Continental AG

Thank you, operator. Welcome everyone to our Q1 2020 results presentation.

Today's call is hosted by our CFO, Wolfgang Schafer. Also here in the room with us is Stefan Scholz, Head of Finance and Treasury.

Rest assured that we are all following strict protocol and maintaining a generous safety distance. 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, we would like to ask you to limit yourself to no more than three questions each.

This will help us conclude our call on time. With this, I would now like to hand you over to Wolfgang Schafer.

Thank you, Bernard. Let me begin today's presentation on Slide 3, and there start with the market overview.

In China, we felt the effect of COVID-19 first with a 50% contraction in vehicle production as well as a sizable demand drop for replacement tires. On the bright side, the second quarter there is developing positively with production activities for us and our customers now approaching prior year levels and the replacement tire market already fully recovered.

However, the situation is very different in our important European and North American markets where the downturn will be more severe in Q2 than in Q1. Because we generate roughly three quarters of our sales from these two regions the impact on our sales will be more materially in the current quarter.

And while there are some positive signs that restrictions are being lifted in Germany, France, the U.S. and other major markets the strength of the recovery remains uncertain.

You can find our market expectations in more detail on this slide. I'm not going to read through this and with the environment continuing to be very uncertain and possible further adverse consequences on production the supply chain and demand, difficult to guard.

We are not yet able to provide an outlook for the business year 2020 at this time. Slide 4 is summarizing the current situation starting with Automotive and Powertrain with the market rebound in China trending very positive so far, our Chinese colleagues have been hard to work to normalize our production activities there which now sits above 80%.

We expect that sales there to reach prior year levels in May. And with the gradual lifting of restrictions in Europe and restarts by our customers our European facilities are now more than 30% ramped up.

In contrast, production North America is commencing in synchronization with our customer requirements two or three weeks later. In terms of the supply chain, the ramp-up of activities in China and now Europe have so far been resilient.

Volumes requested by our customers could and can be provided. However, with Europe, continuing to ramp and the important North American restarts upcoming we remain focused on ensuring supply chain integrity for critical components, such as electronics and in specific regions such as Southern Europe and Mexico.

Regarding R&D, we are not yet seeing that our customers are delaying major launches at present and with the customer focus on our products for electrification and digitalization remain resilient even under current conditions, we are confident in the strength of our business prospects for the near and mid-term. However, based on this, there is only limited potential in the near term to reduce our R&D expenses.

Relative to automotive and powertrain the market and volume improvement is progressing faster on the tire side of the business. In China production activities that replacement tire sales already back to 2019 levels.

Our recovery in China has been led in particular by our strong presence in online channels, which we have built over the past years, with almost one-third of all of our replacement tire sales in China conducted online. In Europe after the strong decline of the first weeks of April, we are seeing increasing consumer activity both in the now reopened stores and online, and almost all of our tire plants have been restarted to serve the demand recovery.

In the U.S. tire production remain mostly idle.

However, we expect a similar positive development of the replacement tire market as soon as the outlets are allowed to reopen and we restart our production. In ContiTech production in the Automotive OE business is currently at low levels, in line with customer demand.

The non-OE part of the business was strong in Q1 and currently is running much better at more than 75%. However, certain business including industrial fluid and conveyor belts are beginning to see signs of weakness from customers in energy-related markets due to low oil and other raw material prices and the recovery might not be as strong as in the OE business.

Whereas the environment is expected to remain difficult for this and the next quarters we remain very much focused on the priorities that we outlined back on April 1, top of our list is and will always be the health and safety of our people. We have established protocols, in all our facilities from offices to production plant that utilize the best practices throughout Continental and especially from China.

To ensure an adequate supply of personal protective equipment, we are re-purposing some of our production capacity to produce masks for our own use. The second priority is sustaining our financial position through cost reduction and cash discipline, actually the main focus of our activities.

I will cover this on the next slide. Managing the ramp-up of the supply chain is another important area of focus.

In addition, two important strategic initiatives remain firmly on our radar. The first initiative is the spin-off of Vitesco Technologies, though, we announced that we think that we will be postponing the spin-off due to the current market environment, we continue to make arrangements to prepare Vitesco for a swift implementation of its spin-off as soon as market conditions and visibility improve.

At the same time, we are balancing with the near-term needs such as cost savings and the postponement of investments. The second initiative is our ongoing structural program announced measures remain on track, even under current circumstances.

With regards to additional measures we have decided to hold off announcement for the time being with one reason being the political environment. However, we are fully aware that any further measures must now consider the significant likelihood that end demand for cars may remain dampened not only in 2020, but also in the coming years.

Thus we are now considering an even more challenging mature market development in our planning and assess how it may impact specific product, technology and, regions. One potential consequence is that our current mitigation actions may be a basis for more permanent changes.

Areas under review include longer-lasting measures to improve our cost structure and portfolio as well and sustainable reduction in capital expenditures. We expect to be able to provide you a more concrete picture later this year.

