Continental AG

Thank you, operator. Welcome everyone to our Q3, 2021 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'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 Q&A session for sell side analysts only.

To provide a chance for all to ask questions, we would ask you to limit yourself to no more than three questions. This will help us conclude our call on time.

With this, let me now hand you over to Wolfgang.

Sure. Thank you, Bernard.

Let me begin today's presentation on Slide 3. Two major events in the execution of the Group's strategy occurred in the third quarter, first the spin-off of Vitesco Technologies was successfully completed and its listing in Frankfurt, took place on September 16.

And second, we announced that we are realigning our structure to accelerate the strategic transformation of the company. I will cover this in more detail shortly.

While we are confident that these strategic changes will help us fulfill our mid and long-term ambitions, the near-term operational situation is more challenging, starting in Automotive managing the semiconductor shortage remains the dominant task with the recent pandemic surge in Southeast Asia, further exacerbating the already tight situation. The resulting effect on reduced vehicle production volume, supply chain costs and operational inefficiencies activity visible in our Q3 figures.

On the flip side, the development of future business remains healthy as we booked €4.8 billion of new wins in the quarter, taking the year to year date - year-to-date order intake totaled to about €13 billion. The Rubber group fell the semiconductor shortage through negative volume development in OE related business however Tires and ContiTech are better able to compensate by leveraging the favorable market environment for replacement tires as well as the positive developments in the industry and aftermarket business.

Now switching to our current priorities on the right side of this chart while we do believe the worst of the semiconductor shortage is behind us. The situation in Q4 and also in 2022 with stay demanding.

Indeed sales to OE customers in October are only incrementally better than they were in September. The effects of cost inflation especially for electronic and electromechanical components, increasing being felt in our figures.

While we are working with both suppliers and customers to define and implement mitigation measures, we do not expect offset become effective until next year. Beside from components cost for other inputs, including raw materials, energy and logistics are also stepping up.

These factors are all reflected in the updated outlook we issued on October 22. Regarding technology, we are making further progress on our strategic priorities in advanced driver assistance systems and sustainability.

In automotive we finalized our joint venture with Horizon robotics that covers not only hardware and software for AI and autonomous driving but also includes memorandum of understanding between our joint venture and electro bid for standardized software solutions for vehicle infrastructure. Tires, we premiered our green concept tire at the IAA Munich as a demonstration not only of our technology capabilities, but also of our strong commitment to sustainability.

I'll come back to this on the next but one slide. Moving now to Slide 4.

Back at our Capital Markets Day in December, we presented our company's strategy based on clear strategies for each group sector with our organizational realignment we adapt our organization as well as reporting structure to the strategy - structure for the strategy to increase the speed of our transformation as well as to increase transparency. While our organization will already be transitioning to the new structure starting in January for reporting purposes, the transition will be done in two steps.

First, strategic 2022 quantitative entire we report and provide outlooks as independent group sectors joining Automotive and contract manufacturing. For automotive.

We will provide disclosure for three business areas. Vehicle networking and Information as it is today and Safety and motion and autonomous mobility.

Starting in '23, we will add more detailed disclosures regarding VNI. We are implementing these changes, so that all stakeholders can more transparently follow our progress entrants formation.

Continuing on the Slide 5 in our continental green concept and as shown at the Auto Show in Munich. The innovative tire features current and future technologies and underlines our strong commitment to the clean mobility of the future.

It minimizes resource consumption throughout the entire value chain, it is made from renewable materials like natural rubber from dandelion, silicon from rice husk ashes as well as vegetable oils and resins plus it contains a high share of recycled materials. Re-using everything from PET bottles and rubber from worn tires to reduce the amount of virgin raw materials needed for tire production.

The 52% share in renewable and recycled materials used is a big step towards our ultimate goal to switch all our tire production to sustainable materials by 2050 at the latest. Thanks to an optimized tread pattern a new type of casing structure and especially side wall and weight optimize bed the Conti GreenConcept tire not only uses less material, but is also up to 40% lighter than today's standard tires.

The GreenConcept is also capable of being retreaded multiple times further, helping to save raw materials and investment. At the same time, reduced rolling resistance increases range and efficiency by an impressive 25% against the tough level A requirements.

