Continental AG

Thank you, operator. Welcome everyone to our FY 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.

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 would 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’d 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, let me now hand you over to Wolfgang.

Thank you, Bernard. Let me begin today’s presentation on Slide 3, starting with a review of 2020 and our priorities for 2021.

We were confronted in 2020 as you all know, not only with significant volatility in all our end markets, but also the task of protecting the health and safety of our employees. In this environment, the Continental team performed well, safety and efficiently ramping down operations during the lockdown and successfully ramping up thereafter to serve the market recovery.

In addition, we effectively protected our financial health with a strict focus on cash and cost control. Fixed costs came down year-on-year by 8% and CapEx declined by 33%.

In Automotive Technologies, with global light vehicle production down by over 16% and our important European market down 21%, we were able to deliver a regionally weighted outperformance of over 3 percentage points. Serious production of our first to market ICAS1 high-performance computer always commenced.

In Rubber Technologies, we proved our result in profitability through strong operational performance, including strict cost and spending control. ContiTech was even able to improve its adjusted EBIT margin versus 2019 despite the sizable volume decline.

In powertrain, we just closed outperformance of close to 1,000 basis points shows not only that it is profiting from the trend towards electrification, but also the resilience of its core business in electronics and sensors. 2021 starts with a challenge to manage supply chain constraints mainly related to the shortage of semiconductors.

In the end of 2020, we have been working closely with our suppliers and customers to minimize these effects. However, additional supply chain disruptions resulting from natural disasters such as earthquakes and snowstorms, border closures related to the pandemic, bottlenecks for other raw materials and of course, volatile demand have not made the situation any easier.

Therefore, our 2021 outlook includes additional supply chain related expenses, mainly to freight costs of approximately €200 million for automotive and powertrain. The Continental team is also busy with deploying the strategy we presented to you in December.

Many initiatives related to operations portfolio and organization, are underway. One important aspect that we have announced today relates to a stronger differentiation of our portfolio between growth and value.

I will cover this on the next slide. We are also continuing to make progress with our structural cost reduction program measures are underway, at a majority of locations with approximately 5,000 positions having already been affected so far.

We expect discussions with labor representatives at the remaining locations to conclude in the near future and are on track to achieve the €1 billion gross cost savings target from 2023 onwards. And finally, the planned spin-off of Vitesco Technologies is entering its final phases.

Vitesco’s Tech Day and Capital Market Day are scheduled for 2 weeks from now, in advance of the Annual Shareholder Meeting on April 29. If approved, the spin-off and subsequent listing will then be completed in the second half of the year.

Moving to Slide 4, I return to the subject of portfolio back at our Capital Market Day in December, we presented the elements differentiate our portfolio as one of the cornerstones of our strategy. The key principle behind this was a consequent differentiation between growth and value businesses and how they should be distinctively managed.

As shown, automotive mobility is clearly one growth area for us. This means that to best create value, Autonomous Mobility, like the other growth businesses must have the proper resources to build out an attractive market position through innovation, growth and speed to secure its share of future profit pools.

At the same time, we remain committed to improve the contribution from our value businesses, so that growth initiatives can be sufficiently financed. The resilience of this combination makes us confident that we will achieve our mid-term growth and profitability targets.

In addition to the more disciplined capital allocation between growth and value, we are also considering organizational adoptions that would allow us to better assort our strategy and reflect our strengthened focus on transparency and ownership. Slide 5 covers the specifics of the opportunity in autonomous driving.

You know that over the last two decades, we have built a solid business and technological position with €2 billion in sales in 2019. We are among the leaders in the market.

ADAS delivered double-digit profitability in the last years. We have achieved this performance by being one of the few in the industry that can provide a full stack solution covering sensors, HPC, software and functions.

That is what makes us an attractive partner for other leading and emerging players in this area, such as the list of names shown here on this chart. Our discussions with customers indicate that the opportunity pipeline for us will accelerate in the coming years.

Indeed, we are currently in discussion with customers of an order volume of €70 billion that will be decided within the next 3 years, double the volume which was on the market in the last 3 years, the main driver, the transition from to-date, L1 and L2 systems to L2+, L3 and beyond. This will represent a significant increase in the content per vehicle opportunity for us and it will come in the form of not just components, but systems and their associated services integration and functions.

To capture a sizable share of these opportunities, we decided to increase the R&D in ADAS in ‘21 by about €200 million to €250 million. It includes both investments in our own technology as well as co-investments with external partners.

We are confident that this pragmatic approach will not only mean better access to competitive funding, but also attract the talents and partners needed to drive innovation and that maximize our chances of success and value creation. The areas we expect investments are most advantageous of our vision, AI for autonomous driving and data management.