Continuing on to Slide 5, examples of our current workforce cost and cash management measures. Since the shutdown began, we have been actively managing our workforce.

As shown on the chart on the left as of the end of April, around 60% of our employees are involved in reduced time arrangement such as short-term work in Germany, unpaid leave, or working time reduction. As our activities gradually ramp up again the number of employees in reduced time schemes will decrease, but we will remain flexible with these agility measures to adapt to the dynamic situation.

The other major dimension is cost and this is closely tied to labor costs and programs such as short-term work that only came into effect in late March and early April. The effect on fixed cost in Q1 was minimal.

Since then, we have put in tight management controls on expenses including travel, marketing and administration. Also R&D processes and priorities are being substantially adapted to reduce costs without affecting scheduled commitments with customer projects.

As one example we are temporarily limiting our R&D on level three ADAS activities for the time being. We expect these and other cost control to continue for the foreseeable future and target at least 5% reduction in fixed costs for the remainder of the year.

We have also proactively implemented numerous cash management measures already in the first quarter, we were able to achieve a significant reduction in capital expenditures with spending down 26% year-over-year. It is our goal to achieve at least 20% decline in CapEx through the rest of the year by realigning cancellations or at least temporary postponement of investments wherever possible.

We also are actively optimizing working capital in terms of inventory, elevated tire stocks from retail. Projects that started in March have been mitigated by production shutdown, putting us in a position to have a lower year-on-year inventory figures in tires in Q2.

Strict working capital management also adds up lower receivables more than payables versus the year-ago period. Going forward, we will remain disciplined to closely align working capital with market development.

Continuing to the next subject, Slide 6 provides an overview of the cash flow in Q1. Though EBIT in Q1 was lower than in the prior year period there was also a lower level of cash outflow for working capital, lower spending and inflows from the SAS joint venture divestiture.

Putting these together result in a free cash flow generation in Q1 excluding acquisitions [ph] and carve out effects of €59 million, an improvement of over €600 million versus the prior year. Financing cash flow was minus €750 million due to the repayment of the €600 million bond on February 5.

This leads me to the liquidity bridge shown on Slide 7, considering the cash flow development I just showed and FX effects, cash on hand, declined by €815 million from year-end 2019 to €2.5 billion at the end of March. Together with unutilized committed credit lines of €4.3 billion our total available liquidity was over €6.8 billion at the end of Q1.

Compared again the only near-term bond repayment of €750 million in September our balance sheet remains in a solid position as a - reminder neither the credit line nor other financial indebtedness are subject to financial covenants or rating triggers. So this concludes the first part of the presentation.

And I will now move on to a review of our Q1 performance and this starting with Slide 8, reported sales came in at €9.8 billion on the upper end of the bandwidth we provided on April 1st, excluding exchange rate effect of €10 million and changes in the scope of consolidation organic growth was minus 10.9%. Adjusted EBIT declined year-on-year by 51% due to lower volumes and increased depreciation and amortization expenses, the resulting adjusted EBIT margin was 4.4%.

Special effects, totaled €51 million, predominantly related to restructuring as well as carve-out effects on the negative side and the sale of the SAS joint venture on the positive side. These factors weighed on net income after taxes, which came in at €292 million as well as trailing ROCE, which came in at minus 2.6%.

As already discussed, free cash flow excluding acquisitions and carve-out effects came in at €59 million considerable improvement over Q1 2019. Let me now move on to the performance by group sector starting on Slide 9.

The new reporting structure shown here has been in effect since the start of the year. As mentioned, Group organic sales were down by 10.9%.

This was mainly driven by Asia, which was down in reported terms by 23% and Germany, which was down 12% in reported terms. The organic sales decline was the predominant reason behind the year-on-year decline in the group adjusted EBIT margin from 8.1% to 4.4%.

With organic growth of minus 11.5% automotive of minus 11.5% automotive showed a high outperformance of 1,350 basis points above global vehicle production. This figure was even higher for Powertrain at 1,600 basis points.

This is to a large extent attributable to our regional mix since we are more exposed to Europe and North America, which together account for roughly 70% of revenues in both Automotive and Powertrain. Some inventory build-up at the OEM level may have occurred as well in Q1.

These effects are not expected to continue in Q2. Operating leverage, using adjusted sales and adjusted EBIT in Automotive achieved 39%, Powertrain 38%, and Rubber 32%.

For the Group, it was 38%. Recall that the first quarter last year had a one-time benefit from the release of provisions for variable compensation, excluding this effect group operating leverage would have been around 36%.

I continue with a closer look at the individual business areas starting on Slide 10 with Autonomous Mobility & Safety. AMS sales came in at just under €2 billion with organic growth at minus 11.6%.

Weaker demand in China and Europe are the main reasons for the sales decline. Moreover, we had a deconsolidation effect of negative €124 million from our Chinese HBS joint venture instead of being fully consolidated it before the contributions of this 50/50 joint venture are now consolidated at equity.

However, our stake at the joint venture remains unchanged. In terms of product ADAS contributed positively with solid volume growth for radar sensors.