In addition to the GreenConcept of tire, Continental equip the IV live presented on the Motor Show by Volkswagen with a special eco-friendly tire which is ready to make its way into series production in the near future. These tires is based on our existing standard [eco protect VI] that will soon be available on new vehicles and later also in the aftermarket.

Let me now shift to our financial highlights starting on Slide 6. Unless indicated all figures are shown for continuing operation.

Reported sales came in at €8 billion, 7.4% below the reported figure from Q3 2020 and organically, down by 8.5%. Due to lower volumes and increase in cost headwinds adjusted EBIT decreased year-on-year by over €300 million resulting in an adjusted EBIT margin of 5.2%.

Special effects totaled positive €38 million, mainly driven by carve out related effects and relief of restructuring reserves. Net income after taxes attributable to shareholders achieved €309 million.

The strong increase versus prior year is mostly attributable to the impairment booked in Q3 2020 trailing ROCE was at 10.5%. Free cash flow for continuing and discontinued operations and excluding acquisitions, divestitures, and carve-out effects came in at €12 million.

I will cover cash flow in details on the later slide. Due to the Vitesco spin-off the clear comparison to the prior-year figures for the gearing and equity ratios is not applicable.

However, the post spin-off figures shown on this charge show that these metrics remain within the target ranges, we communicated back at our Capital Market Day last year. But spin-off net debt was just under €4 billion, a level in line with our commitment to sustaining an investment grade credit profile.

And let me now move on to the performance by group sector starting on the next slide, Slide 7. In Automotive Technologies, we saw a sizable year-on-year organic decline by 17% caused by the semiconductor shortage about 3 percentage points ahead of global vehicle production, as shown on the following slide.

Due to the volume decline and supply chain cost, the adjusted EBIT margin dropped to negative 2.3%. In Rubber Technologies sales grew organically over the prior year by 4.5% pricing and mix compensated follow our OE volume in terms of profitability, while our pricing and cost saving initiatives were helpful, they were not able to counterbalance the sizable raw material headwinds of about 2025 million in the quarter, resulting in an adjusted EBIT margin of 11.3%.

If I proceed to Slide 8, showing our regional outperformance in automotive. Weighted by regional share, automotive sales were about 700 basis points above the light vehicle production in Q3 2021.

Out performance was very significant Europe supported by a strong aftermarket business for commercial vehicles and services and by higher content per vehicle as our customers optimize their product mix. In China and North America all sales development was roughly in line with regional products.

Let me now move through the individual businesses starting on Slide 9 with AMS. Sales came in at €1.6 billion a year-on-year organic decline of 21% all product areas has volume impact of the semiconductor shortage, especially advanced driver assistance systems and hydraulic braking at European and North American customers.

In addition to these reduced volumes, higher year-on-year premium freight charges around €25 million price increases of semiconductors and operational inefficiencies caused by demand volatility affected the adjusted EBIT margin, which was minus 1.7%. The margin does include a positive effect of around €30 million related to the spin-off.

Additional add up R&D increased year-on-year by about €30 million in Q3 and by about €70 million in the first nine months. As a reminder, we have revised our expected increase in advance systems R&D to about €100 million to €150 million for the full year.

Despite customers continuing to delay, their sourcing decisions due to market uncertainties AMS recorded an order intake of €2.7 billion in the quarter. The biggest order wins were related to electronic brake systems, most notably for the MKC2 the one box.

Next slide is VNI adjusted in AMS the semiconductor constraint affected sales in all product areas of VNI, only commercial vehicle and services which is the core of our smart mobility activities for fleets and in the aftermarket recorded year-on-year growth despite the chip shortage. This boost allowed VNI with its overall organic decline of 13% to significantly outperform vehicle production.

The adjusted EBIT margin declined to minus 2.9% as AMS major drivers for this unsatisfying number are lower volumes, supply chain costs excluding premium rate of around €25 million, as well as operational inefficiencies. Also, precision AMS this year's figure includes the positive effect from the spin-off of around €30 million.

