Continental AG

Thank you, operator. Welcome everyone to our nine-month 2019 earnings presentation.

Today's call is hosted by our CFO, Wolfgang Schäfer. Also here in the room with us 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 download on our Investor Relations 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.

To provide a chance for all to ask questions, I would ask you to limit yourself to two questions each. This will help us conclude our call on time.

With this, I would now like to hand you over to Wolfgang Schäfer.

Thank you, Bernard. Let me begin with the presentation on slide three showing the challenges that Continental faces today.

First, the overall economic situation, more specifically, the ongoing recession in the automotive industry. It is our current planning, assumption that global light vehicle production will not materially improve during the upcoming five-year period as we have discussed already before.

Indeed based on current signals and customer sentiment, we expect the light vehicle production in 2020 to be at best at the same level as in 2019, if not decline again for the third consecutive year. We are also seeing increasing headwinds in tire markets, specifically in Europe's passenger car OE and replacement business, as well as any commercial vehicle OE business.

The second challenge is technological change, which presents tremendous opportunities for Continental, but also for new competitors. The third influencing factor is the role of Digitalization and Industry 4.0 on our company's transformation and competitiveness, then come regulatory changes that affect the viability of established businesses both at Continental and at our customers, and last but not least, certain products and locations in our portfolio confronted with issues, of course, competitiveness.

Our responses to these factors are as follows; first, we are consequently undergoing a significant structural program aimed at increasing efficiency and productivity through adjustments to the organization and portfolio. I will cover this on the next slide.

Second, we are placing a greater focus on key growth areas in our business and technology portfolio to make sure our resources are concentrated on the most rewarding areas for sustainable, profitable growth. And lastly, we have taken the decision to fully spin-off the powertrain business with good technology and no longer pursue the preparation of a potentially partial IPO.

Subject to the approval of the Supervisory Board, the spin-off of Vitesco we submitted for decision by the Annual Shareholders Meeting on April 30 next year and could then take effect in 2020. I move now to slide four; the page covers the areas and key details of our structural program, starting with the category performance and cost management.

As of the end of September, the total labor force excluding acquisitions has been reduced by about 2% below the year ago level while variable headcount has been reduced by about 5%. Likewise, we have adopted this year's level of capital expenditures and now expected to be at about last year's level in absolute terms.

Efforts to optimize working capital are also underway. We continue to prepare and evaluate further cost and performance improvements.

Second area footprint it concerns to closing consolidation and relocation of facilities to improve competitiveness clauses in Chassis & Safety tires and ContiTech are already in implementation while stakeholder consultation on closures in Powertrain are underway. We are also in discussions with stakeholders on relocating R&D and production activities for the interior division.

Further footprint adjustments in the areas of production, R&D, and administration are also in preparation. We are also making progress on the third area portfolio.

You already know of our decision to stop further investigations into solid states that resale production. In addition, we recently announced the sale of our 50% stake in the SAS joint venture to our previous partner for Asia.

This joint venture was previously accounted for at equity. With our strategic review still ongoing, we cannot rule out further portfolio changes from either the cessation of certain activities or the disinvestment of parts of businesses and sub-segments to external parties.

We expect the structural program to deliver gross cost reductions of around €500 million starting 2023 onwards. These savings will be attributable to around 15,000 affected jobs by the end of 2023 with 20,000 affected by 2029.

In total, the program to cost around €1.1 billion, expenses of €97 million already booked so far this year. Additional restructuring provisions are expected to be recognized in the fourth quarter of 2019, though the amounts are not clarified at this time, most of the cash outflows for restructuring are expected to occur between 2020 and 2022.

We are working on additional profit and performance improvement measures to further improve the company's performance in a lower volume environment. Now, I comment on slide five.

In conjunction with the structural program, we are further progressing in key growth areas for long-term value creation in the powertrain division. Vitesco Technologies started volume production of its EMR3, integrated high-voltage axle drive with best-in-class power density, size, and weight, the EMR3 serves as the drivetrain for battery electric vehicles, including Peugeot's e-208 and Opel's Corsa-e as well as Hyundai's Encino and Lafesta for the Chinese market.