Driven by negative volume growth, the adjusted EBIT margin decreased by 380 basis points versus the year-ago quarter operating leverage was at 38%. With customers delaying their sourcing decisions due to market uncertainties, AMS recorded a respectable order intake of €1.2 billion in Q1.

The biggest order wins were related to electronics for active and passive safety applications. VNI, Vehicle Networking and Information is covered on Slide 11.

Organic growth at VNI was minus 11.4% driven by lower volumes across all business unit, demand was particularly weak in the Chinese market. The year-on-year margin decline of 240 basis points is tied to lower sales.

R&D increased, mainly due to the final phase of two significant customer projects, on top of that we experienced negative FX effect derived from electronics purchasing. These factors resulted in an elevated operating leverage of only 40%.

In VNI, we have solid order intake of €2.7 billion including more than €1 billion of orders from multiple OEs for connectivity systems solutions. I will now cover Rubber Technologies, starting with tires on slide 12.

Organic growth in the Tire business area was minus 12.2% versus the year-ago period. In line with the markets, we saw double-digit sales decline in OE and replacement for both PLT as well as LCV.

Volumes in Q1 came in at minus 11.7% driven by negative OE demand as well as lower replacement volumes. Price mix was at minus 0.5%, a positive mix effect from a higher share of UHP tires could not compensate for negative pricing primarily related to OE.

FX and consolidation effects were minor. Lower volumes were the main reasons behind 410 basis point decline in adjusted EBIT margin to 10.6%.

There also was the slight raw material tailwind but this was partially offset by inventory valuation effects. The margin was negatively affected by under-utilization and ramp-down costs in March.

We expect another cost burden associated with the ramp-ups to occur in Q2. Moving on to ContiTech Slide 13, the downturn in vehicle production led to a decrease in organic sales in the OE business of 12%, while industrial and aftermarket was only down 4% like-for-like.

Combined organic growth was negative 8.1%. Please note that Q1, 2020 reported sales also includes €84 million from the Cooper AVS and Merlett acquisitions.

Despite these headwinds the margin increased year-on-year by 60 basis points to 8.1%. The profitability impact from negative volumes was more than compensated by the positive effect of the margin enhancement measures, which we already discussed in previous calls.

Operating leverage, therefore, was that's only 1%. Further planned margin enhancement actions will be implemented in this and in coming quarters.

Last but not the least, let me cover the business area Powertrain Slide 14, sales of €1.8 billion were organically 9.1% below last year's figure. The decline was mainly driven by lower demand for ECUs and hydraulic and mechanical components.

In contrast, demand for emission control systems was stable. The Electrification Technology business unit formally known as HEV experienced robust growth for its electrification product most normally for the EMR3 e-axle.

This helped ET achieve sales almost 60% higher than in the prior year. The adjusted EBIT margin of 0.7% was down 320 basis points from Q1, 2019.

The volume decline was partially mitigated by cost savings, especially labor costs as the number of employees in Powertrain decline year-over-year by 8%. Operating leverage was at 38%.

Excluding ET, the adjusted EBIT margin for Powertrain would have been 5.8% and operating leverage would have been around 30%. Order intake of €1 billion was held back by delaying sourcing decisions from major electronics and HEV projects.

On the positive side, we saw healthy order book growth for emissions control including a multi-million order for EMICAT, Vitesco's innovative exhaust-gas after-treatment solution, which has a demonstrated capability to lower NOx emissions from diesel vehicles by at least 40%. And this leads me to the conclusion of today's presentation short summary shown on Slide 15.

Group organic growth was down 10.9% in Q1, which was better than the underlying markets, our operating leverage at the Group level of 38% was satisfactory given that most of our mitigation measures were only put in place towards the end of the quarter. These actions will help us weather the unprecedented negative market situation in the current quarter.

Looking forward, the health and safety of our employees naturally remains a high priority. Our main focus in the short term is maintaining our solid financial position through strict cost and cash discipline and the successful ramp-up of global supply chain.

The mid-term focus is on the Vitesco spin-off the implementation of our ongoing structural program and the definition of further measures considering and potentially more challenging post-Corona market environment. With this, I would like to end today's presentation and open the line to your questions.

Hi, yes. Tom Narayan, RBC.

Thanks for taking the questions. So, in your prepared remarks, you noted that there was some OEM inventory build-up that happened in Q1.

That is not expected to continue in Q2. This likely contributed to the strong outperformance you saw in the quarter.

Should we expect some underperformance perhaps though in Q2, presumably the OEMs now have components not yet assembled? Also where was this inventory build-up specifically?

I would think, just in time components may not be in this but perhaps some of your electronics or technology products requiring longer lead times? My next question is could you discuss the raw material impacts in tires, particularly with respect to Q2?

And finally, can you discuss the long-term impacts that the COVID crisis could have on your autonomous endeavors? Presumably this could impact share transport negatively but arguably you could still do autonomous in a private car form?

Thank you.