Let me now move on to a review of our performance KPIs for fiscal year 2020 on Slide 6. In line with our allowed guidance in December 2020, reported sales came in at €37.7 billion, down 15.2% on a reported basis and down 12.7% organically.

The stronger euro, especially relative to the Brazilian real, Mexican peso and U.S. dollar resulted in an FX headwind of roughly €1 billion.

The significant sales drop was the main course of the substantial decline in adjusted EBIT to around €1.3 billion and a resulting margin of 3.5%. Operating leverage was about 28%.

Special effects totaled a negative €1.9 billion due to restructuring costs, goodwill impairments and carve-out effects. Net income was minus €962 million, and trading ROCE was minus 3.2%.

The higher gearing ratio as well as the lower equity ratio reflects this. Free cash flow, excluding acquisitions and carve-out effects, came in at €1.1 billion, supported by cost and CapEx discipline and positive working capital effects.

I will cover the specifics later. The solid free cash flow kept net indebtedness flat year-on-year at roughly €4.1 billion.

Let me now move on to the Q4 performance by group sector starting on Slide 7. The sharp demand recovery in almost all markets helped us to achieve an organic sales increase of 3.9%.

All group sectors positively contributed. Despite this, the group adjusted EBIT margin decreased by 140 basis points to 6.5%.

The main drivers were higher net R&D expenses and warranty claims in automotive and powertrain. Conversely, Rubber Technologies adjusted EBIT margin increased by nearly 380 basis points year-on-year to almost 16%.

The improvement resulted from cost discipline, positive price/mix and raw materials tailwind. Let me now review organic sales performance for automotive and powertrain versus regional vehicle production in the fourth quarter on Slide 8.

The European market returns to positive growth in Q4, with light vehicle production in the region, growing year-on-year by 2%. Automotive technologies performed in line with the market.

Organic growth in powertrain was above 22%, aided by increased demand for electrification products. In North America, Automotive Technologies underperformed the market due to planned timing shift of volumes at certain customers.

Powertrain delivered impressive regional outperformance of 11 percentage points. And last but not least, automotive significantly outperformed in the Chinese market by 6 percentage points with VNI and AMS, both recording double-digit organic growth in China.

Powertrain, on the other hand, underperformed in China market due to a decline in non-core activities. Taken together on a global level, automotive slightly outperformed its regionally weighted average by 100 basis points, while powertrain outperformed by 11 percentage points.

Now, continuing to review of the individual businesses areas starting on Slide 9 with autonomous mobility and safety. AMS reported sales, totaled €2.2 billion, 5% below the prior year level.

After excluding the deconsolidation of our Chinese HBS joint venture and FX effects, organic growth was almost 4%. This was driven by strong volume recovery and outperformance in China and Europe.

On a product level, growth was led by ADAS and passive safety and sensorics. Despite the organic sales increase, AMS profitability decreased significantly by nearly 500 basis points to a margin of 4.6%.

Higher net R&D expenses and warranty costs were the main causes. As for order intake, a recovery in bidding activity resulted in bookings in Q4, totaling €3.3 billion.

The biggest contributors were ADAS products, including radars and cameras as well as electronic parking brakes. Vehicle networking and information is covered on Slide 10.

Organic growth at VNI was 2.4% in the fourth quarter, supported by continued double-digit growth in China and South Korea. On the other hand, sales were softer in Europe, particularly in Germany as part of the declining demand for instrument clusters.

In terms of adjusted EBIT, the recovery in sales to almost previous year’s level and continued strict fixed cost management could not compensate for higher net R&D expenses and warranties. Therefore, adjusted EBIT margin came in at minus 4.2%.

As in previous quarters, order intake in VNI remains restrained by continued delays of major customer sourcing decisions. However, we did book sizable orders for four digital clusters and smart access systems helping order intake in the quarter to reach €2.2 billion.

Let me now cover Rubber Technology starting with tires on Slide 11. While reported sales in tires declined 5.3%, organic growth was only slightly down by 0.5%.

China continued its trend of positive volume growth in Q4. Winter tire demand in Europe continued to be weak.

Overall, volumes were down 3%. Price/mix remains solidly positive at plus 2.6% as replacement tires continue to enjoy a strong mix contribution and pricing attainment.

These factors more than compensated for negative OE pricing. Despite flat sales, adjusted EBIT jumped to nearly €550 million, equating to a margin of 19.1%.

This was largely supported by reductions in fixed cost, which were down 8% year-on-year and a significant raw material tailwind of almost €80 million. We expect raw materials to become a cost headwind in 2021 due to increasing prices for natural rubber today.