VNI recorded again solid order intake of €2.1 billion, including more than €1 million for a panorama display solution employing OLED technology for a premium volume vehicular with start of production in 2023. Organic growth in tires for the next page area in the organic growth in the tires business area was 2.5% versus the year ago period, volumes decreased by 5.5% due to the weak OE demand on the one hand side and strong demand for truck and passenger car replacement tires in North America and China on the other hand.

The latter ones continue to be ahead of 2019 levels. Replacement volumes in EMEA surpassed prior year but did not fully achieve 2019 levels.

Price mix, improved by 8% reflecting the ongoing favorable business environment, particularly in EMEA and the Americas. Roughly half of the figure is attributable to price which accelerated sequentially versus Q2 and should sequentially improve again in Q4.

The mix contribution make up the other half specifically driven by a higher share of ultra-high performance. Despite the strong contribution from pricing and mix, the adjusted EBIT declined year-on-year by 340 basis points mainly due to cost increases in raw materials of €150 million increases related to energy and logistics were minimal in Q3, but are expected to be more material in Q4.

Quantitate sales as shown on the next slide. Organically, declined by 4% reflecting the impact of lower vehicle production on this roughly 50% OE share of sales.

In contrast, industrial and aftermarket was more resilient with Surface Solutions and power transmissions recording solid growth. Besides the lower volumes profitability was influenced by raw material headwinds of about €75 million as well as operational inefficiencies from volatile demand.

While we were able to partially compensate for this through pricing activities as well as capacity adjustments the margin decreased to 6.2%. We expect these elements to influence profitability in Q4 as well also adjusted in tires we anticipate energy and logistics headwinds to be more strongly fit.

Slide 13 provides an overview of the cash flow in Q3 versus the prior year for comparability, as well as transparency, we have adapted our cash flow reporting and 2021 outlook to reflect the free cash flow contribution from discontinued operations of about €300 million compared to the €2.2 billion figure last year. Operating cash flow in Q3 this year was significantly lower at €478 million.

However, the prior year figure benefited from the reversal of the working capital effect and the contrast working capital was the cash flow burdens this year specifically due to inventories that are higher than normal seasonality. In Q3, working capital, including the contract manufacturing increased by €530 million.

This reflects both higher raw material prices and higher inventories carried as a mitigation measures to supply chain challenges. We expect that these higher numbers and factors will also be visible in the inventory figure at the end of the year and only will reverse the semiconductor shortage is over.

The operating cash flow also includes cash outflows for restructuring of €66 million. Year-to-date cash outflows for restructuring €192 million.

The expected total for the full year is about €350 million. Excluding the cash inflow of €125 million resulting from the sale of a minority stake in a financial investment, investing cash flow was only slightly higher than last year.

While we expect CapEx to step up in Q4, we have lowered our expected investment for the year, down to 6% of sales. Free cash flow for acquisitions, divestments and carve-out effects was €12 million.

Continuing on Slide 14 with our market overview. As explained in our pre-release, given the ongoing constraints related to semiconductor components, as well as uncertainties related to the supply chain and in customer demand, we revised down our expectation for year-on-year global light vehicle production to minus 1% - to minus plus 1%.

This considers not only the severe volume impact in Q3, but also the uncertain environment we are seeing in Q4. The same factors also influence our reduced expectations for commercial vehicle production.

For replacement tires, we slightly increased our forecast due to the ongoing favorable market environment, though we do expect growth rates to come down in the fourth quarter as comps get tougher. Let me conclude today's presentation with our updated outlook on Slide 15.

Unless otherwise indicated, all the parameters shown here are only for continuing operations. These numbers were already pre-present, pre-release and therefore we'll not read through them.

The only additional update is the tax rate which we have reduced from 27% to around 23%. All other elements of our outlook remain unchanged.

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

Yes, Tom Narayan, RBC taking the questions. So first on Tires what happens to tire margins once OE comes back.

Presumably, you're benefiting from better margins in Tires, as a result of more replacement market share relative to OE. And then could you give us some color on your EV tire market share and with this increase your Tire margins or decrease, since it will likely be more OE exposed especially early on.

And then on automotive some OEMs, especially in the premiums side have been benefiting from better price mix given limited supply. I guess the question is how much does this translate to better price mix for your business?