To start with the inventory build-up we have seen it on two dimensions. One was just in overall inventory buildup of finished cars, which we observed in the U.S.

Well, I think that was a 5% inventory increase from February to March, which is probably something where we had a type of effects, which might and this your is following question which might impact then the ramp-up phase because this buildup in inventories at the ramp-up phase will probably be used. So this is a smaller effect which we might see in Q2 when the ramp-up is finally starting, but it should not be too big.

For the rest, I mean, we don't know one by one. But we suppose there was some inventory build-up specifically in electronic components at our OE customers, probably more in Europe than in other areas of the world, which actually we appreciate not only because sales in Q1 were partly supported but because those are the components, which might be the most difficult one to make sure an orderly ramp up.

An orderly supply chain can be guaranteed and if we have a little bit of more reserve at the customers in this regard, this is I think only positive. For the raw material in tires effect in Q2, I don't want to specify a number.

It is still valid, but this is more, obviously, for a total year number, than the quarterly effect which is as well influenced by a P&L effect of this at a $10 reduction in oil price for us €50 million costs positive cost effect and this number which we - I think discuss sometimes as well in these calls is a number, which is still true and this could for the total year be a gross effect, which we have always opened question, how much of that finally is passed over to the consumer via price changes. The long-term impact of autonomous driving, I think it is too early to discuss any structural changes in autonomous driving as a result, out of this, Coronavirus topic.

At the moment we are concentrating on cost reductions, short term cost reduction. We don't see, we don't have any discussions with customers right now in this first four months of this crisis, about a structural change in their product offerings over the next years.

We don't observe that actual programs are going to be changed, giving an indication in any of this direction and when we talk about delays of orders coming in from our customers then we don't see this again at structural. But it seems to be only that the orders are somewhat delayed either because the sourcing decision because of other priorities are delayed or because there seems to be an intention to probably delay the one or other ramp up instead of 2022 somewhat later.

But nothing of this is giving any sense of intention to specifically on autonomous driving have a structural change in the product offerings.

Okay, thank you. I'll turn it over.

Thank you, it's Thomas Besson, Kepler Cheuvreux. Also have three questions, please.

First, I'd like to start with the free cash flow ambition and the reasoning behind paying a dividend. What you think about paying a dividend from here?

I understand you're not giving guidance for the time being, but you're suggesting you're doing a lot to generate positive free cash flow. Could you confirm that and comment on the possible payment of the dividend in 2021?

The second question, probably more difficult, you announced a plan to reduce your workforce this decade which seems outdated as you've mentioned. Your workforce is almost at the same level of six months ago while global light vehicle production could be substantially below what we had imagined a few weeks ago for 2020, 2022.

Could you comment about the right level of your workforce to bring down operating leverage? And then final questions can you remind us your exposure to SUVs and pickups, thus special discounts in the NAFTA region?

Thank you.

Free cash flow ambition. I understood.

This was more questions towards dividend payments expected in 2020 and 2021. For 2020 there will be the invitation for Annual Shareholder Meeting second week of July, will be in June - mid of June and our Supervisory Board in the end, we'll make a recommendation for the dividend payment, and actually I cannot comment more on that at the moment.

And the second topic, the workforce reduction, I did not fully understand the question. Let me just see if in the room it was understood.

While we are at the moment working and using all these short-term measures which the legislations around the world are offering, which has short of work which is short-term working. In Germany and other similar instruments in other countries we are completely on track with our restructuring measures, which we booked again, part of restructuring in the first quarter, showing that additional agreements could be made and these agreements will be affected throughout the year and will lead to a further work workforce reduction.

I mean indirectly mentioned that we are as well considering to add to the program, which we are having. We had already announced this before.

We are now even taking into account obviously potentially different market conditions. Add to that it is right now, not the right time to announce is we are specifically in Germany is discussion that we are receiving short-term work - aid from the State but definitely, they have to be announcement to further proceed on this way in the course of the year as I mentioned.

Our share of the SUVs and pickups in the U.S. is below the market average.

Our share is lower of SUVs and pickups in the market shares.

Yeah, good afternoon. Hi.

It's Henning from HSBC. Wolfgang, I heard you on Bloomberg Television earlier today and I hope I understood you right when you said it's going to take you a few more weeks rather than a few more months before you know when you're going back to normal and what normal means?

So I was hoping you could just elaborate on that a little bit and help me understand what makes you realize how quickly and to which level, you can go back to in the next few weeks. Again, I hope I understood you right, but I'm just wondering what gives you the confidence that this short timeframe over the next few weeks is good enough to understand more the direction of travel.

That's the first question, please.

I'm not sure that was the intention of what I said or I'm sure this was not the intention. The message was more that at the moment we are even having problems to basically predict the next two weeks of our sales volume and it's the message was more at least take a longer, at least some weeks before we get some more clarity on this and it will take probably even longer to get an idea about the year 2020 and specifically year 2021, 2022.

There are many in imponderables there, there is the question of potentially incentive programs in some world regions. There is always the question, and the risk of the Coronavirus having a second impact and I think it remains to be seen.