In the interior division, the ICAS1 or in-car application server will soon enter mass production Volkswagen's ID range of EVs for the MEB platform. It is building on Continental and Elektrobit's expertise in gateways, control units and software.

It is an integrated solution and it's a central element of the advanced service-oriented electronics architecture for these vehicles and is one of only two or three total service required in ID vehicles. Not only can ICAS support over-the-air updates, installations of applications, it also manage its key functions as battery charging management and so on, in addition to Volkswagen MEB, we have also been selected to deliver similar solutions for other OEs.

Lastly, in the tires division, we have recently opened the two greenfield plants in the U.S. and Thailand, both plants are currently starting initial production activities and are expecting to complete their ramp-ups over the next four years.

Now, let me proceed to the most important financial KPIs for the first nine months of this year, which are shown on slide six. Reported sales came in at €33.4 billion, slightly above the same period over last year.

If I exclude exchange rate effects of €504 million and changes in the scope of consolidation, the organic growth was minus 2.1%. Adjusted EBIT declined year-on-year by 21% due to lower volumes and increased depreciation and amortization expenses.

The resulting adjusted EBIT margin was 7.2%. As announced, the revision of market expectation and changes in various assumptions resulted in non-cash impairment of about €2.5 billion, which is visible in the figure for special effects.

This was the predominant factor behind the net income for the period of negative €0.9 billion as well as the decline in the trading ROCE to 2.5%. Free cash flow before acquisitions and carve out effect came in at minus €263 million compared to plus €370 million in the year-to-year.

On a year-to-date perspective, however, the figure was better than a Q3 perspective, reaching €343 million in Q3 2019 versus €74 million in Q3 2018. The main drivers of the decrease in the nine-month period were lower EBIT and higher working capital, while the first-time adoption of IFRS 16 had a positive impact on depreciation of €256 million.

Both IFRS 16 and the impairment affected the gearing and the equity ratios. Order intake in the automotive group was about €22 billion in lifetime sales in the nine months reporting period, which is equivalent to a book-to-bill ratio of 1.1 times and below the almost €30 billion achieved in the same period last year.

Biggest factor behind the decline or -- versus previous year, our previously mentioned, more conservative vehicle production assumptions for the years to come. Additional factories include delays in sourcing decisions by various OEs and higher selectivity on our part to ensure our profitability targets can be met.

In terms of financing, in September, we successfully placed two bonds with a total volume of €1.1 billion, a near zero rates. In addition, we hedged two private placements in October with a total volume of €300 million, also at very attractive rates.

With these transactions, we have effectively refinanced the €1.35 billion worth of bonds that come due next year. And finally, the acquisition of thermoplastic specialist Merlett was closed on the 4th of November.

Now slide seven, the quarterly perspective. Reported sales in Q3 totaled €11.1 billion, 2.9% above the year-ago quarter on a reported basis and minus 0.3% on an organic basis.

The organic sales decline as well as increased depreciation and amortization and provisions for warranty claims were the main reasons for the year-on-year decline in the adjusted EBIT margin from 7.1% to 5.6%. Now, more details to the automotive group on slide eight.

Our organic growth in automotive was stable versus Q3 2018 despite a 3% decline in global light vehicle production, making the fifth consecutive quarter of market decline. In Continental's most relevant markets in Europe, North America, and China, the drop was slightly lower at 2%, mainly due to an easier comparable base.

ContiTech year-on-year growth, the upper right chart, came in at minus 2%, with just over half of its revenues coming from automotive OEs, the continued decline in light vehicle production weighed on this figure. This was balanced by positive growth in industrial and aftermarket albeit at a slower pace than in previous quarters as this customer group becomes more cautious with their business expectations.

Moving on to our tire division, the lower left. Our tire higher volumes for passenger vehicles and light trucks were at minus 1% compared to Q3 2018.

This was mainly due to lower volume demand from our e-customers in Europe. Our most important replacement markets of Europe and North America, our volumes were in line with these stable markets.

Commercial vehicle tires, our volumes were flat versus the prior year period. In North America, our volume growth was well ahead of the minus 12% growth of the replacement market.

Likewise, our volume growth in European CV replacement was also ahead of the market. Now, moving on with the automotive group, on the next slide, slide nine.

