Continental AG

Thank you, operator. Welcome, everyone, to our H1 2019 earnings presentation.

Today's call is hosted by our CFO, Wolfgang Schäfer. Also here in the room with me our colleagues from Investor Relations, Media Relations and Finance and Treasury.

If you have not done so already, the press release and presentation of today's call are available for you to download from our IR website. 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.

[Operator instructions] With this, I would now like to hand you over to Wolfgang. Please go ahead.

Thank you. Just as we expected the first half of this year was difficult, global vehicle production continued to remain weak, down 7% versus the prior year in H1.

Auto production in the Chinese market was down about 13% year-on-year in H1, while our key markets in Europe and North America were down 6% and 3%, respectively. Additionally, demand volatility between months was very high, most notably in China, due to the early implementation of new emission regulations in many parts of the country in different times.

You see those numbers on the chart left is Europe, in the middle is North America and the right block is China. Just before this first half, the high level of uncertainty around geopolitical developments and trade tensions continues to impact car demand in absolute terms, we are expecting a lower number of vehicles to be produced in H2 versus H1.

In Europe, Q3 is shaping up to be quite difficult based on current core of visibility and announced customer planned holiday schedules, but due to the very weak Q3 and Q4 in 2018, we expect Europe to be on a prior year level in H2 as you can derive out of this left block. In North America and China, differently, we expect further declines in H2 versus prior year of minus 2% and minus 6%.

These are the reasons why we have updated our light vehicle production forecast for the full year 2019 to expect a decline of around 5% versus 2018. Based on the current market signals and customer sentiment and material, recovery is not expected in the next year and in the next years.

Furthermore, mid- to long-term challenges related to more stringent regulatory requirements as well as the pace of technological change are not only continuing, but seems to be accelerating. We are working to adapt to this challenging environment, as shown on Slide 4.

We have already activated multiple performance and cost levers, the left block of the chart, Page 4, to improve our financial position. Foremost of the measures has been the adaptation of the labor force to the lower volumes, which after adjustment for acquisitions is about 1% below the level one year ago.

And if you look at the blue collar numbers, they are basically developing in line with the top line. Other measures include tighter control of fixed costs and variable costs, reduced CapEx spending and programs to improve margin.

Given the expectation for a lower level of vehicle production growth and high levels of investment needed to secure our future technological competitiveness, further adjustments are under preparation. In addition to this block, performance and cost management, there are two additional categories, footprint and portfolio.

The footprint block includes the closing and consolidation of facilities to improve capacity utilization as well as the relocation of activities from high-cost to best cost countries to improve competitiveness. Some capacity reductions have already been announced in tires and ContiTech, while we are preparing further footprint adjustment in the areas of production, R&D and administration.

The category portfolio involves the ongoing strategic review of our business and technology portfolio to make sure our resources are focused on areas for sustainable profitable growth. One conclusion from the review is that powertrain will step up its reorientation towards electrification by concentrating more closely on e-mobility.

While this change does not affect at all our very successful and financially attractive business in electronics and sensors used for the engine management, transmission management and so on, in improving the combustion engine, it does mean that we will see development of new business for hydraulic components such as injectors and pumps. Another decision was to stop further activities, investigating solid-state battery cell production.

We concluded that there is no attractive business case for us in this market. Depending on the results of the continuing strategic review to improve our competitiveness and decisions that may be taken, potential material impacts like impairments and restructuring costs may occur in the coming period.

We do not expect them to be immediately cash relevant. Consultation with stakeholders involved with potential measures in all 3 categories are underway, and we will update you on our progress in the coming weeks.

In the meantime, implementation of organizational realignment, such as the establishment of the new automotive technologies group sector as well as the potential IPO of Vitesco Technologies are progressing as planned. Slide 5 provides an overview of H1 2019 before I switch then to specifically covering the second quarter of 2019 on later slide.

Reported sales in the first half of the year came in at 22 billion, flat versus the same period of last year. Excluding exchange rate effects of 333 million and changes in the scope of consolidation, organic growth came out at minus 2.9%.