So I don't want to give the confidence that there is in any other position than anybody else. And we, it remains to be seen how the markets develop it is even harder to predict when we finally have a knowledge of how the markets are going to develop.

We work with scenarios, as I guess, you are doing and obviously we know these scenarios in the most probable outcome which IHS is seeing and this might be one scenario. We are working as well with numbers above and below that for this year and actually we don't feel in a position to put any of these scenarios with very high significant probability versus the other as a basis for our guidance.

Okay, I understand. And the second question, I was hoping we could talk a little bit about the structural margin potential of the new automotive divisions.

Of course, the old restructuring plan, or the margin enhancement programs they were such that to you were generate savings by 2023 and I imagine this was to bring the structural margin potential back to 8% to 10%. I was hoping you could maybe confirm that or talk a bit about what you're seeing in the current order book and that is indeed the level that you're, - that you're shooting for by 2023, of course, and considering that you need to bring the workforce as you just described and the fixed cost in a position to be able to achieve that?

I can't - I can't confirm that this is our intention. I think the message was as well that is €500 million might not be sufficient.

And this is why we are in consideration and in quite concrete plans to add to this, which at the moment as we reconsidered and with the market knowledge of the next years to come. Again, we discussed - just discussed it little bit too early to know this but the intention is still there.

And this is our base for everything, which we are discussing about cost restructuring, cost deductions and as well order intakes which have to assure as well that these numbers can be achieved. Now, this was the right understanding this was our intention - this is our intention, just the framework conditions are most probably changing and there is a probability.

But again, I don't know yet. There is a probability that the volume numbers in 2023 might look different in our assumptions in half a year from now than we saw them only three months ago.

Okay, great. And just finally if I may, on the degree of outperformance in Q1 and underperformance potential underperformance or a degree of outperformance in Q2, I suppose there was also a strong element of regional mix to the outperformance because of the weight of the China revenue.

So between what you described as a small potential reversal effect in Q2 from the - from the stocking or over-ordering and the unwind of the regional mix. Do you see a risk that you could underperform the global - a global light vehicle production in the second quarter?

The main effect - main effect in the end was regional, you're rightly saying and the two big regions on our 75% Europe and the U.S. to get the 75% of our sales, but their impact on us is significantly stronger than our 13% sales share in China, and yes the positive effect, which we have seen in Q1 might partly reversed in Q2 because we have the stronger effect on Europe and U.S.

Now if you take mathematics I mean, this should not be a one-to-one. The plus on the one inside should not be the minus on the one inside.

But there would - should be some effect on it.

Great, thank you.

Hi, thank you for taking my question. Gabriel from Citigroup.

I'd like to start with the Tire division and on tire pricing, you mentioned the negative pricing was mainly related to Arriva contracts typically index to raw material prices. Could you expand on your pricing strategy for when we exit the crisis?

Do you see an opportunity to win market share when demand recovers and are you preparing a promotion strategy for this and to win market share? And my second question is just around the supply chain because previously you've spoken about security on supply chain is one of the biggest risks of the current crisis.

Could you update us on how is the supply chain in particular that of Tier 2 and 3 auto suppliers and also your tire dealership network? Thank you.

Well, tire pricing actually we saw in Q1, we saw. If I look at the replacement tire markets, we saw stable pricing.

This is true for Europe. This is true for the U.S.

and this is true for China, we saw in China bigger shift in the distribution channels. The roughly 1/4 of online sales in the past, move to one-third of online sales, so significantly increase obvious reason for that, but again this for us is not detrimental for our margin as Continental LCS pricing is a little bit more aggressive, but on the other hand side the overall cost to serve their channel for us is compensating the lower cost is compensating for this somewhat more aggressive margin.

So from the pricing side Q1, markets were running okay. And now, we don't have any indication that the following quarters should see stronger deviations from this Q1.

But I mean, as already some questions answered the visibility is limited and at the moment, we are lucky to see we're actually happy to see that in China, in April, it looks like we are at 100% more than 100% to prior year even in retail sales. So people really seem to come back to the stores and get the tires.

And if I just look here at Germany you have now. If you want to go to our retail channel for goods and change your tires to summer tires you have to wait four weeks.

So people are really running to the stores. And again this is positive.

If this is continuing, like we are now experiencing it for a couple of days in Europe and for some weeks in China. This should be a development which is positive on pricing as it shows the demand is there and volumes are there.

Supply chain automotive we are feeling and we are confident - I'd say we are confident that after in China, we and the overall industry, but we managed to supply everything which our customers wanted that this will continue in Q2. The always most tricky parts are the electronic, partly as value through the ramp up situation in Malaysia and other Asian countries where there are still lockdowns which make it more difficult, but we are still in a good position to make sure that our customers get what they want, managed up to now there is no shortage on the horizon at all at the moment.

And I think with all the efforts, big efforts, which are done there to secure this we should get out of this Coronavirus crisis hopefully and most probably from our point of view with any disruption in the supply chain from Continental and as it looks as well from others.