Would there be more content per vehicle or does this really not help you guys maybe it just goes to the OEM? Thanks.

Thanks, Tom. First question, higher margins when OE comes back, while you would have to be at the [indiscernible] comparison of what we expect for next year and what we would see is on the pass through clauses.

We have a positive effect on the OE prices at the raw material price increases with the delay from raw material price increase to the final price increase through the year, OE will be positive. So if we see an increase in volumes of the OE next year, it is definitely on a better margin than what we see this year as these additional pass-through process will have to increase the pricing on the OE side.

And the EV profitability is above the average profitability of our tire business. If the tires allow for differentiation, if the tires are specifically optimized and rolling resistance at the same time braking distance shall not be compromised, we have the higher way to carry and all this together, allows with this differentiation to get better margins from our customers.

And thirdly OE price mix their optimization of their sales. Now to the higher end cars, where they have higher margin actually it is for us not positive on our margin as we do not necessarily earn more on parts sold to the - as we've to earn on products sold to be exact just to give an example of one customer.

In the end it is all the same sales organization, which we are seeing. The positive effect on us is though at least partly that the content per vehicle for us per vehicle sold is in some case is higher, because our share in high-end vehicles is higher - absolutely higher than it is in lower-end vehicles, as they have more of our products.

So the outperformance, we saw before of about 7% regionally adjusted is partly driven by this. But again this is a topline topic, the average margin of these additional business is not higher than the average margin we have in the rest of the business.

If I could just follow up on that, EV tire profitability point, I guess the issue would be early on, wouldn't most of the EV tires the OE and far less replacement given that it's such a nascent market. And with that, you know kind of current margins just simply because initially it's more OE and less replacement?

Which is true, yes this is true. But even there, the message is right.

I mean I'm comparing OE margins non EV with OE margins for an EV and replacement margins for non-EVs and for EV. We see by the way now more statistics, which show that.

So therefore the replacement tire market will probably be faster coming that indeed on the electric vehicles, the use of the tires is higher than we see on classical vehicle. So therefore the move into the replacement tire market should be faster than we see this is combustion engine tires.

Good afternoon, Wolfgang, Bernard, it's Gabriel, from Citi. I've got three questions please.

My first is on the auto EBIT guidance. When I look at your guidance for the auto division even the upper end implies an EBIT margin in Q4 around negative 6%.

My question here is when do you expect to generate a positive margin again in your auto division and what currently gives you the confidence that the business is on track to reach that 6% to 8% mid-term target that you set in the CMD last year. My second question is on the pricing discussions that you mentioned in your presentation.

Maybe you can just give us an update there on the discussions that you've been having with your customers around price increases and price recovery. What really gives me confidence here that you will be able to recover some of that cost inflation, next year and maybe you could help us understand, roughly what percentage of these costs, you think you can realistically recover.

And then my final question is back on Tire then price mix and the price mix in tires looked like it was probably strong enough to fully offset raw mats in Q3. Is there any reason this level of price mix wouldn't continue into Q4 and cover most if not all of the €350 million raw mat headwind that you're forecasting for that quarter?

Thank you.

I think if I respond on the first two questions together because actually your question. When is the auto business or probably is the auto business indeed in a position of mid term to achieve the 6% to 8% looking at the extra margin.

And the answer is a clear, yes. I still confirm that we have three elements, which will have, first volume.

We have this now very rough number 20 million cars per quarter now. We see that the demand, the end consumer demand is significantly higher.

If you're put into account as well that the supply chain is basically empty most probably in all the numbers days on hand for retailers and wholesalers in the US massively down from normally 60 days to 10 to 15 days, so this on its own is basically more than 10% annual increase of demand just to fill up the pipeline. An example of how we yes.

So volume will be one driver. Secondly, the restructuring will show its effect in 2023 and later not only the one year and later.

And the third thing, and this was your second question is, the price in Q4 now includes already significantly higher impact from price increases of the semiconductors, which we are facing. Logistic costs are with special at least logistic cost continuing in Q4.

And we see, we discussed it in the last call and in between. We see this volatility in our production to adjust over to the very short changes in call from our customers, which is another as we've said in other more than €50 million probably to €70 million.