Adjusted EBIT declined year-on-year by 21%, impacted by lower volumes as well as increased depreciation expenses. The resulting adjusted EBIT margin was 8%.

The decrease in EBIT and higher level of special effects are the reasons for the decline in the net income of 32% versus last year's level. Free cash flow before acquisition and carve-out effects was minus €609 million versus plus €296 million in last year's comparable period.

Main drivers for the decrease were lower EBIT, lower payables and higher CapEx. However, the first-time adoption of IFRS 16 had a positive impact on depreciation of €158 million.

IFRS 16 also affected the gearing ratio and the ROCE numbers as always shown in the comments on this page. Other highlights in the first half of the year, order intake in the automotive group was about 16 billion in lifetime sales, equivalent to a book-to-bill ratio of 1.2x.

This is below the 20 billion achieved in H1 2018. Biggest factor behind the decline is a more conservative assumption about the market, both actually by us and by our customers.

On our end, order intake is now calculated using medium-term vehicle production assumptions that are roughly 10% below those numbers, which we have used last year. As a second factor, we see the one or other OE in various regions delaying its sourcing decisions due to market uncertainties.

And finally, our base is significantly smaller. We are at the moment, more selective in our order intake to ensure our profitability targets, especially after taking the more conservative market assumptions into account.

Despite this overall lower level of order intake, fast-growing areas like advanced driver assistance systems, e-mobility, connectivity continue to secure important business wins that will drive future outperformance versus the market. For ADAS, I would like to mention order intake of an ADAS domain control unit with lifetime sales of more than €500 million of the German premium [indiscernible] start of production is planned for 2022.

Last, but not least, to mention the acquisition of the anti-vibration system business of Cooper-Standard Automotive that was closed and has now been consolidated starting April 1. Slide 6 shows the split of the sales and adjusted EBIT numbers by quarter with some help from currencies and the consolidation of Kathrein Automotive and Cooper-Standard, reported sales came out in Q2 at €11.3 billion, 1% below last year's Q2.

However, the organic sales growth of minus 3.7% was mostly responsible for the year-on-year decline in the adjusted EBIT margin from 10.2% to 7.8%. Moving on to the next slide, Slide 7, the growth profile of Continental in Q2.

The upper left columns compared the decline of more than 9% for Continental's most relevant markets, Europe, North America and China as well as the decline of the world car production, minus 7% to the organic growth in our Automotive Group, which was compared to these numbers only minus 5%. ContiTech, the upper right numbers, was also burdened by lower light vehicle production impacting specifically the business areas, mobile fluid systems, power transmission and surface solutions.

On the other hand, positive macroeconomic conditions supported good organic growth in its industrial business like Air Spring Systems, Industrial Fluid Solutions and from ADAS. All in all, Continental's organic growth was minus 2%.

Moving on to the Tire division, the lower left. Our tire volumes for passenger vehicles and light trucks were at minus 3% compared to Q2 2018.

This was mainly driven by the European region where both the OE and the replacement tire markets experienced decline. The Q2 level showed -- the Q2 showed a slightly weaker sales performance of passenger tires than ContiTech at the market, mainly driven by us being strict on pricing.

If you take the H1 numbers, Q1 and Q2 together, our volumes were worldwide in line with the market volume development. In commercial vehicle tires, the lower right of this chart, our volumes fell by around 1% versus the prior year period.

In North America, our volume growth clearly outperformed the minus 10% growth of the replacement market, whereas in Europe, we roughly moved in line with the market. I continue with Slide 8.

Now moving to the Automotive Group and the key performance indicators of the individual divisions. Overall, left part, organic growth in Q2 was minus 4.9%, and the adjusted EBIT margin achieved 5.5%.

Just as in the first quarter, negative volumes, together with high R&D and D&A expenses were the main drivers for the margin decline. In the Chassis & Safety division, organic growth was minus 4.6%, a significant improvement versus the minus 8.4% in Q1.

The sequential improvement was supported by the ramp-up of our integrated and compact MK C1 brake system. The adjusted EBIT margin was 7%, declining year-on-year by 190 basis points due to lower volumes as well as higher R&D expenses, but sequentially better than the 6.3% in Q1.