Thank you.

Good afternoon. It's Sascha from Jefferies.

Also a few questions from my side. The first one would actually be on the spin-off from Vitesco.

I'm curious what was the reason to call that up now, and not rather put it at the vote at the AGM. And then like tactically deciding to spin it off.

It is now my understanding if you would need to either call an EGM or wait for the next AGM to proceed, is that correct?

Yes, this is correct and the main reason behind it is twofold, one, I mean this is a young organization also experienced organization to put them on their own. In an environment which is extremely volatile and has many risks in dealing with sort of a mid-term action, I think it is something which we could not do.

There are starting from the managers. I mean, many people are in quite new in their position or there is a build-up newly processes annuity this is fine if there is more or less stable environment such an environment this would be too risky.

And secondly, a very pragmatic financing cost at the moment for something like Vitesco it would be significantly higher now than they had been only 6 or 7 weeks ago and as we expect that market is finally will normalize and it shouldn't take too long. I think there is no reason to now agreed to conditions which probably are I would say, significantly better off just back to normal before the growing up prices in some point in time.

And these were the two reasons why we said, well, I mean the easier thing it's probably even just to say we go for it and we do it and we put it on the market and that them cope with our financing and other costs in the future or now say well we thought would be delayed, knowing that we have a history in this topic which has already some turn. I mean, what we said well, unfortunately, this one we have to take this turn again with the intention as you rightly said, we will do it as soon as the market is ready for it, if the market is more, has more visibility and then it is either an extraordinary Annual Shareholder Meeting, which we have to ask for or we would use the next Annual Shareholder Meeting.

I think it's set for April next year.

Okay, thank you. And then my second question would actually be on your SG&A and R&D costs.

SG&A has been flat year-on-year and R&D even higher despite I think €1.2 billion lower sales for the group. Some of it is driven by the carve-outs, but maybe you can share some thoughts around Q2 and beyond Q2, how you can flexibilize the cost kind of below your gross profit?

The CapEx was down 20% already in Q1, we expect to continue on this for the rest of the year and now delaying the spin-off, by the way, should have the one other positive effect on CapEx could add to this 20% target. Obviously, it's only delayed and has been something which we will see next year that could support this year's cash flow of the group.

I think the other question was part of us to R&D?

SG&A actually because R&D I guess it's driven by the OEMs, more or less, but SG&A has been more or less flat year-on-year and I was wondering, given that revenues down so much. How you can flexibilize that going forward?

While SG&A partly driven by spin-off of course preparation for the spin-off, which by the way these preparations we will continue to make sure that we are ready to spin-off as soon as the market is there and for the other SG&A costs, if you are referring to the Q1 report, we have had in 2019, we have had a warranty released which is now the other way around. And we have restructuring cost partly in that number, and this makes it looking that to be a stronger increase than it is if you adjust for those factors it's basically sideways development.

Okay, perfect. And then my last question would be on the lessons learned from the China ramp-up, when you look at your production now versus before COVID, do you have a big impact on productivity or extra cost from the change of the production setup in either of the division?

There is some which is due to - in some case, it's not many. So, but in some cases chain processes because of health situations.

It should not have an impact, which in the end is noticeably negatively affecting the Group profitability.

Great, thanks very much.

Good afternoon. Yes, just a few for me, please.

Firstly, could you talk us through what changed between your first pre-announcement of the Q1 numbers and the second? And just to give us a sense, really for how quickly things are moving around.

And then linked to that could you talk a bit about the conversation that you're having with OEMs right now on the restart? Clearly you would usually have six weeks of called off and that's very good planning visibility for you.

How are you dealing with what must be much more fluid situation with the OEMs? You said in the end, the next couple of weeks are quite difficult to plan for.

So could you talk us through what measures you're taking there? And then you've also obviously mentioned the drop-through in Q1.

Should we think about that kind of high '30s level for the remainder of the year or should we allow for a little bit more benefit from the 5% fixed cost reduction that you've talked about?

When the first announcement, which we had head and then had to basically correct on the better side with the second announcement, the reason is quite simple. We were beginning of April, we had three weeks behind us, where basically the numbers I got from our organization on a daily basis for each day and on a weekly basis, each week was always a little bit less than that what they had expected the week before.

So we were in a downturn, which actually the group did not have the experience for in such an amount suddenly basically complete demand breaking down. When I saw the numbers on the day before and we discussed what should we do as a pre-announcement we went on the more careful side because I said after this experience over the last weeks, there is a chance that these numbers, which we are seeing now will be downward revised in the next days from our people reporting and this is why we went to this lower number.

Actually had I taken the numbers, which we had on our table this was quite close ready to what we saw. So it was starting to stabilize already there.

We were not fully trusting of the report. Sorry for that, but

No, that's we are clear and that's kind of my question, right, because also from our side, it's kind of an unprecedented thing to think about you shall be doing so quickly. So, that's very helpful.