As mentioned, organic growth in Q3 was stable versus the same period last year, while the adjusted EBIT margin was 1.6%. The year-on-year margin decline of 240 basis points resulted from higher R&D and G&A expenses as well as provisions for warranty claims of €187 million.

In the division Chassis & Safety, organic growth was nearly flat year-on-year, a significant improvement versus the declines, which we saw in the previous four quarters. Please recall and this was mentioned in some of the calls before, that the growth headwind from our braking business began in Q3 last year and that is now annualized.

In addition to these easier comparable base, the continued ramp-up of our MK C1 brake system, integrated brake system as well as higher volumes in advanced driver assistance systems, also positively contributed to growth. These factors supported 150 basis points improvement in the adjusted EBIT margin, which came in at 6.5%.

In the powertrain division, organic growth was positive in the third quarter at plus 0.4%. Organic growth was supported by sequential improvements in demand in Europe.

HEV sales also grew sequentially and amounted to €64 million. However, provisions for warranty claims of €165 million significantly impacted powertrain's profitability in the period, resulting in an adjusted EBIT margin of minus 6.5%.

If HEV were excluded, powertrain's adjusted EBIT margin would have been about minus 3%. Moving to interior, interior division organic growth of plus 0.7% was driven by higher volumes for connectivity products.

The adjusted EBIT margin was 3.3%, declining year-on-year by 560 basis points due to negative FX transaction effect. Warranty provisions increased R&D and D&A, while at the same time, mix continues to be unfavorable, specifically the switch from analog to digital clusters.

Now, I move to slide 10, I'll discuss the automotive group outgrew global light vehicle production by about 300 basis points in Q3, with all divisions outperforming at roughly this rate. Now moving to the rubber group, slide 11.

As mentioned, softness in the European OE negatively affected organic growth in the tire division, which was plus 0.6% in the third quarter. The adjusted EBIT margin was 14.5%.

Year-on-year margin decline of 140 basis points resulted from lower volumes and increased period expenses related to wage inflation and ramp-up cost of our new plants in the U.S. and in Thailand.

Despite an organic growth of minus 2.4% in the third quarter, ContiTech was able to lift its margin by 190 basis points to 7.8%. Part of the improvement in profitability is due to warranty provisions that were recorded in the year-ago period.

However, cost discipline and the announced margin enhancement program also made material contributions to this positive outcome. The tire sales transition is shown on the next page, slide 12.

Tire volumes in Q3 came in at minus 0.5% due to continued soft demand from European OEs. On the other hand, we saw stable replacement volumes in EMEA and the Americas.

In terms of price/mix, this came in at plus 1.1%, supported by continued mix improvements and the stable price environment in APAC and the Americas. However, pricing in European OE and European replacement market continues to be difficult.

This resulted in an organic growth of plus 0.6% in tires in the third quarter. And to complete the bridge, FX and consolidation effects positively contributed €49 million and €72 million, respectively.

And please note that the consolidation benefits should be smaller for the remainder of the year as the acquisition of the Australian Retail organization, KTAS, closed in Q4 last year. Slide 13 shows the net indebtedness bridge.

Most of the items in which are relatively unchanged versus the last update in August. The only two movements in debt of notes during Q3 are the increase from other cash flow due to the negative EBIT and the decrease from depreciation and amortization related to the impairments.

The result is a net debt at the end of September of €5.5 billion, equivalent to a gearing ratio of 34%. I move now to the breakdown of the free cash flow on slide 14.

Operating cash flow adjusted for carve-out effects came in at €1.9 billion, €467 million lower than in the first nine months of last year. Excluding the effect of pension funding last year, the year-on-year decline would have been €652 million.

The year-on-year reduction was mainly caused by lower profitability and higher working capital. Investment cash flow adjusted for acquisitions came in at minus €2.2 billion, €170 million higher than the year-ago period due to higher CapEx.

Mentioned already, we anticipate that CapEx for full year 2019 to be around the same absolute level as in 2018. The resulting free cash flow before acquisitions and carve-out effect was minus €266 million.

As implied by our outlook, we expect this figure to be in the range of approximately €1.2 billion to €1.4 billion for the full year. And actually, if you take the numbers, it's required slightly lesser about the same free cash flow generation as in Q4 of the last year.