In the Powertrain division, organic growth was minus 6.1%, and the adjusted EBIT margin was 3.7%. Organic growth was affected by weaker volumes demand, especially in Europe and North America, primarily for hydraulic products, including injectors and pumps.

In comparison, HEV sales continued to grow from ramp-ups and amounted to €55 million in the quarter. If HEV was excluded, Powertrain's adjusted EBIT margin would have been above 7% in Q2.

And the interior division, organic growth of minus 3.7% was negatively impacted by lower-than-anticipated demand in Europe and China, specifically in the instrumentation and driver HMI business. The adjusted EBIT margin was at 5.3%, declining year-on-year on a 340 basis points due to lower volumes and negative FX transaction effects and higher cost for electronic components.

The negative FX transaction effects were already by themselves responsible for basically 100 basis points. Slide 9 is showing the organic sales growth of the auto divisions by quarter.

As already mentioned, the Automotive Group grew faster than the global vehicle production in Q2 by about 200 basis points with all divisions achieving outperformance. Also, as mentioned, Chassis & Safety improved sequentially versus Q1 due to ramp up, while Powertrain experienced lower growth due to unfavorable regional and product mix effect.

Actually, our regional mix is reducing our outperformance of the world car production by about 1 percentage point as we are underrepresented in Japan and Korea, which is the only mention of the regions with positive growth rate and we are overrepresented in Europe with lower growth. For the remainder of the year, we expect further improvement in organic growth for Chassis & Safety as last year's negative effect from braking systems annualizes in the third quarter and MK C1 continues to ramp.

For Interior and Powertrain, why we expect organic growth to be better in H2 due to the easier comparable base for the underlying vehicle production, we do not expect an easing of the headwinds from regional and product mix. With this, I move to the Rubber Group, Slide 10, key performance indicators now in Q2.

Despite the persisting challenging market conditions, the Rubber Group delivered stable results in Q2 versus Q1. Regarding tire, the softness in the European OE and replacement markets negatively affected organic growth in the Tire divisions, which was minus 1.2% in Q2.

The adjusted EBIT margin achieved 14.7%, while price/mix and FX were margin accretive, come to that on the next slide, lower volume, raw material headwinds and increased period expenses related to wage inflation and ramp-up cost of our new plants in U.S. and Thailand were dilutive.

The net year-on-year margin decline was 310 basis points. As mentioned, ContiTech's organic growth was burdened by tepid vehicle production, but supported by its industrial business.

The negative organic growth was minus 2.3%, with the OE part of the business of ContiTech being in line with the world car production decline and the strong growth in the industry part of the business. The adjusted EBIT margin was almost stable versus Q2 last year, thanks to fixed cost management.

Let me cover the tire sales transition on Slide 11. Due to the over proportional importance of the European passenger vehicle tires in our total mix, the negative volume trend in the region is visible in the overall volume effect of minus 1.9%.

Likewise, negative pricing in Europe is also visible in the overall price mix of plus 0.6%. This impacts -- these impacts could not be fully compensated by the positive trends in APAC and Americas as well as in truck tires.

This resulted in an organic growth of already mentioned minus 1.2% in tire in Q2, a significant decline versus the plus 3.8% achieved in Q1. Mentioned already, if you take the H1 volumes, we are in line with market development.

To round out the bridge, FX and consolidation effects positively contributed €31 million and €72 million, respectively. Consolidation predominantly resulted from the acquisition of the Australian retail organization KTAS, an effect that will be annualizing starting in Q3.

Our net indebtedness bridge for the first half of the year is shown on the next page. Operating cash flow adjusted for the carve-out effects came in at €806 million, €662 million lower than the same period last year.

Though there was a slight improvement in Q1 -- in Q2 versus Q1 of almost €700 million, the year-on-year reduction in H1 was mainly caused by lower EBIT, higher working capital and the reversal of unexpectedly good payment behavior by our customers in Q4 last year. The first-time adoption of IFRS 16 had a positive impact on depreciation and amortization, resulting in a benefit to operating cash flow of €158 million.