While the conversations on the restart we would never talk negatively about our customers, but it is not so easy to have an idea what we call out over the next seven days or next 14 days will be as we have the feeling that all of our customers just want to make sure that their supply chain is significantly filled and many of them seem to fear that it is more or short when they give us a little bit more optimistic numbers of the call-up and what finally appears. And so it's a very fluid number which we are working with at the moment and it is far from anything which I could give you as an indication how the sales in the next four weeks will be?

And so from your perspective, I guess, thinking about people coming off short-time work and so on. It just means that you have to be very, very cautious about doing that.

And, but also, I think the short-term work can be quite flexible as well. Right, you can ask people even to come in for one more day?

It can be. This is right.

And yes, we have to keep maximum flexibility. And then the load of the factories and on each single product.

Third question was on the drop through. We saw the 38% leverage in Q1 for the total year.

I would assume something around 35% expect though that the Q2 is still a challenge because this will the massive lockdown in the U.S. and Europe.

This is, and I think in our history probably an unprecedented reduction in sales as well. You saw the expectation, which we have for the World Cup production.

We won't be too far away from that and they're probably the leverage might be somewhat under-stressed before then in Q3 and Q4, it will be easier because then we come from a lower base and ramp-up and go up to a high base.

Great, thank you.

Yeah. Thank you, very much and good afternoon.

I would also have three questions please. The first one is, I hear you on the fixed cost cut and I also hear you that you'll probably expand layoff but you were already quite busy going into this crisis with your strategic positioning, the restructuring plan simply also the ongoing business.

Now you have the crisis on top and it's probably fair to say that the restructuring needs to have amplified from here. When do you realistically have time to focus on cost cuts again and really strategically repositioning this group that would be the first question?

Well, as I mentioned, we are continuing with all the discussions about the restructuring measures, which we have announced, which we call the transformation program and as this is done on a local basis in the local production side or the local region only supported and backed up from Central. There is time to discuss it and there are the capacities to do so.

And we have an unchanged program in place from the Group to check what is done, what has to be done until when and we are in time with all these negotiations and all these procedures.

So you believe that realistically this year we will have a point in time where you come to us and talk to us about your targets and then we will also start to see the first impact?

This is our intention, yeah.

Okay. Then - my question - you spoke about an indication for the earnings and we also spoke about an indication for the CapEx side, we didn't really touch too much on working capital the other major element in the very important free cash flow question.

You say you will manage this tightly, can you end the year with a tailwind from working capital realistically?

If you give me the number of volume, which we see in December and January, I mean this is the main indicator for our - working cap side, I probably give the answer this way. Our intention and what we are doing now and what we are focusing on is now to keep the working capital quarter on the same level, which we have seen in good years plus a certain additional target in there, but we want to make sure that at the end of each month and basically, day but each month and very important at the end of each quarter we achieve on the sales and last of the last month.

So this quarter-end the sales of the next month following the quarter which is obviously for the inventory is important there. We are on the same level and the same quarters which we have had before.

So if you would - if you would ask before a forecast for the working capital for this year. I mean, the first thing we have to provide is basically, the sales level which we achieve around the end of the year.

And if you apply the same working capital color which we have achieved in 2019 I think this is a very good indication and this is our target.

Thank you, that's very clear. And then the final question when I look at your outlook for the quarter, and just what's the replacement tire outlook in Q2, is this the indication that you are getting now that some of the wider dealers are opened any way you could have done some service before that.

But is this indication, you're getting from your European dealer network that it's going to be sizably worth year-on-year than Q1?

Sorry. Could you repeat that?

This was just - we did not get it here.

No problem. If the indication that you are getting from your dealer network that Q2 replacement tire demand in Europe will be sizably worth year-on-year than it was the case in Q1 or is that just your assumption based on the economic conditions that you assume?

While we have the situation that in Q2 the big regions for us, Europe and North America had been lockdown for the retail stores in April and now this is in the U.S. and North America is even probably in May, and only then, this is going to be released.

So this is the big chunk of our business in tires in these two regions had a strong lockdown effect which we saw in China in the Q1 positively, is that there is obviously a strong recovery, as I mentioned, I don't want to overstate it. But at least in the first days here in Europe and we see it in the, in the first weeks in China, the first half recovery back to pre-crisis levels.

Obviously Q2 still will have this strong burden of the first month of Q2 definitely April, where in many cases that just no sales or only online sales, which is always the smaller part of the whole channel, but then it could well be that May and June are already recovering nicely. Is this answering your question?

Yeah, it does. Just on that side.

And do you in many industries there is no pent-up demand. In tires I kind of would see a catch-up effect, possibly because people in Western European countries at least change their tires typically after Easter.

Is that something that you do see right now, could we see a potentially very strong rush from retail customers into times?

Well we have just a couple of days after the lockdown. So this is too early to say.

Fair enough. We have to take into account that people were driving less in April in Europe.

So there should be just by usage of tires, there should not be a strong catch-up effect. People did not drive to work back and forth, they did not go on Easter vacation.