Slide 15 shows the historical development of net debt. I already covered these details on previous pages.

So, I move to slide 16. I would like to conclude today's presentation with the outlook section, starting with vehicle production in our key regions.

Given recent developments, we have changed our expectation for global vehicle production from minus 5% to minus 6%. The main drivers for the revision are the now concluded strike at GM in North America and customer indications of lower production plants in Europe in the fourth quarter.

We continue to expect China to be down about 10% versus 2018 in Q4. And we summarize these numbers in our overall market outlook for 2019 on slide 17.

In addition to this expected decline in vehicle production by 6%, we have also lowered our expectation for global commercial vehicle production by five percentage points to minus 7% versus last year, as we are experiencing sizable reductions in the production forecast of commercial vehicle customers in Europe and North America. As for tires, we have left our expectation for the PLT replacement tire market, broadly unchanged for CV replacement tires; we have slightly reduced our market forecast to negative 1% versus 2018 due to lower global macroeconomic expectations.

And let me close today's presentation with the outlook for Continental on slide 18. As communicated, the announced impairments and expenses for restructuring provisions will not have an effect on the main financial indicators that are used in our 2019 outlook.

We also do not expect that they will materially influence the setting of the fiscal 2019 dividend. However, these factors will increase the expected negative figure for special effect to at least €2.8 billion, including carve-out effect, also excluding the effect from impairments, the expected tax rate including carve-out effects remains at around 27%.

All other elements of the outlook remain unchanged. Probably to summarize.

Our operational performance in Q3 came in as expected in this challenging environment. Current signals from our key OE tire and industrial markets indicate that conditions will likely become more demanding in the near term, while initiatives to lift profitability are already underway.

2020 will definitely be a transition year before the expected benefits materialize in the following years. We are confident that our efforts to tackle both headwinds and long-term opportunities will result in improved performance and drive the growth going forward.

With this, I would like to conclude today's presentation and I open the line for your questions.

Thank you very much for taking your time. Just the first one, really, on your cost-cutting outlook.

I understand, obviously, the plan that sort of pays off from 2021 onwards in terms of the structural costs you're taking out. What are the measures you're taking really more near-term?

Because you said 2020 will be a transition year. How are you trying to ensure that you can at least keep the margins that you currently have in an environment where you obviously are seeing possibly even a step down in terms of global production growth again?

Second question is just actually coming back to your dividends. You mentioned all these factors don't impact your dividends.

How should we think about it? Do you think about the dividend as an absolute level you're paying out?

Because before, I remember you always targeted at around 30% level. Will you be willing to go up all the way to 50% if it requires you in order to make a statement and keep the dividends possibly flat?

And then the third question was sort of a positive one. On the ID 3 product that you mentioned, obviously, this new product, that is the central computer platform.

Will that be applicable to all MEB cars? And as we see, obviously, the MEB platform being rolled out more widely, will you be in all of those?

Or is it just on the ID 3 in particular?

Thank you for the questions. The first question towards cost 2021 following and what do you do with 2020, we are running, but these are not that big -- not big projects which we are mentioning here.

But we are running projects on divisional and on BU level, which are intending to adjust the cost basis already at the moment and the quarters to come to the lower production there and production volumes which we see. I mean I mentioned in the presentation that our variable headcount is already down by 5%, just as an indication that we are not sitting there and waiting for these bigger impacts but we are constantly working on these programs.

And this is including, by the way, not only cost. This is as well including investments, capital investment as well, including cash flow measures where we are all trying to work on short-term measures as well besides these long-term measures, which we have talked about in this call.

And the dividend message which we gave during the -- or within the notice on these impairments was specifically concentrating on the impairment impact. So what the message is that these impairments, which are not cash relevant and that these impairments which are done by a company which has a very solid equity basis should not have any effect on our and will not have any effect on our recommendation to the Annual Shareholder Meeting about the dividend to be paid.

Nothing else was intended to be said with this, and actually, we did not finally make up our minds about what we will propose. Third question, the ID product, which we talked about, the ICAS1 is something which is for the whole MEB platform.

And actually, I mentioned we have programs with other customers. It's always exclusive one supplier for these products as R&D costs are massive, and the know-how which we put into this is tremendous.