Also, benefits from cost savings we will face this year as many measures were temporary in nature. ContiTech on Slide 12, ContiTech sales ended the year on a strong note with organic growth up 2.9% year-on-year.

On the OE side, mobile fluid systems volumes grew in line with the recovery in vehicle production. Industrial and aftermarket developed also well, supported by volume growth in air springs and surface solutions.

In regional terms, ContiTech also benefited from solid demand out of China. In addition, ContiTech has made notable progress with its thermal management solutions during 2020.

Not only did our lightweight hoses and lines go into production on the Volkswagen ID.3. We have won additional orders worth €275 million for similar solutions in hybrid and electric vehicles at German, Asian and American OEs.

Moving to profitability, thanks to the execution of previously implemented performance enhancement measures that started in 2018 and supported by short-term fixed cost savings, ContiTech achieved an adjusted EBIT margin of 9.5%, slightly down from Q3 due to higher OE business share in Q4. We also announced further restructuring measures to support future profitability, including the site closure in Africa and capacity adjustments in Europe.

Finally, let me cover powertrain technologies on Slide 13. Sales of roughly €2.1 billion represented an impressive organic increase of 13.5% versus Q4 2019.

This was driven by the business unit electrification technology, which almost tripled its sales to €140 million year-on-year. Sales of power electronic products as well as our high-voltage e-axle drive were especially raised.

Electronic controls also benefited from increased demand in Europe. Now, the last adjusted EBIT in the quarter reached only €6 million, equivalent to a margin of 0.3%.

Benefits from restructuring and short-term fixed cost saving measures were not able to compensate for higher net R&D expenses as well as claims related expenses. Excluding electrification technology, the adjusted EBIT margin for powertrain would have been almost 5%.

Order intake of €2.2 billion benefited from several business wins in electrification. Let me now continue to the overview of the cash flow for fiscal year 2020 on Slide 14.

Due to the challenging environment in 2020 and the resulting lower EBIT, operating cash flow excluding carve-out effects came in at €2.7 billion. As for working capital, it was €130 million higher versus year end 2019, so roughly at a normal level relative to sales.

Investing cash flow, excluding acquisitions, was negative €1.8 billion. The improvement versus 2019 of €1.8 billion was due to lower capital expenditures inflow from divestitures in VNI and ContiTech as well as lower capitalized R&D.

The resulting free cash flow before acquisitions and carve-out effects does amount to €1.1 billion. Slide 14 shows the liquidity position.

We ended 2020 with €10.7 billion, including cash of €2.9 billion. The additional revolver of €3 billion, which we secured at the beginning of the COVID crisis in Q2 2020, was never used.

Our target is unchanged to have a liquidity position of above €5 billion in less volatile normal times as you know it from prior years. Our bond maturity profile also supports our financial position outside of the coming €200 million redemption in April.

The remainder of our debt will only come due in 2023 and thereafter. Slide 16 as already announced in February, the executive board will recommend to the Annual Shareholder Meeting in April not to pay dividend for fiscal 2020 due to the negative net income.

We do confirm our dividend policy or dividend payment ratio of 15% to 30% of net income in the future. Slide 17, our market expectations for full year 2021.

The outlook assumes that there are no new unexpected impacts from the ongoing COVID-19 pandemic on production and supply chain or demand. We remain confident that the market recovery we saw in the second half of 2020 will continue for the midterm.

However, the near-term outlook will be more challenging due to COVID and supply chain risk, especially in the first and second quarters of ‘21. Nevertheless, given the low comparable base from 2020, we expect global light vehicle production to increase year-on-year between 9% and 12% with a recovery in all regions.

For passenger car replacement tires, we expect demand to be up by 6% to 8%. Again, this growth is mainly related to the lower comparable base from 2020, especially in the second quarter.

For commercial vehicles, we anticipate that production in ‘21 will decrease by 7% to 11% globally, driven by a strong decrease in the China market. Meanwhile, truck tire replacement volumes in Europe and North America are expected to be up by 4% to 6% year-on-year.

I am now on Slide 18. Before going through Continental outlook for 2021, one short remark, even though we expect to complete planned spin-off of Vitesco Technologies in the second half of this year, our 2021 outlook assumes powertrain remains fully consolidated in our financial figures for the entire year, assuming a positive decision of the annual shareholder meeting, the forecast may be adjusted.

As shown on the previous slide, even factoring in supply chain constraints, we expect a significant recovery in all our underlying markets. We also expect continued outperformance in automotive and powertrain from content growth in HBC, advanced driver assistance systems, digital displays and electrification.

These factors will overcompensate for the phase out of instrument clusters and non-core powertrain products. For other, we expect a positive contribution from price mix.