Investment cash flow adjusted for acquisitions came in at minus €1.4 billion to €244 million lower than H1 last year due to higher CapEx for equipment needed to start the production of new orders in the Automotive Group and for the inauguration of plants in the Tire division in Thailand and the U.S. Resulting free cash flow before acquisitions and carve-out effects was minus €609 million for H1.

As implied by our revised outlook, we expect this figure to be in the range of approximately €1.2 billion to €1.4 billion for the full year. Slide 14 shows the historical development of net debt as covered already.

The increase in net indebtedness and the gearing ratio is mainly due to the first-time adoption of IFRS 16 since the 1st of January and the payment of dividends in Q2, followed by the outflows for CapEx, acquisitions and increased working capital. This leads to a summary of our 2019 overall market outlook, starting with the upper left box.

As said at the beginning, based on the assumptions of continued soft demand conditions in Europe, North America and China, we have revised our forecast for global light vehicle production to be down by around 5% this year. Therein, the most significant impact for us will be due to the now anticipated 3% year-on-year decline in our main European market, the region where Continental sells its vehicles for both Automotive and Rubber are the highest, We expect North America to be down 2% and Asia to be down 7%, including Asia, including China, where we expect, as already mentioned, for the year, a decline of minus 10%.

For the commercial vehicle production, upper right chart, we reduced our expectations for Europe and Asia by 2 percentage points, each compared to our last guidance, bringing our expectation for worldwide production down from 0 to minus 2%. In PLT replacement tires, we lowered our outlook from 2% to 1% growth.

This is mainly driven by an upward revision of the 2018 figures, not so much by a revision of our 2019 number expectations. This revision was specifically in Europe.

In commercial vehicle replacement tires, we continue to expect a stable worldwide market development in 2019. But as we continue to anticipate 2% growth in the Asian market, our exposure is lowest.

We have reduced our expectation for the North American and the European markets that are most relevant to Continental to minus 8% and flat, respectively. However, we anticipate that we will be able to outperform in both these markets on a full year basis.

And with the next slide, let me close today's presentation with including the revised 2019 outlook, which we already published on July 22, reduced our top line guidance from around €45 billion to €47 billion, as it was originally to now around €44 billion to €45 billion. Instead of the previous expectation around 8% to 9%, the adjusted EBITDA margin should be around 7% to 7.5%.

For the Automotive Group, we expect sales in a bandwidth of around €26 billion to €26.5 billion and an adjusted EBIT margin of around 4.2% to 4.8%, though the quarters and corresponding amounts of potential expenses related to warranty claims are not clarified at this time, they are included in the margin guidance. However, these expenses are not expected to result in material cash outflows this year.

For the Rubber Group, we have narrowed the bandwidth to the lower end of the previous range. Instead of around €18 billion to €19 billion, we now expect a top line around €18 billion or to €18.5 billion and instead of around 12% to 13%, the adjusted EBIT margin will be around 12% to 12.5%.

Our outlook for CapEx spending has been revised downward from around 8% to below 8%. This and an expected reduction in working capital will support free cash flow before acquisitions and carve-out effects as we reported, which we now expect to be around €1.2 billion to €1.4 billion for the full year.

All other elements of our guidance remain as originally communicated in January. With this, I would like to conclude today's presentation and open the line to your questions.

It's Ashlee from Redburn here. Firstly, if I can ask a question on the tire business, and really more stepping back and looking at the medium term here.

So looking and hoping for an eventual recovery in the replacement tire market and an easing of the ramp-up costs in the new factories, do you forecast that the 15% tire margins we've seen in the first half are indeed the trough and margins can recover from here? Or with ongoing price pressure from the Tier 2 OEMs, capacity expansion from peers, will tire margins struggle to stay at this 15% level in the medium term?

So that's my first question. And then my second question is on the dividend.

So it's cost you €950 million this year. And even if you account for the cost of M&A and then if we reach the top end of the current guidance for free cash flow, that will be a struggle to cover everything.

You made a progressive move in 2018. But it seems that if we stick to the current policy, the dividend will need to come down quite dramatically, maybe over a quarter.

So my question is, are we looking to remain with the 15% to 30% payout ratio? Or will we be looking to top that up with respect to 2019.