Thank you very much. Maybe one -- just a quick one on your measures that you have into next year.

Can you give us an indication how much of your business you're starting to possibly want to roll off that is no longer in your margin profile when we think about 2020?

There will be deconsolidation. Besides the spinoff of Vitesco, there will be consolidation effects which are, in the end, a couple of hundred million.

Okay. Thank you very much.

Good afternoon Wolfgang. I'll stick to the two questions.

Firstly -- both on cash flow, actually. Firstly, on CapEx.

So, group CapEx reduced in Q3 looks to be, from what I can see, primarily driven by the Automotive division. Can you just help us understand your expectations here for auto CapEx, particularly given the slowdown in automotive topline over the course of the last 12 months and your order book development, which is down 30% year-to-date?

Secondly, I noted the Q3 cash inflow of €240 million classified as other assets and liabilities on Page 32 of your financial report. Can you just kind of help us understand what this relates to please?

Thank you.

The CapEx, auto divisions, please don't refer to the order book. 30%, I mean, this is a long-term number, which is not really related to this year's or next year's investments which we -- and CapEx which we have to do in automotive.

Obviously, sales are less than we had originally anticipated. This is what we try to reflect in our investments in the auto divisions.

Against it is running new ramp-ups which we are seeing, which had to outperform the industry and the world car production. And secondly, as well, the carve-outs of powertrain of Vitesco which requires us to split a significant number of factories, and some of this ends up in additional CapEx.

But as I mentioned, this is very much in our focus, not only on tires but as well on the automotive division. I wasn't sure I completely understood the last question, right?

If you talk about this cash flow -- which is the other effects, is this line you were referring to?

Yes, it's actually in the financial statement. So, I wasn't really looking at the net indebtedness bridge, but the -- I guess, it's kind of going to be included within that.

But Page 32 of the financial report, there's a line which says changes in other assets and liabilities, €240 million. Just trying to understand what that is comprised of?

Yes, these are short-term liabilities, other financial -- short-term contract liabilities, other financial liabilities, including value-added tax factors which tend to fluctuate over time. If you look in the years before, the potential expected changes for this in Q4 are included in our cash flow guidance of €1.2 billion to €1.4 billion.

Okay. And just to clarify on the auto CapEx.

Obviously, you're saying don't refer to the order book as an indication of what you're going to spend in 2020. But given the discipline that you seem to have shown on the CapEx side in Q3, is that simply timing?

Or is that something that you're looking at much closer with the view to being more disciplined in terms of how much you're spending on CapEx for the group, I guess, but auto, specifically given that's where the decline was in Q3?

We have included additional restrictions on CapEx, for sure that the number is moving in line with our topline.

Okay. Thank you.

Thank you very much. I'd like to come back to your comments about 2020 being a transition year.

If we assume a best-case scenario of flat demand, to follow your guidance for global production, should we expect the group adjusted margins to progress, so be flat with what you have put in place between the short-term measures and the beginning of the long-term restructuring?

This is not a guidance yet we are giving for next year. But seeing all these headwinds which we are facing next year during the spin-off of the Vitesco business in a market which still is a weaker market in potentially the tire business, which, as we see it now, still facing some pressure from, specifically OE business, probably a sideways expectation is what -- at the moment before giving any guidance, what I would assume as a good guidance.

Okay. thank you.

I have another question on -- actually, on your balance sheet this time. Your employee benefits have gone up about €1.5 billion between the end of December and this reporting.

Can you just explain why that is the case? Have you changed your assumptions in terms of interest rates or--?

Yes, the interest rates have come down, I'd just give you an example, for Germany from 1.3% to 0.3%.

Okay. So, it's one point interest rate?

Yes. And that makes a big difference.

And in the U.S., the number was even -- the absolute number is higher, obviously, but the reduction was even a little bit higher.

Okay. I have one last one to take, quick one, if I may.

On your SG&A, it keeps going up for the time being, as an absolute amount. Should we consider it's the last quarter where it goes up because we haven't seen yet the benefits of the different actions you've taken?

Or should we consider that it could stay at this level in the coming quarters?