Assuming that the exchange rate prevailing at the end of 2020 persist for the entire year, we expect the sales headwind from FX from about 2% for both automotive and rubber, with the impact disproportionately in the first half of the year. Combining these elements, results in a sales outlook of €24 billion to €25 billion for automotive, €16.5 to €17.5 billion for rubber, and €40.5 to €42.5 billion for the group.

Moving to the EBIT bridge on Slide 18. The improved market conditions, outperformance and cost-saving measures from the structural program will contribute to automotive EBIT in 2021.

Conversely, the previously mentioned supply chain constraints will result in about €200 million of additional logistics expenses. We anticipate that 2/3 of the headwind will occur in H1 and the remainder in H2, assuming the situation normalizes.

In terms of business areas, AMS is expected to be about half of the additional cost, while BNI and powertrain will be at 1 quarter each. The other cost factor in the bridge is the previously mentioned additional R&D expenses in AMS of about €200 million to €250 million, related to autonomous driving.

In Rubber, we expect year-on-year margin expansion in both tires and ContiTech despite the reversal of temporary cost savings and based on current conditions, higher year-on-year raw material costs of around €200 million. Both business areas will also benefit from ongoing restructuring activities, regarding FX, we are naturally hedged at the group level.

Tire is expected to have a disproportionately negative FX transaction effect due to export activities from Europe. The aforementioned factors result in an adjusted EBIT margin outlook of 1% to 2% for automotive, 11.5% to 12.5% for rubber, and resulting 5% to 6% for the group.

Continuing on the outlook for cash flow on Slide 19, the operating cash flow expectation includes an outflow of €700 million for restructuring. The first portion of the totaled €1.2 billion outflows for 2021 to 2022 that we previously indicated.

Assuming normalized business activity, working capital is expected to be relatively stable. We expect capital expenditures to be around 7% of consolidated sales, up from 5.9% in 2020.

There, we expect higher CapEx in rubber from postponed investments and higher CapEx in automotive due to growth investments and dis-synergies from the planned spin-off. In total, we expect group free cash flow before acquisitions and carve-out effects to be between €0.9 billion and €1.3 billion, and therefore, on previous year’s level at the midpoint, though it indicates the mentioned cash out for restructuring.

Slide 20 covers the remaining elements in our outlook due to the ongoing structural program and further costs related to the carve-out of the powertrain division, we anticipate special effects to total approximately €600 million. The financial result is expected to be about negative €220 million, while the tax rate is expected to be around 27%.

As in the past years, PPA amortization should be just under €200 million. This concludes today’s presentation.

And Bernard, I hand over to you again.

Great. Operator, can we now open the line for the Q&A session?

Yes, hi. Tom Narayan, RBC.

Thanks for taking the question. The first one is I wanted to drill down a bit if I could on the 2021 automotive top line guidance.

The implied outperformance of 1% to 2% is below your mid-term 2% to 4% guidance you issued back in December for outperformance. I know some of this is coming from phase-out of legacy business, particularly at VNI.

I was just wondering what the outperformance for 2021 would be excluding those phase-outs? Also, how long will these phase-outs take?

And the second question on tires, could you comment on the pricing environment to combat the raw material price inflation you called out in 2021? I know Michelin is pushing through a price increase now that should be largely implemented in H2.

Does that $200 million raw material headwind you called out include price increase impacts? And then could you comment in any potential benefits you expect to see from U.S.

tariffs on Asian tire imports? Thanks.

To start with the question on the outperformance and specifically, VNI clusters, we do see further reduction in the cluster business of about €300 million in sales for in 2021, which then is the increase in the outperformance of between 1% to 2% for automotive. And if you ask for what is left then, there is still about €600 million sales this year to be expected, so logically prior year 2020 was about €900 million.

Pricing environment is quite okay in tires. We do include in our guidance, the €200 million headwind for raw materials, but we do include as well price/mix improvements.

So, we see them in the U.S. and we see them as well in Europe.

The tariff benefits in the U.S. for basically the rest of most of – many of the Asian tire imports is helpful, I mean, partly led to some pre-buys in last year is helpful.

We have seen though in the past that this is always helpful for a limited period of time and then imports find their way in the U.S. through some other ways.

Okay. Just a quick follow-up on the VNI phase-out of legacy business, over what time period, is that the entire midterm plan that you guys have or is it really mostly weighted in like 2021 and maybe ‘22?

There is another bigger chunk in ‘22 and ‘23, and then we are basically through with that topic.

Okay, thank you.

Thank you very much. I will have three questions as well, please.

Firstly, I apologize for asking it, but I am sure someone else would have if I hadn’t. Can you, Wolfgang, please qualify the guidance?