Now, these costs are still in there and they are not compensated yet from discussions and price adjustments to our customers. And yes, we are - in these discussions, we have started this discussion some weeks ago.

We are in this discussion and we have to financial solutions with our customers to make sure that these cost can be passed over. Finally, I think they have to be passed over to the end consumer.

We don't believe that they will stay there only for half a year or so, they obviously logistic cost will fall away as soon as the chip crisis still was on higher leverage for some time and this cannot be borne by the supplier Now taking these three elements restructuring, volume, pricing I think we are still on the right path to achieve the 6% to 8% mid-term. Price mixed tires, we mentioned that the price increase is 5% of the price mix which is a nice 8% which we saw in the third quarter.

The price element is during the year increasing. We see further positive trend in Q4 and Q1 again will be required to pass over this raw material cost finally to the end consumer, if the raw materials stay on this extra level and we have to do this.

Meaning we have to do price increases again, in the beginning of the year to compensate for that.

Okay, thank you. Can I just follow-up there.

So is it possible that you could fully compensate the €250 million raw mat headwind that you're guiding to in Q4 then if the first further price increases come through in the next few months?

Yes, this is our intention. As we have always done in the past, raw material price increases in tires have to be in the end passed over to the end consumer and we have full intention to do so.

I would like to go back on the automotive guidance. You of course it includes a step up in R&D costs.

Can you maybe help us understand if the previous guidance of €450 million to €500 million, I believe it was of our R&D for it is still valid and would there be a significant step-up in 2022?

And let me just to check Giulio I did not fully understand.

Giulio you're asking if the R&D amount will also or a separate R&D will occur between 2021 and 2022 is that where you're getting at?

Yes. If the guidance is still valid the indication you gave €400 million to €500 million?

Sorry now I understood. The guidance for this year was for these advanced driver assistance systems specifically to have this increase of €200 million to €250 million.

Now, we were not realized all of it is actually was, including two elements, one element was internal additional R&D build up for specific topics we're entirely. We can get a step further roughly up was nearly half of it and the other half was basically for additional and while joint venture corporations where, there are new technologies which we want to be close to and which we want to be able to use without believing that we can invent all of these ourselves or should invent all of this ourselves.

Now what we want to do internally we'll fight well on our bet on these cooperation joint ventures. It is not growing as fast as we believe nine months ago.

Still on its way and it will come, but it might come a couple of months or even two or three quarters later. Therefore guidance for next year is still around it, I would see it at the moment around these €200 million and €250 million, while at the moment it's €200 million to €250 million.

So, there will not be another additional step up but what we did not achieve this year in additional investments, let me call it investments in R&D and in the technology probably might be done next year to achieve this €200 million to €250 million. This is a private number not finally budget for next year is not finally decided on and the volume we would need is not finally clear but there might be, what we did not achieve next year might move over in this year and next year.

Okay, thank you for that. And just about this delays.

I mean, we are seeing the market moving really quickly on ADAS with the new players coming in, we're seeing consolidation of players. Are these delays causing you some concern when it comes to market share and winning new business you're doing some clear progress in the plays the you've been progress on breaking, but we are not hearing a lot of progress we made on ADAS when it comes to new orders, it doesn't it off considerably?

No, actually the targets, where we want to do the cooperation and this joint ventures close or getting to the technology. The targets are there, we know that we talk to them this is just to the finalization it takes somewhat longer than we had hoped for.

Thank you very much, It's Thomas with Kepler Cheuvreux. I have a few questions as well, please.

I'd like to make another attempt at the Q4 implied margins, I'm not sure I understood your answer, the implied margins for both Rubber and Automotive it looks particularly low. So I'd like to know how much cushion you effectively put in this guidance, I know the ranges are quite wide in terms of volumes for the quarter, but still looking at the, even the upper end of what you guide for it implies a major step down even adjusted for the adjusting for the one-offs included in the Q3 margins.

The second question is trying to come back as well to how you get eventually to the mid-term 6% to 8% margin. The pace of improvement in Automotive.

I mean, so you're going to start up, minus 2%, minus 2.5% for this year and you've explicitly said that the improvement in 2022 would be moderate. So, but let's say if you assume that the restocking effect eventually happens at one point in H2 next year, and in 2023, do you believe that wheels volumes in 2024 or 2025 back at 2019 levels we should be then by 21, 25.