Our SG&A includes the carve-out effects, and the carve-out effects are -- there is still some effect to be seen. This is then moving more from carve-out towards spin-off.

Still something to be seen in the next Q1 and Q2, I would say, then it's fading out. And obviously, it should be then gone.

But there is still some elements in there.

Okay, very clear. Thank you very much.

Thank you very much. José, JPMorgan.

A couple of questions, please. The first one on the market and a little bit of what is going on in China.

You're already mid-November, as you think about maybe the next months, I'm sure you have vertical visibility already into January next year, January, February. Do you think broadly the market is up or down year-on-year or your revenues up or down year-on-year in the first months of the year 2020?

And then second question, just coming back to this transition from sort of analog into digital. Is this a division that you think is core for you in the medium term?

Do you need a strategic partnership for this division to improve profitability going forward? I'm more interested, do you think if it's core going forward?

Thank you.

Market expectation, I'm not sure if the question was only related to China.

Just China. Yes, please.

Just China. Well, you see that we expect Q4 still to be down I think about 5%, as mentioned in this chart.

We have reached a base which is -- if you look at Q1 this year, which should be a base where China finally could be on a sideways development. And this is the first assumption which I would make for China in beginning of next year.

But again, I don't want to give a guidance now in these volatile times for the Chinese market already. Our assumption, when we say a flat or a negative number next year, our assumption at the moment is U.S.

is probably slightly negative after we had some good years of sales in the U.S. We see Europe more sideways.

And then China might make the difference, and a slight increase compensates the U.S. or be on a sideways development, which then would make next year slightly negative versus this year.

And if I understood the question correctly, the ID business, digital cluster versus analog cluster, it is an attractive market for us. We have some know-how there.

We are somewhat reacting to a significantly faster switch now from analog to digital clusters. And there's actually orders where customers in model lines have both.

They move much faster to a pure digital solution versus the analog solution. And this is what we started seeing beginning of the year and this is continuing.

It is still something where we can add value, where we have a competitive position. And we see this as an important element of Continental's portfolio where we can add value and we can generate attractive returns for us in the mid-term.

And do you need a new -- a partner to improve the vertical integration of the products? Or I mean I'm just trying to understand if you need to change something in the business to be able to quote better prices and gain the volume momentum -- the revenue momentum in this division.

The target -- and this is -- what we see as the main topic is footprint adoption. This is, if you look at our -- in the announced and published footprint measures, there is a further significant element of moving the footprint in this product area from high cost to low cost.

We don't see and feel that we have disadvantages on the integration side.

Thank you.

Hi, good afternoon. Please, can I ask on the schedule of ramp-up costs in the Tire division, specifically?

I think we're now in the third year where we have constant or even increasing ramp-up costs. So, if I could please ask you to reconcile where we stand now in absolute terms versus the original baseline, and when this could reverse in the EBIT bridge to give us positive year-over-year changes from the -- then the absence of ramp-up costs.

That's the first question, please. And then the second question, just to understand the savings program and where that leaves us relative to your original target.

If we just focus on the automotive divisions that will remain in the group, Chassis & Safety and interior. Is it fair to assume that it's still a good assumption to think of 3% to 5% outperformance for yourselves over your forecast of a flat market?

And then within that, these measures that you have now announced are good enough to drive you back to a 10% -- or 8% to 10% target margin corridor in this given scenario even after a 10% haircut to your order intake levels that you had reported? Is that fair to think about it like that, measures such that you get back to the original targets for the automotive divisions that remain in the group?

thank you.

Ramp-up costs, tires, is above €200 million now, if that question understood is -- the accumulated ramp-up costs, not only this year, but accumulated over the last two and a half years when we have started this project. And now, production is starting.

We are in the process of ramping up the business; therefore, no additional cost of this will occur. But obviously, we now need the productivity in these production sites, which leaves another one or two -- one to two years to finally normalize the cost situation in those plans.

I don't want to give a guidance now for 2020, and I definitely don't want to give a guidance for the years afterwards. It's even more difficult.

So, I would not like to comment on this question or recommendations which you were giving for outperformance and performance on the profit side. And I mean, I think we have shown in the last quarters again and our outperformance on the top side is there that we are in the right areas for growth.