Is it fair to believe that as it is, to some extent, the first guidance of a new CEO, it maybe even more conservative than it would normally be?

Thomas, I would not in principle see this. If you want my – at the moment, my evaluation of it, I think on the rubber side, it is probably a careful guidance.

If I see the actual development we already briefly discussed with the question before on pricing environment and this, in connection to raw material, I think this is more on the careful side on the automotive side, I would see it being a realistic guidance. It’s probably to qualify a little bit if you would ask me I mean what is Q1 as a starting point of this guidance?

The answer would be more on the top line. Probably, we are more at the lower end of the guidance.

I mean, there is a shortage of ships is playing a role and just less volume in the market on the profit side and this is true for automotive and rubber, I would see us more on the upper end side of the on the positive, upper end side of the guidance.

Okay. Very clear.

Thank you. My other two questions are release symmetric versus your two main groups.

I would like to understand the net impact of raw materials on your automotive business on one side and the price/mix versus raw mats in the rubber group basically. Could you tell us what you are assuming whether you are assuming a positive delta in rubber or neutral and what kind of share of your raw materials headwind you believe you are going to be able to transfer to your customers?

Well, I think if you take Q4 as is probably an example, 2% to 3% is a realistic assumption for what we included in our guidance and this should be fine to compensate the raw material impact, actually.

In the tire business, you mean?

In the tire business, yes.

Yes, yes.

Okay. And so can you also qualify the same thing for automotive and talk about the net impact there, please?

Well, this is the question. It’s a little bit hard to understand, Thomas, but I think the question of raw materials on automotive this is your question, is it?

Yes.

Okay. Well, the pure raw materials metal, copper or whatever you might think of, oil is not so much important to our automotive businesses.

I think you might know now the question. Obviously, you might extend the question to prices of chips or electronics.

And there, obviously, we do see what other suppliers see in the classic raw material. We do feel this and see this on the electronics side.

We talked about this shortage already in my presentation, we might discuss it later in this call. But yes, there, we see price pressure demand for price increases coming up, price inflation as well on this side.

And this is included in the guidance and it’s something which we expect to see more in Q2, Q3, Q4, then we do see it in Q1. While with the extra freight cost, the logistic cost, we see more in Q1 and Q2 and less in Q3 and Q4.

Yes. Thank you.

Hi, good afternoon. It’s Gabriel from Citi.

My first question is on the free cash flow guidance because it implies quite a high cash conversion ratio. And when you calculate the net income based on the midpoint of your guidance, I get to a cash conversion of about 100% to 130%, excluding the restructuring cash out, which compares to a midterm target of above 70%.

Can you just maybe comment on why cash conversion is expected to be so high in 2021, based on your guide?

I want to answer it, so I think the answer I gave in one of the last costs. We had a similar question to another year, but the answer is the same.

It’s basically as the profit is very much coming from the rubber side, and rubber is always with a higher cash conversion and we see profits in automotive. So this is a simple answer.

If you make a very – Gabriel, very rough calculation, this is now a very high level. If you look at 2020, €1 billion in EBIT more expected in ‘21.

We have €0.5 billion more, and I’m taking very rough numbers, €0.5 billion more in ‘21 than we had it in ‘20. But then we have €700 million more cash out for restructuring.

We had already 100 – €700 million cash out restructuring, we had €100 million in ‘20, then you would come back as well to about the same free cash flow as we had it last year, and this is basically logic in here. So higher EBIT, €1 billion, €0.5 billion more in West.

€700 million cash out for restructuring, €100 million out that was as well in 2020, gives, again, about the same number as we did last year.

Okay. That’s clear.

And maybe a follow-up on cash flow. And related to that as a dividend, could you just explain perhaps in a bit more detail the decision behind not paying a dividend?

Because I understand your point that net income was negative. The company just did $1.1 billion free cash, expecting to another $1 billion or so of free cash in ‘21 post restructuring costs?

What were the main factors in reaching the dividend decision, please?

Well, it was actually the policy we follow for a long time, this 15% to 30% more in years in the last years more at the upper end. But what we did last year, as we discussed, I think, in one call, what we did, we adjusted for impairments, goodwill impairments, as we said, goodwill impairments are not cash relevant.

They are only equity relevant and equity wise, the company is quite well-established balance sheet. And this led still then, if you did so in ‘19, our payout for ‘20.

We still led to this dividend payment we did. If you do the same for ‘20, and make the calculation this leads in the end to no dividend payment.

So basically, it was sticking to our dividend policy adjusted for this basically, goodwill related to this decision. And yes, you are right, we are generating free cash flow.

But in the end, our indebtedness stayed on the level which we have seen last year, so we did not improve our indebtedness in 2020.