I mean at 6% to 8% for Automotive margin? And lastly, my third question more a philosophical question probably.

There seems to be almost a fight ongoing between automakers and suppliers currently, in terms of trying to effectively recover prices or in terms of not necessarily talking as much as would be possible to improve the complex situation. Do you believe that there could be effectively from improvements in the communications between automakers and suppliers knowing what you've been through in terms of stop and growth and what you've been through in terms of being able to supply semiconductors up higher cost for you to your customers.

Well regarding the questions for Q4 as you call it on us. If I look at October automotive we saw little step up in sales probably do you did not see a significant step up in sales volume.

So I would not fear that there as you are rightly saying there is a wider range obviously now in a guidance which is already and we are already in November. But I think within the range of this guidance, we will be on the cost side, it is including the higher cost for the semiconductors, which are stronger in Q4 than they have been in Q3 and Q3 if you add those €230 million factors up, which we had in VNI and AMS at this type of headwind from these spin-off related one-time positives.

For the rest of the question, if you want to do the bridge it's a question of leverage on the respective lower or higher end of the guidance. The same is basically true for the Rubber business.

There I think October was quite okay. Regarding these guidance so probably we would end up more in the upper part.

This is my actual as I actually see it in the upper part of the guidance, but we would, I think we will stay within this range, as well as the guidance which is accepted quite a big range. While the margin recovery as I mentioned before they are these three elements, which we see restructuring, volume, prices and we don't expect for next year.

To have already this very strong volume increase. I think what IHS is forecasting for next year, seems to be realistic.

But if we talk mid-term until 24, 25 we see a good chance to come back towards the 2019 volumes and this should be sufficient of a driver to get into the 6% to 8% range together with the restructuring and together with the price recovery. The cost recovery which we need for this higher input cost and this leads three of fourth - third question you recorded a fight between suppliers and OE.

I think we would not call it a fight, but there is a strong discussion ongoing among us and our customers. In principle, I think there is an understanding that this cost base is not the cost base which is reflected in our actual costing.

But yes, it is always a question, how much of these additional cost that the suppliers in the end will be accepted or will be negotiated with the OE and this process is ongoing. It's very intensively ongoing, as I said, started already some weeks ago and too early to give any comment on that.

Hi, Wolfgand, Bernard, Jose of JP Morgan. A couple of questions please.

I think on the go back again to the VNI. I mean, first, can you comment a little bit by region, which of the regions are you seeing coming back quicker to stronger revenue growth post the semiconductor this obviously had in Q3, which region are you seeing coming back to stronger revenues.

First question. Second question, can you talk little bit more about AMS and VNI I'm just trying to understand it better the past in the next first 16 months.

Maybe you can update this may differentiate a bit more on this three buckets that you have restructuring, volume and pricing. When you look at the AMS and VNI it is more restructuring in AMS versus VNI so which are the biggest growth drivers within this capabilities, within AMS and VNI?

And then the third one is again coming back to the fourth quarter are we looking at sort of revenues dropped more in line with Q2 very slightly below Q2, how we should be thinking about it. I mean, you're talking about, not a major revenue recovery the first three?

Is that maybe the way we are thinking about it sort of a Q2 level slightly below that? Thank you.

Could you, Jose could you repeat the last question I did not fully understand that.

The last one, when you look at the revenue profile for the fourth quarter, you're seeing that there is not a major uptick. I understood there is no major uptick on AMS and VNI in Q4.

How do we think about that, that revenue profile before. Is it sort of firstly half versus Q3.

But maybe below Q2 is probably the best way to think about it for outcome?

It is little bit hard to understand here Jose if you talked about I start with the last question, if you talked about the volume, it's our expectation, this is the guidance more moving towards the Q2 quarter. Margin is below anything we saw in the Q1, Q2 or Q3.

As it includes now not only the special freight costs, but as well. This is price increases for the semiconductors and it's more volatility in the production.

If you look at the regions for the growth recovery. For next year, we would expect that Europe is as North America is nicely recovering and is the one who is back that in the second half of the year, more in Q4.