So I don't know. I wouldn't go that far, but just take as a message, it seems to recover fast.

And actually, I would like to have a more detailed analysis. I'm not in a position to deliver this at the moment.

Fair enough. Thank you.

Hi, thank you very much for taking my question. Maybe the first one actually on following up from Tim on your tire markets.

You've obviously said that we will continue to have ramp-up costs in the coming quarters from your two plants in Asia and the U.S., is that still the plan that they go online and start producing or you changed any sort of plans in terms of the size that you starting to run there? And then the second question is really on some of the pricing in the Automotive division.

Obviously, you know the volumes are significantly below what you were expecting and what you plan for and what we've agreed with the customers. And we've heard in the media VW has been quite outspoken that supplies are asking for price increases.

Is that something we are seeing across the board? Are you part of that?

Or is it right now, not the time to ask for better pricing to compensate for the lower volumes?

Kai, this was a misunderstanding on this when I use the word ramp up what I wanted to point to is that the actual existing production side had to be ramped down. In Europe, our Colmar factory, which you know our factories in Eastern Europe as it was in the first quarter in China in Hefei and now, they have to be ramped up again.

And this process of basically closing down the production side, the old tire factories at a certain point of time we're sitting idle and are now ramping up, this was the ramp-up costs, which I was referring to. So the efficiency in the first weeks of the production of our big tier brands worldwide is below the normal level just because of this effect ramp down, ramp up and I go from basically 100 down to zero and then move up pick up to 100.

Secondly, pricing it is unchanged through that we have clauses in our contracts with our customers, which allow for discussion about the pricing if intended volumes are not met, but this is never on a quarterly basis, it is always on the basis of sometimes lifetime of the product or it is on the basis of certain defined number of years. And for us regarding this contractual situation at the moment, it is not the time to go to the OEs and ask for price increases because this time is only there when lifetime sales are close or when certain number of years can be added up in these numbers are not achieved.

Okay. And maybe on the latest comments by the government, obviously there was a summit earlier this week regarding potential incentive programs.

Is there something you can share or it's something that has been shared also with the suppliers? How you get - how you prepare yourself and what do you think the likelihood is that we see something in the summer?

Well, we had - this was a discussion where the VDA the German Association of Suppliers and OEs were discussing with the Chancery and other stakeholders involved. And the discussion - the demand from the automotive industry overall, the request was to put incentives in place.

Similar to what we had seen in 2009 in Germany, where I think we have €6,000 was the number which we had, which significantly increased. The volumes are headed for a sharp ramp-up back to a more normal situation, and this was the request of the VDA.

And now there was discussion starting, we're obviously other people said, well, it has to be more targeted towards certain emission reductions or certain technology does it have to be combined with you only get this incentive, if you give back an old car with better technology emission ratios and so on. And the outcome finally was, as there was not one main trade in the discussion that it will be another meeting in about four weeks where a design of such a program should be outlined, including the interests of the different stakeholders of this topic.

And this is probably not the best outcome in such a discussion because we all know when people are getting aware and the German population is aware of this discussion, it is not too much supportive for selling cars in the next days people tend to wait in the hope that there might be an incentive program. So it remains to be seen.

Hopefully discussion is finalized very soon with then the one other incentive for Germany has, by the way we see as well the one, are there incentive in China which helps there to get the automotive industry ramped up.

Okay, thank you very much.

Good morning, - good afternoon all, sorry. Two questions left for me, please.

I appreciate that the dividend decision is in the hand of your Board but as the views of the Management Board changed in any way regarding the dividend proposal. Would you today show more moderation in the view of the current difficult environment for the dividends that should be paid in 2020?

First question, please.

The Executive Board has given its recommendation in December, 13th December and now dividend in the end of the Supervisory Board whereas as you know, there is a representative even 46% of our shares even represented in our Supervisory Board.

Okay, thanks. The second question as more specifically on ContiTech please.

The efficiency that have kicked in in the first quarter we're probably in the magnitude of €25 million to €30 million of the EBIT level just correct me if I'm wrong, my assumptions. Do you expect the same kind of magnitude of tailwind in the coming quarters for ContiTech?

This is in line with our expectation of this cost reduction program, which we initiated 18 months ago and as we said the outcome is to be expected in 2020 and 2021 this is what we see now and then it was, as I mentioned, helped by strong industry business.

Okay, thanks. Last one if I may.

Do I understand correctly that you will update investors in the community on the cost-cutting plans for the whole group in 2020 not in 2021 in your new fixed cost initiative, et cetera?

Yeah, this is what we intend you're rightly understood that. This is what we intend and the only thing we have as main unknown at the moment, is how the markets are going to be and how much we probably have to add to achieve as we discussed before.

This margin targets for the Automotive Group and for Vitesco, Powertrain and, for the Rubber Group.

Yeah. Okay, thank you very much.

Thank you, operator, and thank you, everyone, for participating in today's call. As always, the IR team is available if you have any remaining questions and goodbye.

And most importantly, please stay safe and healthy. Have a good day.