And I think there's not an expectation or an indication that there is a drastic change in our performance there in the mid-term. I mean, I have commented on this order book reduction from €32 billion.

The number is now €22 billion, which is mainly different assumptions. We assume world car production to be lower by more than 10% versus our previous assumptions one and a half years ago, which already has a significant impact on these numbers.

And we actually have seen that the one other OE at the moment is delaying sourcing decisions. And we don't foresee that our market share in the significant product areas where we are working at the moment that our market share there should be going down in the years to come.

So, just as a follow-up, if I may. You have indicated in various places that you might do more on the restructuring, if you have to.

That is more geared towards a market performing even worse than a flattish outlook and less so about whether you're able to generate the intended savings internally. It's about the market, yes, when you might have to do more.

Well, it's both. If we see that the measures are not achieving our target -- even if I'm not discussing targets now on this call, I mean, obviously, there are targets.

If we see this is not sufficient, then this could as well be, for us, the point to add additional measures.

Thank you.

-- much for taking the questions. This is Tim from DB.

Mr. Schäfer, I'd like to first ask you about the indications that you've given for 2020.

Not so much what you really expect by market, I understand that now, but what do you base your forecast on? I mean, we're hearing from first suppliers about much more negative numbers into next year.

You found yourself quite negative, to be honest, but then a sort of flattish environment globally would probably also not be too bad. And then secondly, where do you think you stand on the review process?

Very much to Henning's question just now that you said you would do more if needed. Is the review process finalized?

Do you know what Conti wants to stand for in five, 10 years down the road? Do you know how many people you need to have on Board in these kind of things or is that still very much work in progress?

Thank you.

On the market assumptions, I mean, it's flattish to probably slightly negative, and I gave you more details on how the regional split at the moment is assumed by us. And I think this is our assumption now, but I'm not aware that others are much more negative.

My understanding is it is more or less in line with many other suppliers, and though, obviously, you're more looking at the market and know this better. Well, internally, we know where we want to go, where we want to be.

We will -- obviously, as soon as we will be in a position to share this information, we see we will do that. We are still working on the one other element, and therefore, there might be some additions on the one other projects to make sure that we can achieve what we wanted to do.

And therefore, the question is it finalized already internally, no, it is not completely finalized. But we are we are close to it where we have quite an okay picture already of how Conti will look like in three to five years.

Okay. If I just follow-up on the first question, and it was after, for example, now talking about a possible 3% to 5% decline next year, and you specifically highlight a very weak European market.

You seem to be somewhat more confident. Is that backed by discussions that you have with your customers?

Or do you just look at the IHS numbers, primarily? Or how do you come up with a flat market?

No, it's like always. It's a mixture of both.

I mean, we have our internal. For the first months, we always look -- we rely on what we get from our customers.

And the longer you look out, the more we take a mixture of both information.

Okay. Thank you very much.

Yes, good afternoon. Christian from Lampe.

Two questions from my side. First of all, on the CapEx, Mr.

Schäfer, I understood you that CapEx going forward will be more or less a function of your sales development. Now, I kind of hope that with the investments and the two tire plants done that we might be able to see a drop in CapEx going forward.

I was obviously -- am I a mistaken there? Will that be made up by more investments in automotive or how do I have to think about that going forward?

We definitely will see a reduction in the CapEx of the tire division for -- starting next year because the two factories are done. In automotive, we did not finalize our budget discussions.

We have definitely less business on Board than we had for one and a half years ago. I mean, this is what we discuss all the time.

Topline is lower. At the same time, we see these two conflicting factors: one, new ramp-ups, always good; and the other thing, which is the carve-out.

As I mentioned, the production sites have to be split, and partly, even small and new production capacities have to be built up. This is the conflict which we still have in the next years to come.

We announced this. I think I talked about it a year ago when we talked about this carve-out first time.

If you take these carve-out effects out, I mean it's the -- CapEx in automotive will not be in line with the topline development but relatively will be lower than the topline development.

Okay, great. Thanks.

And then just a quick one. On your Q3 P&L, you reported a significant loss in income from investments.

Could you just elaborate what that relates to?

These are the -- we have impairments, and we have goodwill and asset impairments, and this is to 80%, 85%. This is the impairment on the Osram value in our books, the joint venture, yes.

