Continental Aktiengesellschaft (OTCPK:CTTAF) Q2 2022 Earnings Conference Call August 9, 2022 9:00 AM ET

Anna Fischer - Investor Relations

Katja Durrfeld - Chief Financial Officer

Stefan Scholz - Head, Finance and Treasury

Horst Schneider - Bank of America

José Maria Asumendi - JPM

Tim Rokossa - Deutsche Bank

Giulio Pescatore - BNP Exane

Philipp Konig - Goldman Sachs

Welcome everyone to our Second Quarter 2022 Results Presentation. Today’s call is hosted by our CFO, Katja Durrfeld. Here in the room with us is Stefan Scholz, Head of Finance and Treasury. A small reminder that the press release and the 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. [Operator Instructions] With this, let me hand over to you, Katja.

Thank you, Anna. Let me begin today’s presentation on Slide 3 starting with a review of our second quarter 2022 and our priorities for the remaining quarters of 2022. The impact of the war against Ukraine as well as the COVID-19 lockdowns in China hit us hard at the beginning of the quarter. Although fluctuation and demand persisted, our business rebounded in June and overall sales were in line with the first quarter. Nevertheless, the crisis is not over. Be assured that we remain focused on our goals and we will do our utmost to significantly strengthen our position and our value.

Diving deeper in Automotive. Towards the end of the quarter, we were able to perceive relief. Our negotiation efforts are showing results as expected. We have concluded further price agreements with several OE customers. The majority of these have a retroactive effect as of January 1, 2022, which is now included in the second quarter results. There are further negotiations still ongoing with certain OE customers. These contracts are expected to materialize in the third quarter, including retroactive effects for the first two quarters as well. Having said this, despite much higher inflation in the auto sector and lower volumes in the global light vehicle production in the second quarter compared to quarter 1, we were able to increase our margin by 260 basis points from minus 3.9% to minus 2.3%. We deliver as promised.

Regarding semiconductors, the critical supply situation is still our concern. The feedback was received from our customers is positive. Despite the shortages they are satisfied with the professionalism about how we manage this crisis. This makes us confident that we are on the right way. Overall, our strong order intake in automotive is measurable KPI. €6 billion lifetime sales show customers’ confidence in the solutions we offer. Particularly, our very strong order intake at user experience proves that we know how to translate the transformation of our industry into future business.

Transitioning the technology in just a few years to high-performance compute and digital clusters is an innovative solution, which gains the trust of our customers. The rewards are €3.2 billion order intake within the first half of the year, showing that we are the winner of the transformation in this area. And these are capabilities which we apply also to other areas of transformation within our industry. In Tires, mainly due to our pricing management, especially in Europe and the Americas region as well as focusing on a favorable mix, we were able to mostly compensate the negative impact of increased inflation costs and reduced volumes in the second quarter.

At ContiTech, the solid growth in the industrial and aftermarket business compensated the increased inflation costs and declined volume, especially in the OE business. Material positive EBIT contributions mainly resulted from price adjustments negotiated with industry customers. However, negotiations are not over yet. We are expecting further agreements to be settled by the end of the third quarter. This will support in mitigating the inflation headwinds in raw materials, energy and logistics.

In June, a further major step was taken to optimize costs and improve performance whilst adjusting the operational footprint to the new increasingly battery electronic vehicles production environment. We decided to adjust the setup of the German whole sites in our business area mobile fluid systems to align our business to the constantly changing requirements of the automotive and commercial vehicle markets, increasing battery electronic vehicles generate new growth opportunities. For example, battery and fuel cell vehicles require innovative solutions for host components and complex line systems for thermal management.

In the future, we will focus on these promising applications. We expect the total restructuring costs, a onetime effect subject to adjustment, to amount to a low 3-digit million euro figure, starting to materialize in the cash flow of the financial year 2024. Once fully implemented, in steady state, annual gross savings will amount to approximately €25 million per annum starting 2026. Similarly to this measure, we and the Executive Board of Continental will continue to analyze and take actions in order to make sure we have the optimal portfolio on board to secure our future performance.

Now switching to the right side of the slide, our current priorities. To further mitigate the broad inflationary headwinds, implementation of sustainable pricing is still key. Constructive discussions with our customers have shown already first effects in the first half of the year, and we expect further positive developments in the third quarter. Our actions and measures are still driven by the tasks of increasing the overall performance in all group sectors. With our transformation program announced in 2020 and the restructuring measures currently decided for ContiTech, we continue to set up and implement new efficiency programs, which were needed and control costs strictly. As already said, we are proactively managing sourcing and logistics challenges worldwide, securing the delivery chain in the automotive sector, given the semiconductor-related constraints is of assets. To improve our free cash flow, we are managing our inventory levels aiming towards lower levels whilst at the same time securing the supply of critical components.