Thank you. First to tire recovery of the market.

If you have a look at the Slide 15, we gave our expectation for the replacement tire markets. I think the most important part of it, and I think this is your question.

We do expect for the full year, Europe to be flat in that market. So you might make this as a slight interpretation of a positive development after a slightly weaker number in Q2.

And North America, with continued growth in Asia with plus 3%. I wouldn't really call this a recovery of a market.

It's more a slightly positive sidewise development, I would say. Ramp-up costs will still be there this year, and our only basically not growing base I covered with top line sales, starting at the end of the year and only notably in the beginning of next year.

Margin recovery, the guidance is including margin for the tire business, which is in the range of 14.5% to 15%. So somewhat on the level of Q2.

I don't expect the margin to go significantly above 15% in the second half of the year. Second block of questions or your question, dividend.

We did not yet decide at Continental on any dividend payment for 2019, and it is too early to have any comment on that.

When I consider your Automotive EBIT margin guidance and adjusted for the second half '19 warranty provision, you seem to be expecting a full year margin of around -- between 4.8% and 5.4% at the top end of that guide that implies, I think, an auto margin of 5.3% in the second half of '19, which is slightly lower than what you've just delivered in the first half the year. That seems to suggest no benefits in Automotive of any cost-cutting initiatives or any operational leverage.

Can you just help clarify this, please? That would be my second question now as well.

Have inventories picked up again in Q2? Can you just talk a little bit about the current inventory position of the group, please?

How comfortable are you with it, particularly in light of the subdued production outlook you're guiding for 2020?

Well, the automotive guidance is including that we are still seeing in the second half of the year, sales development, which is mostly affected by this further decline in the world car production. By that, I mean, there is, I think, no positive leverage to be expected.

As we are still struggling to just follow with our cost adjustments to the reduced top line expectations. And we are, as I mentioned, we are adjusting personnel.

We are adjusting fixed costs. These effects take some time to be shown, But had we not done this, I mean, the overall margin development would look significantly different to what I mentioned.

The guidance includes the headwind in FX for Interior, which I mentioned is our expectation will continue, which is about 100 basis points on the margin development there, and we see continued already mentioned in the first quarter call, we see continued this unfavorable pricing situation on the electronic components, which we, as well as mostly affecting Interior. Inventory, but I would say that's different.

If you look at our overall working capital, working capital after the step-up, which we saw in Q1 versus Q4 stabilized on the €6.2 billion. And we expect now that, as we have seen before that we -- after we stop the step up, we are now working on a reduction.

I think we will see this starting Q3 and then Q4 and by that, I think this should be as supportive to our cash flow guidance as we are expecting.

Okay. Can I just ask a quick follow-up on the margin question and thinking beyond 2019.

You talked in your opening remarks about material impairments, I guess, in light of the restructuring. Is that relating to the realizable value of certain operational parts of your business that you're looking to divest or to the value of facilities that you might close?

It's a mixture of both effects. And I mean taking that this is a company which has done over the last 20 years or even more, more than 100 M&A deals.

There is significant goodwill of [indiscernible] in the '90s acquisitions still in our books which has more than paid off over time. And obviously, everything has to be rechecked and the goodwill has to be rechecked when there is different volume assumptions on the one hand side.

So this is one part of your question. And the other part of your question, obviously, is as well, is there an impact of potential readjustment of the company and yes, this could not be excluded either.

The first one is coming back to your opening remarks, you mentioned, obviously, H2 is, again, well below H1 and you don't really see improvement into 2020 and even beyond. Can you just outline, especially going into 2020 and beyond, do you mean that the market would be flatlining or that you continue to see declines overall?

And maybe can you give us a bit of color, you mentioned, obviously, your assumptions for the orders you've booked this year in H1 are lower than what you would have used before. What sort of overall global market growth assumptions do you actually use for that?

And on the second point is you mentioned, obviously, cost savings that you've already undertaken and with more to come. Can you give us a bit of a time line?

Are we expecting this in the coming weeks, more updates? And what level of cost cuts can you actually do versus what you have already done?