Finally one which is showing the growth, but then as well. China is they see this last month as well.

On retail level we see as well the China has a potential to pick up.

Thank you. And then for the medium term, as we look at AMS in VNI - do you think restructuring is a bigger boost to earnings within AMS or is it within VNI like where do you think restructuring is going to be a bigger boost to margins?

The bigger boost is the VNI and specifically the cluster business in the end, the phasing out of the cluster business it's caused by corrected with the restructuring.

Thank you. And final one, when do you expect this growth to accelerate within AMS and VNI, when do you expect the outperformance to grow the production to pick up, is it sometime in 2022 or is it more than 2023?

We see this already in 2022 already in VNI that we have less, less burden from the cluster business which is moving down. We see orders for the brake business, which are starting in the US, which are starting in AMS for next year.

So the outperformance is there next year and 2% to 4% is our expectations for the years to come.

It's Horst from Bank of America. I've got few questions, the first one that relates to limit to the question that has been us also by Thomas and on this Q4 and sequential development.

So if I get it right, you focus despite your line with IHS your forecast kind of sequential revenue decline. So I just want to understand what is the sensitivity of earnings to revenues?

I mean we can of course debate volumes. But I also don't know what kind of outperformance you assume basically for Q4?

So maybe that's the first part you can answer what is about the outperformance? And then second, what is the sensitivity of revenues to EBIT and why is there a reason to assume declining revenues Q4 versus Q3 and then may be a general sort on outperformance.

I mean we saw it not bad in Q2 it was actually quite strong because of the year ago basis and then also know Q3 was pretty good. So I don't know, you have got this 2% to 4% outperformance guidance in place is set.

It's the frame that we should work results for next year because we have good change in mixes for example outperform it should be weaker in 2022.

The Q4 sensitivity on profit level regarding to sales. We take a leverage of around 30% is what we, I think I've seen in the last quarters, and this, I think it's the right number to assume for the fourth quarter.

I think your question was specifically for the fourth quarter there. And the regional weighted outperformance for Q4 the assumption here is basically around zero.

So if we are somewhat better the Q4 numbers would come more somewhat more to the upper end of the guidance, but let's wait and see again. It is, not so easy at the moment is still a very volatile environment and predictions even in November are not completely safe to the rest of the year specifically as well regarding vacations or production vacations of the OEs, which are not fully transparent to us at the moment.

And yet for the region outperformance 2% to 4% is what you for if you are on the business area level which you should assume that those numbers, which we have given us on the Capital Markets Day, basically a year ago as well on our action fields those numbers in principle are valid.

Okay. I mean it's a wide range 2% to 4% but anyhow.

I don't want to be greedy but then if I get it right this on the 0% outperformance for Q4 you had made that this is just the kind of measure of precaution it's dependent on plant holidays et cetera, but I mean, also the car makers they have got shortage, right? So that if they can they produce longer.

So there is a chance that there is no early plans for the days in the outperformance should be bigger. There is no reason to assume that it shouldn't be also to 2% to 4% maybe in Q4.It is possible, technically, right?

But you can make, it's that point Horst, and I wouldn't contradict. But I mean, there might be as it is, what, at least I have heard there might be, as I think OE that volumes anyway there is shortage as well in Q1 and then you might as well shift some to the next year, at least this year as it is weak for the demand so wait and see.

This is not a straightforward I think as you were assuming in your question at the moment.

Yes, okay. Then the last have some more specific one, I remember last year when we had the call on Q3 you're guiding for this lower R&D reimbursement in Q4 last year and I was hoping all year that we're going to see this year in Q4, nice R&D reimbursement, but it seems that this is not happening.

So I don't know, it has been postponed for some reasons again or it's - I don't know or some other reasons like just not showing up in Q4 seemingly?

It was more equally distributed this year over the year starting already in Q1. We saw a more equal distribution that we have seen it in not last year, but the years before.

So overall the quarter is not really changing, but it was more on an equal distribution and this year than it has been in the years before, in the - prior years.

Thank you for taking my questions as well. The first one will be on a bit of the sourcing strategy for semis and the difficulties to pass on the prices.