Regarding the potential gas shortages, we are monitoring the situation very closely. The dependency of our plants in Europe from Russian gas varies greatly from location to location, from using natural guys purely for heating purposes to use of natural gas to generate process seed to the necessary use of gas directly in the production process. We are already introducing solutions at all the plants concerned, for example, by using alternative energy sources like liquid gas fuel or electricity to bridge short-term disruptions or fluctuations in the gas supply. Additionally, we intend to reduce compared to the previous year, the gas consumption by 20% on group level and average.

We strictly control and steer order intake to ensure our future profitability. The strong order intake in automotive allows us to focus on the most efficient orders, which are the best fit within our portfolio and strategic growth fields. An active portfolio management in line with our growth and value strategy is always on our agenda. In some regions, as the entire industry, we are quite struggling with workforce availability and high staff turnover. It is utmost important to be the employer of choice and attract the talent we need to achieve our goals and keep highly motivated, passionate colleagues in the company.

The situation is particularly tight in North America at Tires and ContiTech. Even though we are able to attract new colleagues, fluctuation is at very high levels. In all regions, particularly affected, we are implementing measures to combat the labor shortage. In the past quarter, some EU regulations that have or will have a direct impact on our business came into force over adopted. According to EU regulation recently enforced from July 2022, several assistance systems will become mandatory for every new car, even the low budget cars in the European Union. These include an emergency braking system, lane departure warning system and a system that warns wants the driver when the vehicle has reached the speed limit. As a supplier of these solutions, this is a clear advantage for us.

The sixth sanctioned package against Russia adopted by the European Union in June makes further production in Russia, even if it’s only for the local market practically impossible. We monitor current developments very closely and evaluate all options available, including a controlled exit of our business from Russia. Also in June, the EU Council of Ministers decided to allow only zero emission passenger cars and light commercial vehicles from 2035 onwards. We expect that this decision will further strengthen our outstanding market position in the electric vehicle Tire segment in the EMEA region and continue to drive demand for our automotive solutions, supporting the shift new electrical electronic architecture in electric vehicles.

I am happy to announce that Continental has recently entered into an investment and partnership with MOTOVIS Intelligent Technology in China, focusing on jointly developing cruising parking integrated autonomous mobility systems and commercialize these on a large scale. As the leading parking software solution provider in China, MOTOVIS brings the capability of full stack parking solutions, covering auto parking assist, home zone parking assist and automated valet parking, which are fully vehicle-based and independent from infrastructure, thus, expediting penetration in the sizable and rapidly growing market in China. All in all, our cooperation with MOTOVIS will allow us to quickly enter the parking market, accelerate Continental China’s localized innovation capabilities, ramp-up and into a fast response and customized service to Chinese OEMs.

Let me now shift to our financials, starting on Slide 5. Reported sales came in at €9.4 billion, 13% above last year’s comparable period. Excluding supporting exchange rate effect of €428 million and changes in the scope of consolidation, organic growth was 8%. Adjusted EBIT decreased year-on-year by €102 million, mainly due to further increased inflation headwinds. The adjusted EBIT margin was 4.4%.

PPA effects did not change compared to prior year. Special effects totaled negative €529 million and were mainly related to non-cash impairments and restructuring expenses. A non-cash impairment of assets in automotive became necessary due to accounting regulations as assumptions regarding the input parameters and the goodwill impairment has changed. In this case, the triggering event was the higher interest rate environment. And due to the automotive weighted average cost of capital moving from 10.7% on December 31, 2021, to 12.8%, the value and use of some cash generating units were lower than the carrying amount of these units. This resulted in an impairment of goodwill amounting to €57.3 million and further fixed assets amounting to €313.1 million were impaired in line with the IFRS.

But let me emphasize here that this is purely a technical valuation effect, resulting exclusively from the change in the interest rate level. The planning on which the valuation is based has not changed. The volatility of the interest rate level has an impact on our entire balance sheet. For example, this has also reduced pension obligations by €2.3 billion. If interest rates fall again, the opposite might happen. The impaired fixed assets would be written up again and the pensions would increase. An impairment of fixed assets in Russia of around €75 million became necessary due to the latest sanctioned package. ContiTech recognized restructuring expenses of around €63 million in the second quarter, mainly in connection with the closure of the German house plants. Net income after tax decreased year-on-year by €796 million to negative €251 million. Trailing ROCE came in at 4.7%.