I mean, if you take how much you can do? How much of that have you executed upon?

And the comments on the market is expecting not at the moment further declines after 2019, but more a sideways development for 2020 and the years to follow. Without completely quantifying how many years we are talking about, but we don't, see necessary impact is coming from those markets in '20 or later to really give them a further growth tailwind.

The market growth assumptions for the order book, which we are reporting now are exactly those. We don't expect the market to grow after this decline in '19, further for 2020 following.

By there is -- I mean, though we are already strongly working on cutting costs, I mean, there is more -- significantly more potential to come. And with these market assumptions that I was mentioning, we are working on those potential additional measures.

We have these 3 categories as well internally, our guidance, this is footprint. We have announced two or three footprint adjustments already in South Africa, one in Germany and other areas, we are working potentially on further measures to adjust our capacities and adjust our footprint.

Portfolio measures, I mentioned some in Powertrain, further review at the moment ongoing. There can be more -- probably will be more and performance and cost management is the -- using those levers, which we have in the, I would say, classic cost reduction measures where we are as well strongly still working on and are not finished with what we think is possible to adjust our cost basis.

Perfect. And maybe just a follow-up.

If you say flat market development. Is it still fair to say that you need sort of a 4% organic growth, including your outperformance to keep margins flat even from this level in '19 going into 2020?

Or will you have readjusted the cost base that, that is no longer required.

No, I mean this is a different world than we have been in the last many years, and our target and our work is to make sure that our cost position is now in a different type of logic to the top line, so that even in markets with lower growth, we can achieve sufficient margins.

I guess, my question would remain around the second half outlook? Because it sounds like a lot of the benefit is coming from the idea of Europe's "easy comp?"

And then, obviously, some of the outlook being a little better. We're hearing about a lot of OEMs destocking, and there's a lot of fear around next year regarding CO2 regs.

I think you guys have been caught a little bit offguard for most of the year. Why do we think the second half is flat, when there's some indication that basically second half production could be down another 2%, 3%?

Like how would Conti deal with sort of another downgrade of production in Q3 and Q4?

Well, that's basically related to the strong downturn, which we had last year, starting already in July and then continuing strongly in the following months. If you look at the last year's numbers versus 2018 -- 2017, there was a strong decline in Europe on the PLT customer.

And actually, I mean, this forecast is based on what we see as call-offs and what we hear from our customers, and it is our best assumption using all these information, which we got.

Okay, great. And then just a quick second question around pricing dynamics in the industry.

I think in your powertrain release, you talked about EGR and some tough pricing in fuel systems, mostly related to diesel. But we started to hear, whether it's direct or indirect pricing across the industry, R&D reimbursement complexity payments.

The OEMs are clearly in a very a tough point. Are we -- should we expect or is Conti seeing sort of a different pricing regime than they've seen in the past, meaning, could we see some of the weaker players shaken out by what is tougher pricing than normal, which I think the industry is quite used to dealing with?

Well, it's -- I wouldn't say that it's basically an answer for all OEs. But yes, we experienced and see as well that some OEs are bid on R&D reimbursements or bid on price downs for the following year are coming with more significant price requests than they have done this in the past.

And like always, it is our job for us to -- I mean, adjust our cost base to that. If we think this is something which we have to adopt to or on the other hand side, to make sure that we can differentiate with our product so to make sure that we have good arguments why Conti is still value accretive for the customer.

I'm Gautam Narayan, RBC Capital Markets. I actually have a follow-up to Raghav's question on automotive margin guidance for 2019.

I'm just trying to understand a little better versus the July 22 press release. So the new guidance versus the maybe old one before that release.

It seems like a pretty significant drop in EBIT, you have 34% drop relative to only a 4.5% reduction in sales. I understand the tremendous impact global production cut on guidance has.

But how much of it is also the -- what you guys referenced in the press release on July 22, the unexpected changes in customer demand. Is that -- is that outside or beyond the global production cut you guys made, just trying to understand how much of that -- of your guidance revision on EBIT has to do with your reduction in global auto production?

And my second question is just China. Any commentary you may have.