Okay. And then my final question is on the R&D spending, which is expected to rise this year.

Your net R&D ratio will probably go up to about 9% of sales this year, which compares to 7.5% in 2019. Is this 9% level now sort of considered the required rate of investment for going forward if it wanted to drive growth through software and ADAS components?

And is there even a chance that perhaps it rises above 9% as the order books continue to recover? Thank you.

Well, our overall R&D expenses, ‘19 to ‘20 were basically sideways. And if I take out the additional R&D, we discussed the €200 million to €250 million for ADAS.

In ‘21, R&D expenses even would have come down about €50 million to €100 million. This is our expectation.

And now with this other coming back into – or having this additional €200 million to €250 million. We are moving up above this level of ‘19 and ‘20, which we have seen.

And by that, the – obviously, the quarter is not coming as much down as we would have seen it without these additional €200 million to €250 million. I don’t expect that this number is further increased as the quarter is further increasing.

Okay, thank you very much.

I mean, obviously, this is a high number of investments we do. As I mentioned, we have agreed on these additional investments, not in a business administration centers.

This investment spend on R&D, be it with own people or be it with corporations, because we see this big order volume of up to €70 billion, over the next 3 years on the market. And we have to prepare ourselves to improve our capabilities more in the whole systems area, not only components.

I mean, we were already strong there. But the – we get the feedback from the customers more and more that the whole system is even more important for these bigger chunk of the business, which will be on the market.

And this is exactly where we want to invest in topic of data management, eventually topic of vision, including LIDAR, and artificial intelligence to further move to everything which is software systems related in this area. This will be this year as this business opportunity is there from ‘22 to ‘24, the €170 billion is what we expect in that time.

There will be as well additional spendings, additional cost in that about amount in 2022.

Okay, that’s…

This is by the way, this is not something which we did not include in our margin guidance for automotive in the midterm, which was discussed on the capital market day, which is the 6% to 8%, and it was as well included in our sales guidance, which we have given at that time in outperformance guidance.

Okay, thank you.

Yes. Good afternoon.

Thanks for taking my questions. The first one was actually going back to the Q4 results in automotive.

And can we drill down a little bit in the one-offs that you – or so-called one-offs that you don’t adjust for in Q4 because it looks like R&D alone accounted for €200 million of, let’s say, elevated spending? And then I was just wondering if you can explain how much – if that’s the correct number or a correct assumption?

And how much was kind of warranty across the automotive business than on top of that? That would be my first question.

We had about – we call it about 200 – in automotive, excluding powertrain, we had about €150 million to €200 million, of nonadjusted type of one timers. One was, this is what you called the higher R&D costs.

This was reimbursement quarters where we saw that there was a shift in other quarters. And then there was warranty bookings, which were generously done in the fourth quarter and the year by anyway, the profitability was very much subdued.

And this €150 million to €200 million or more on the VNI side than they were on the AMS side. And this was specifically due to the reimbursement topics in R&D and overall, the R&D cost.

There was another chunk of the business, which was somewhat above €50 million, which was in the powertrain business. And this was more relating to warranty bookings.

Okay. Okay.

Understood. Thank you very much.

And then there was a jump in the D&A of VNI, even if I exclude the impairments, was there a reason behind that, in particular? So the run rate was kind of $130 million, $140 million, and it jumped above $200 million in the fourth quarter.

So I just want to make sure I understand what the rate of D&A is in that business?

There were asset impairments, which were not goodwill impairments in there as well related to the restructuring program, which we did not adjust for.

Okay. Perfect.

And then on the payables side, you didn’t have the usual seasonal pattern that your payables tend to be supportive in, in Q4. Was that active management that you paint your suppliers early?

Or what was behind that?

Yes. There was a little bit of active management in there.

We wanted to make sure that for let’s say, the starting point of ‘21, we were at back at a working capital level, which is adequate to the business. And actually, we saw that our customers were paying quite well.

And so we adjusted a little bit on that side to basically, have a working capital quarter. If you take the level for the Q4 level of sales, and do the math, we basically had a working capital quota of around 12%.

And this is, as you know, the 11.5% to 12.5% of working capital. It’s the normal level we should – we do achieve on sales.

And this is what we did achieve in the fourth quarter. And therefore, we are quite of without any negatives, we move the working capital from 2020 to 2021, and have on the sales level of Q4 has the right working capital level.

Perfect. Understood.

And then my last question is on ADAS. Just wondering if you can explain why ADAS sales were roughly down in line with the market, maybe a touch better, given that it’s such a high-growth business and you have actually quite good order intake.

Was that kind of contract phasing? Because if you calculate, it was also down 15% or so in 2020.