Yes, good afternoon to everyone guys. Thanks for taking the question.

Pierre with MainFirst. Two quick questions, if I may.

First one, could we have at the end of September just a wrap-up of the non-repeat warranty costs and other costs that have been burdening the adjusted EBIT line at this stage, and that won't repeat going forward?

This was €187 million which we booked. And I mentioned the number; the majority of it was in powertrain Vitesco.

Okay. And you don't intend to have other kind of costs like that burdening Q4 adjusted EBIT margin?

No, no, no. No intention.

Thank you. Second point, which -- it seemed that the efficiencies measures are starting to kick in significantly in Q3 into ContiTech.

Is it fair to say that? Or is there also a dose of favorable comps and non-repeat one-off costs of last year?

Could we have an idea of how much is efficiency and how much is non-repeat of one-off cost in Q3 2018? And should we take that as a run rate for Q4 at ContiTech?

Thanks.

I just -- technically, I remember, €25 million at ContiTech, which was last year a quality topic in Q3. So this is something which is obviously not a performance improvement but just something which did not occur again as it was a one timer.

For the rest, we do see the -- yes, it's confirmed. It was around €25 million.

But for the rest, we do see the efficiency program taking effect. We expected this to be about €50 million.

It will be about €50 million this year, and the rest to be helping the profit line next year. And ContiTech is suffering from this world car production reduction.

As you know, they don't have this outperformance. They are basically one-to-one to world car production.

So, we see the 6% downward trend in the automotive part. 50% of ContiTech is -- there was the negative leverage effect, partly compensated with quite a good development of the industry and aftermarket business in the first nine months.

And is it still fair to assume that another €100 million of efficiency is expected to come on top of the €50 million this year, €100 million next year for a total of €150 million?

Well, yes, we will see this -- as a gross cost reduction, we definitely will see this €150 million at the end of next year as an accumulated effect. And so I can confirm this, yes.

Thank you.

Thanks for taking my questions. Just a few clarifications.

First one, when you talked about your 2020 margins, I know you highlighted further carve-out costs as a headwind. Just to clarify, would you mind summarizing what the carve-out costs so far year-to-date has been?

And how much more do you expect in 2020, both on P&L but also in terms of cash cost? That's the first question.

Secondly, on HEV, do you expect HEV losses to increase further in 2020? And also, revenues have been running broadly at around €60 million per quarter.

You would expect that to ramp up over the upcoming quarters. So, is it possible to give us a bit of a guideline on how much the revenue ramp-up would be and also what the losses could look like at HEV next year?

And then lastly, on tires. I know you highlighted tough pricing environment in both OE and RT in Europe.

Other tire makers have announced price increases in Europe as of Q4. Are you seeing those price increases in the market?

And are you planning to follow these price increases or have you already followed them? thank you.

Sorry, I was just checking on the carve-out cost. The -- if you have a look at the slide with the free cash flow bridge, indebtedness and cash flow, we mention there, its €68 million which we have as cash effect of the carve-out.

Last year's number was a similar number, I think. The EBIT effect was a little bit higher, but not significantly higher.

HEV, we don't see an increase in losses. This year, we see the increase in sales.

We will achieve about €250 million around in sales for HEV this year, so a significant increase towards last year and yes, this increase in further sales growth will continue in next year. Tire pricing, sorry.

We have this -- still this more mixed situation, one inside OE business. Difficult, I mentioned before for next year as well.

Discussions with the OE show quite some headwind from their side and quite some pressure on the prices. We expect Europe -- we see Europe as well as more difficult, as already discussed in quarters before, different to U.S.

and to the Asian market. It is unchanged.

Not our intention to go for volume, and by that, jeopardize pricing. Strategy is unchanged, but obviously, if there is a market which is very competitive, I mean this has some effect as well on Continental.

Sorry, can I just follow-up. On the carve-out cost, probably didn't catch you, but do you -- how much more of carve-out costs should we expect for 2020?

Well, guidance for 2020 is not yet here. It's just this number when we talk about the guidance for 2020.

Thank you.

Thank you, everyone, again for participating in today's conference call. As always, the IR team is available for any further questions.

And have a good day, and bye-bye.