You're calling for down 10%, which is below, I guess, where IHS, I think, is only down 7%. Just seeing if you could comment on any color there why your -- maybe perhaps more bearish there on 2019?

The other margin guidance includes that we see more volatility in the calls of our customers. And this is actually relating very much as well to China, but as well partly to Europe where we see, and again, included in our top line, where the announcement of potential vacation production -- vacation are shorter, more short-term than they have been in the past.

And this is included in the guidance. I don't want to put a number behind it, included in the guidance is as well the effect of the reduced volume assumptions from flat production worldwide to minus 5%, and this was mostly affecting the second half of the year.

Obviously, as the first half, we were already predicting that this was a requirement. The third effect is warranty topics which we don't want to quantify at the moment, but which I as well included in those plans.

So those are the three elements, I think, which I mentioned and the major drivers for this margin prediction. And China, while, again, there is no specific reason for exactly 10%, but we don't see any indications at the moment that the Chinese government is moving towards a specific support program for the automotive industry.

They have said on the 1 or other occasion that potentially some consolidation of this more than 100, I think, carmakers still in China is something which is required to get more efficiency in their industry as well, not an indication that they specifically want to support the industry. We saw somewhat of pre-buy effect in June in China as in bigger, in some bigger provinces, the new emission regulations started in July, which as well is not helping for the second half of the year.

And all this taken together is our actual guidance composition.

There would be two left. The first one is on your cost improvement program that you're planning?

It sounds like you've started conversations with the labor unions. Are you happy to give us a few wins, what you see in terms of your cost savings potential?

And if not, this actually sounds like it might still take a while. When do you expect to have some tangible results for us to be communicated?

And then finally, just when we think about powertrain, I think we don't really have to ask you what it costs you to move now more towards electrification, what exactly does this mean for the returns, R&D spending in that division, specifically, given the already existing HEV losses and perhaps the target share of sales, that would be nice.

To start with the latter one, you can actually take this announcement in 2 directions. One would be the one which you are taking, which is not our intention to do at all.

And so we don't want to replace profitable business with at the moment, not profitable business, HEV, clearly not. The message is we have at the moment, an existing powertrain business and this powertrain business is composed of very attractive electronics and electric parts, order management, the transmission management and sensors in there and significantly less attractive business, which is on the wet side of the motor.

So injection pump business, injectors and the pumps and what we were saying is that on this part of the portfolio, we want to be less active. And by that strengthening the very successful part of electronics and electric and this as well using as a base, as a strong base, to get our footprint and our fair share in the HEV business.

So it should overall be margin accretive because we shift the business in the existing part from less attractive for us from our point of view, less attractive margin business to be more attractive, significantly more attractive margin business in electronics and electric. The -- I don't want to put a number on the cost improvement measures and portfolio reviews, but yes, we will communicate the progress which we are making there.

And perhaps sneak in one more. And then just one for me, the 0.6% price mix within tires.

Are you willing to give us how much of that was price?

I mean, the price, the overall price was negative, was negative in Europe, was positive in the U.S. and China.

If we could, please stay on the tires. I appreciate that you're saying once the ramp-up cost fade out, you'd probably rather under earning currently at that margin level.

I just wanted to understand the shortfall year-over-year a little bit more again, just between volume, price mix and FX, there's basically nothing to drop through negatively. So the 19 million earnings shortfall, if you could just elaborate on that again a little bit.

If you could maybe give a negative raw material impact that you had in Q2. But really only just to understand the incremental ramp-up costs, I guess, because I thought there was quite a bit in last year already.

So is this fully attributable to incremental ramp-up costs, the earnings shortfall? That's my first question.

And then the second also on tires, in that changed environment, are you still keeping up your ambition to go to above 200 million units capacity by 2025? As was your -- I think it's called Vision 2025 plan?

Or is there a similar haircut to be done as you're sort of doing to your order book assumptions?

I think 2 numbers, if I understood that correctly, which would answer your question. Raw material headwinds was €20 million in Q2 and talking about Q2 now, and the increased period expenses related to wage inflation and ramp-up costs of the new plants in U.S.

and Thailand, all this together was about €50 million. And the -- obviously, we are adjusting our capacity planning to these lower volume assumptions, which we have seen at the moment in the specifically European tire market.