Yes, it was partly contract phasing and specifically in Japanese business, which we had there, which we talked about already earlier with one, you probably know the big customer where we had big others business, there was some phasing out.

The other aspect to consider, Sasha, is that ADAS, of course, is much more heavily Europe and North America focus in terms of geographic mix compared to the other businesses.

Perfect. Thanks for all the color.

Thank you. José Asumendi, JPMorgan.

[Technical Difficulty] in that opportunity, it looks to be like.

Yes. Thank you and good afternoon for taking my finance questions.

Just want to make sure that I got the guidance basically, for ‘22, right, that you gave in the Q&A here. So is it fair that basically this limited outperformance going to continue into ‘22 just because in VNI, you continue to suffer from this phase out of mechanical clusters business?

And then also on the R&D side, I’m not sure if I got it right. So did you say that the higher R&D also continues into 2022?

Can you just clarify again, please?

No. Horst, I only commented on those two factors, which are part of the override, yes, rightly so, you understood this correctly.

I said this €200 million to €250 million. Others will continue probably in ‘22, probably not in that amount, but there will be some in ‘22 as well because the business we are going for is in that.

And the second thing I mentioned that this was not commenting on the overall outperformance. But on headwind on outperformance, and this is right, there is still some fading out of the business of clusters, but I did not comment on the growth of the rest of the business.

Alright. Then my follow-up question is, so is it now fair to understand?

I mean, since you leave your midterm guidance unchanged, that basically now ‘21 is a trough and from here on, everything going to accelerate. I mean headwinds of 21% will reverse in ‘22?

And then also outperformance is going to be higher from ‘21 onwards?

Well, we – I think we mentioned on the Capital Markets Day that we saw on the outperformance is 2% to 4%. We mentioned that in – in the first year, I think we mentioned the first 2 years, we saw at the lower end of this range.

And this is what we see now, and this is – we discussed all the reasons basically, this fading out business. And yes, for the profitability, it is the same.

We have these headwinds, which we discussed. And we do see the effects of our cost reduction program only coming in, kicking in, in the bigger amount starting ‘23 following.

So yes, you are right.

Okay. Alright.

But it sounds still that still the main part, it gets only really good in 2023. ‘22 is still a kind of transition year?

Just that I get that right.

We, unfortunately, have some transition years now in [indiscernible]. I would like to contradict that you might – I mean, it is not yet at the 6% to 8%.

I mean, unfortunately, you’re right. This was the midterm guidance.

And so probably, yes, yes, I cannot contradict. Yes.

Alright. Okay.

The other question that I had because at the CMD as well, you mentioned these best ownership reviews. Isn’t now the time for best ownership review?

I mean, when I look at the results that we and I and discuss the business as well. I don’t know, isn’t it time for that now that you think about best ownership?

We do think about it. And we clearly did not forget it since then.

We are working on it. And timing is always a question of – on the one hand side market of our own preparedness of the carve-out proceeds and so on.

And – but yes, we are not forgetting about this aspect. And this is part of what we are working on at the moment and in the time to come.

Okay. But there is nothing specific now that you can mention, right, or that you want to point out?

No, not at the moment, no.

Yes, yes. Alright.

And then last but not least, this R&D, just that I understand the process. I mean, we only had the CMD in December.

And at that point of time, you could have warned already about this R&D issue. So why has it been that much of a surprise for you?

Why you only tell us about that now? So what has happened basically in the meantime between December and March, now that this now comes to the forefront?

Well, we did not give a guidance for ‘21. I mean this is not – this is not a topic which in the end, it’s completely new to us.

What is – it’s not new to us. It is included in our midterm guidance.

It’s – we knew it there. What was still, I would say, somewhat new is the reduced volume, which we see due to this shortage of the semiconductor, specifically in Q1 and probably still in Q2, a little bit in Q3.

And this logistics cost headwind, which we – even at the Capital Markets Day, did not expect in such an amount as it is coming. And this is basically, the topics which are worsening our guidance against the guidance.

Had you asked me on the Capital Markets Day, but you did ask me what I didn’t answer. It would have been – it would have not included those elements.

The right would have been in there already in this 2 months ago or 3 months ago at the Capital Markets Day.

Alright. Thank you very much and good luck.

Thanks.

Thanks. Good afternoon.

Two for me, please. Firstly, on tires, could you talk a bit about what your plans would be on capacity?

Obviously, the changes that you’re making in [indiscernible] are well understood. What about other plans?

You talked about higher CapEx for tires after delayed investments in 2020 so what are your plans there? And where do you hope to get capacity utilization for tires in 2021?

