer: Okay. Perfect. You're welcome Monica.
Operator: Thank you very much also from my side. As there are no more questions in the queue, I'm handing the floor back over to the hosts.
Max Westmeyer: Yeah. Thank you very much, operator, and thank you very much for joining today's scheduled call and for participating. As always, the Continental IR team is available for you if you have any remaining questions. And with that, we'd like to conclude for today. Thank you, and goodbye.
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