In the current environment other discussions that you would probably OEMs are setting up, say by end programs as they've mentioned sourcing semis directly passing them on to you and the they would also take the price risk. Is that something that you are currently discussing as well, and if yes, how quick could it implemented and what you welcome a scenario like that, as a first question.

Thank you.

Well, actually - the sourcing of the semiconductors and then we additional functionalities, which we basically add to them by building them in our products and adding our the software is something, which is proprietary, and it was just a part of our differentiation through competitors. So, therefore, it is not in our interest that the OE goes directly to the semiconductor supplier buys the chips as a directed buy, for example, and now do what you want to do with the chip and then deliver the product to me.

We do see this in the one or other case, but we are not seeing this to become even if the one or other OE talks about it, but at least for our product, not to become a widespread concern OE are doing this directly with the semiconductor maker, as well as the specific conditions for the semiconductor, which we are buying and then delivering not as a semiconductor as it was but added with our additional features as I might call it is something which we can do. But with the specific specifications not something, which necessarily the OEs could do directly.

But again, it's not in our interest that it would happen and there is not a strategy, which we are pursuing.

And in the current environment is the share of price escalation clauses outside of basic raw materials that are usually included in contract anyway. Also increasing on the OEMs pushing against putting in more price escalation clauses?

At the moment, we are discussing these cost increases, which we are seeing with our customers as mentioned before. In the midterm, more strategic type of discussion which we are having internally now.

I think I mentioned in the last already. There is a big project, which is doing lessons learned from the situation, which we are as an industry and his colleagues specifically in, and this includes now the mid-results of this project include a multitude of eight topics and one is, yes, the question of how to more harmonized the potential volume and the secured volume from our supply chain to the requested volumes from our customers.

And obviously this was not at the moment, at least we don't have this harmonization as we see and potentially to better react on future variations that we see it now. We need more secured guaranteed capacity at the supplier and then the question is obviously who is finally taking the risk that is capacity might not be used and whether there is additional cost.

All these discussions on our started in our industry from us with our customers with our suppliers. Just as one example.

There are other topics, which have to be improved in the industry overall, which is probably volume forecasting and, but, yes, it's a topic, obviously we are strongly working on and we try to resolve within the next year to come to terms on all sides of our business, which are by it says inherent logically and harmonized.

Thank you. And one, so it's come back sort of related to the answers on the mid-term margin, you stressed the restructuring payback more from '23 onwards.

Is there anything we should already expect for '22. I guess the previous comments finance it that there should be slight positive although not significant one already next year.

We see already from the 850 which we said should be materializing at gross cost reduction and we see about €200 million to €300 million next year already.

Very clear. Thank you.

Yes, thank you for taking my question. My first question is on your automotive order intake year-to-date you have recall order intake of around €13 billion, just under €5 billion in Q3 we should annualize around €20 billion for the year.

As we think about the coming years and the share you want to take in your segments. Can you give some indication of what type of intake you're expecting given your technologies and as €20 billion sort of number you're happy with as we move into the coming years?

And then my second question is monitored you already mentioned that October volumes were a bit better than Q3. I was just wondering, has that also translated into an improvement in the volatility of the call-offs and doesn't an improvement in efficiencies and cost base?

Thanks.

Well, the €20 billion if their was €20 billion order intake this year. This would be okay to support the type of - which we had guided at our Capital Markets Day and that's why I was basically the assumption of those - of the answers to the questions, are we on a path to achieve this 8% to 11% on a group margin respective 6% to 8% for automotive.

So this is okay. We don't worry about that.

October numbers developed and yes if the volumes drop we talked. I talked about the leverage is about 30% leverage is true in both directions.

So if volumes are getting better this leverage will show. The overriding topic actually in Q4 is though that these cost increases for the semiconductors.

Now significant in Q4 fell more significantly more than the Q3. This is the main reason for this lower profit forecast and actually this is or we are discussing about with our customers at the moment what fair share of these additional cost stays with Conti and what share goes to the OE.

Thank you, operator and thank you everyone for participating in today's call and for your great questions, as always, the kind of IR team is available thereafter if you have any remaining questions. With that, we'd like to conclude today's call.

Please stay safe and healthy. Thank you and bye-bye.