And secondly, could you talk about whether you have any orders or are in any discussions with any of the new electric vehicle startups that we’ve been seeing, either in China or in the U.S.? Thanks.

For the investments in tires are not concentrating on capacity. This is improvements in efficiency and processes, which we are doing there, which we – you saw the strong reduction in capacity in investments we did in 2020, which is partly picking up on that and doing things which we did not do in ‘20.

But capacity is not what we are concentrating and build up is not what we are doing in ‘21. The second topic, I did not understand.

I just ask you.

No new EV start-ups, if we have orders from there. I think we can just generally say we talk with all customers, big and small.

We have products that basically, cover the entire portfolio and can slot in depending on the customers’ needs from single components of the full systems. So I think from that, you can assume that we talk with a lot of people.

Okay. So discussions, I guess, I take from that, maybe not orders quite yet.

When we have orders to announce, we’ll let you know.

That’s great. Thank you.

Thank you and good afternoon everyone. Wondering if we could talk a little bit about some longer term strategy for a moment.

You have another German, very large supplier competitor that is opening capacity, probably early in the summer on Microchip fabrication and already has wafer fabrication in-house. Could you talk please about the Continental strategy?

To what extent are you outsourced? Do you have any of that fabrication in-sourced?

And then long-term, where do you see the company going in that regard?

Well, we have capabilities through design chips. We do the design.

We improved there. We have no intention to do our own chip or wave production.

Okay, thank you very much.

Yes. Good afternoon.

Pierre-Yves Quemener, Stifel speaking. Actually, I got one follow-up on the guidance on the medium time guidance for AMS.

I’m not sure I understand if the increase or the new normal in R&D spending and in will impact your midterm guidance for EMS modules?

No. The midterm guidance includes these additional investment cost R&D increases for the advanced driver assistance system business, specifically to move us even more from components to software to software systems AI data management vision.

It’s included in our midterm guidance.

Okay. Very clear.

And just, let’s say, housekeeping question, what is the share of tire that you export from a euro base to non-euro base, which explains the higher FX impact in 2021 for the tire business?

Well, it’s about 8 million tires, which we are still exporting from. It’s Europe to the U.S.

Okay.

And this obviously is something where you feel on the FX impact as it is produced in euro and then sold in dollars.

Thank you. Thank you very much.

Yes. Thank you very much and good afternoon to both of you.

I have two questions, please. The first one is just to clarify, since Mr.

[indiscernible] on my last roadshow with him, was very clear that he sees you as being responsible for them not having enough semi components. You didn’t provision anything for potential claim that VW might have towards you when it comes to compensation for that?

And then secondly, when I saw the R&D numbers this morning, the additional for ADAS, I had to discussion that we had a couple of times, and that is that one of your key competitors, Aptiv is now running around for, I would say, a good 2 years, saying that your ADAS product is actually not very competitive and that you don’t sit on the table for the key negotiations any longer. Can you just take away that fear that this additional R&D money that you’re now spending is related to you rather catching up on the technology side than really getting new orders in?

Can you confirm that this is really just something that you have to invest for technology that you potentially already have, but really just to secure the orders? Thank you.

And to the first part, I mean, the discussions we have in our organization with our customers, and I think this includes Volkswagen and all others. At the moment is purely 800 people at Condi are basically working on trying to secure supply at the right point in time to the customer with the right volume.

We don’t manage always. We do our very best I think the situation is not so different for many other suppliers.

And the OEs themselves, I think, talk as well to the chip suppliers where they have the direct orders from them and get that delivered. And I think this is the interest of the industry at the moment to get these programs solved and not talking about anything else, and this is why we did not reserve on anything else.

And the question Tim, on ADAS is – I’m not sure I should answer that. I mean we are we want to assure that we are fit for – and in the end, can qualify for all of the €70 billion of orders, which will be in the market from ‘22 to ‘24.

This is what we think the volume is in discussion with our customers. And we have to get better in those areas I mentioned, data management, artificial intelligent vision specifically.

And this is what we are taking the money for and either incorporation or ourselves, get better there. The system, which the customer more and more wants to have on level 2+, 3, 4 including these elements.

Have the capability to order that. And I don’t want to quantify.

This is something which others have had in the past, and we did not or where everybody has to get better. Actually, I couldn’t do that qualified with any qualification, could not really make this distinction.

But there, we feel we have to get better to be ready to get the decent chunk of these orders which will be on the market, and this is why we do it.

Okay, that’s very clear. Thank you and have a good evening.

Thank you.

Great. Thanks, operator, and thanks, everybody, for participating in today’s call.

As always, the IR team is available if you have any remaining questions. Then this call is now concluded.

Please stay safe and healthy. Thanks, and bye-bye.