And I think I mentioned already in the last call, at least in some one-on-ones that we would have stopped our buildup of capacity in the U.S. and Thailand, specifically in Thailand, if this would make sense economically.

Capacity at the moment is not required, additional capacity for next year. But our calculation sets out that should we have stopped those buildup of hard ready plants would not have made sense.

So therefore, we continue to build up these plants. But this is the large capacity addition, which at the moment, we think we need for some time to come, and we only will continue when we see that our capacity utilization is then back to the levels which we want to have, which is around 95%.

But it's fair to assume that you can't really go to a normal margin level until this capacity is fully utilized, right? So you're basically wearing that underutilization for another year or two, even beyond 2019.

Is that fair?

That's fair. Yes.

A couple of questions, please. Begin on auto, can you elaborate a little bit the proportion of temporary workers you have maybe for the division or by region.

That'll be the first one. The second one, within Interior, you mentioned lower demand for instrumentation and driver HMI and is this the general industry trend that we have now?

Is this a bit more specific to Conti -- just provide a little bit of color there? And the third one, tire pricing, Europe on passenger car, is there anything irrational going on in the market at this stage?

Or is this just some repositioning for the market?

While we get temporary workers, we still have, on a worldwide basis, we started, I think, 2018 or so with about 10% in many markets. The number is significantly down now in many markets, it's -- there is not very much left for this in between 3% and 4%, which we still have in some areas.

But I mean further adjustments will be more difficult. And this is what we are working on, as I said before.

And because it's easy to do things and are no longer there -- are more limited than they have been in the past. On Interior, one reason, specifically in ID, what we are seeing is that analog clusters in the cars are faster than expected and then announced from the customers a switch to digital clusters.

And specifically, at the lower end, we see this, and this is for us at this lower end part where it is done, I think, as well from the OE side to have some cost advantages in a less attractive market. This is not necessarily margin accretive.

And is tire pricing in the EU irrational? I wouldn't put it on that degree.

We see the pricing pressure more in the premium side, even when we see it on the lower side. And we notice that some new players are getting into the market and doing some -- or not so many, but doing some pricing, which puts pressure on the prices, it's not irrational.

I think this is too much, but we see these now I think in the second or third quarter, even in a row. We try to counterbalance it and we even took lower volume as a result in Q2 in our books, and not irrational in a way that we see this to continue, however.

I have two, almost all the questions have been asked. Can you talk about what you view as the new two, three years of margins for auto and for tires.

In this new context you described, which is basically flat at the lower level or more or less flat. And second question, apologies, because it's a bit direct.

In the past, it continue to be a bit more brittle with its adjustments in terms of costs, if I understood correctly what you said earlier. You said that the headcount adjusted for M&A is down 1% year-on-year, while you're setting a context, which is clearly forecasting a much heavier decline in headcount than not.

Could you explain why we haven't seen here this announcement we were going to have in the coming weeks.

I can't understand the second question. I start the first question.

I don't want to discuss about the two to three year margin outlook for automotive at the moment. Obviously, we have targets there.

Obviously, our cost program is designed to make sure that in a flat environment market environment, we can achieve that. Too early to talk about, and I just have to ask around, if somebody understand this second question.

No, unfortunately, the line was not very good. Could you repeat it, please?

Sure. Could you correct me if I'm wrong.

I think I understood you said that your headcount adjusted for M&A is down 1%. Given the context of down sharply in the second half last year, sharply in the first half of this year, the new outlook, I would have expected a reaction to be more brittle as has been the case in the past.

So is it just a matter of weeks? Or has anything changed at Conti?

If we understood it correctly here, the question is how much of the headcount development is related to M&A and how much of the headcount is really following -- showing that following the top line development. And there's about 4,500 headcount, which at the moment versus same period of last year has to be deducted due to M&A activities.

I hope this was your question.

Okay. Thank you, everyone, and thank you for participating in today's call.

In case you have further questions, please feel free to reach out to the Investor Relations team. Otherwise, I wish everybody good day, and bye, bye.