Free cash flow, excluding acquisitions and divestitures, came in at negative €687 million. Main cause is the development of working capital. Accounts receivable are higher due to higher sales level in June and also as the price negotiation results have not materialized in cash at the end of the second quarter. Also, higher inventory levels and higher material prices have contributed to the negative cash flow in the second quarter 2022. Please note, the value is not comparable to the value in the second quarter of 2021. The value of the previous year comprises continuing operations as well as discontinued operations, whereas the value of the current period contains only the continued operations.

Let me now move on to the performance by group sector, starting on Slide 6. Despite a further decline in light vehicle production due to the difficult market environment, we were able to increase the year-on-year organic sales by 7.7% in Automotive. With minus 2.3%, the corresponding margin did not change compared to the second quarter 2021. Entire organic growth of 11.4% mainly reflected our pricing activities in the replacement sector, the adjusted EBIT margin decreased by 400 basis points to 13.8%. An organic growth of 6.4% shows that the strong industrial business at ContiTech could compensate for the weakness in OE volume. Despite the strong organic growth, adjusted EBIT decreased by €35 million year-on-year, weighed down by around €150 million inflation headwinds. Finally, Contract Manufacturing declined as expected year-on-year by 22.2% organically in line with the gradual phase-out of its business with Vitesco.

Let me now review organic sales performance for automotive versus regional vehicle production in the fourth quarter on Slide 7. Segmented by region, Automotive organic growth was able to significantly outperform vehicle production in our important European market as well as in China. Our organic growth in North America nearly matched local vehicle production. Altogether, Automotive outperformed its regionally weighted average by approximately 8 percentage points. Besides the effects from increased customer pricing, we attribute the strong outperformance of the second quarter also to higher content per vehicle. Nevertheless, we do expect overall uncertainties and the volatility in the market to persist for the remainder of the year.

Now continuing with the review of the second quarter sales and adjusted EBIT on Slide 8. Automotive sales totaled at €4.3 billion. The impact from FX was positive 5.1%. The organic growth of 7.7% was driven by increasing content by vehicle and the new price agreements in place. With negative 2.3%, the adjusted EBIT margin for automotive has not changed compared to the previous year. Inflation headwinds slightly increased from below €300 million in the first quarter sequentially to above €300 million in the second quarter. Autonomous Mobility reported sales totaled to approximately €0.4 billion and showed an organic growth of 5.2%. This was mainly driven by stronger radar and camera volumes.

Safety and Motion reported sales totaled at around €1.6 billion and showed an organic growth of 5.7%. Higher volumes for new brake system generations compensated the decline in volumes for hydraulic brakes and electric stability control systems. The new business area, Architecture and Networking, Smart Mobility and User Experience, the Former Vehicle Network and Information Systems business, reported sales totaled around €2.3 billion and short an organic growth of 9.5%. Sales were mostly supported by connectivity and aftermarket.

Turning now to the order intake in the second quarter of 2022 on Slide 9, we see a satisfactory total order intake on automotive of €6.0 billion. We are pleased that we’ve also succeeded in winning attractive awards within our growth business. Again, our business areas, Architecture and Networking, Smart Mobility and User Experience showed a noticeable order intake of €3.3 billion. The biggest wins were related to two orders for display solutions within our UX action field and further business wins for telematics control units.

We are particularly proud about winning an attractive award for an eHorizon solution for commercial vehicles. eHorizon is an additional virtual sensor that networks data from various sources, assesses it intelligently and related to other vehicles and automatically sets gear, engine characteristics and speed by using information on road profiles ahead, including current traffic and road condition information. Our customers can save more than 10,000 liters diesel over the lifetime of the truck. To date, this solution has already saved our customers more than 3.6 billion liters of diesel and 9.5 million tons of CO2.

The order intake in Safety and Motion of €1.6 billion – €1.7 billion was mainly supported by awards for our MK C1 and MK C2 brake systems, worldwide orders for airbag control units and an order for an electronic air supply system. Autonomous Mobility achieved an order intake of €1.1 billion in the second quarter. Particularly worthy to mention here is that in addition to continuing solid order intake for radar sensors, we were able to achieve more than half of the volume with awards for multifunction cameras. Furthermore, we won an award for our system solution, the AD control unit.

At this point, I would like to draw your attention to our Mobility Study 2022. The Continental Mobility Study 2022 covers general mobility needs, attitudes towards sustainability effects, especially electric mobility and in-car technology development. According to the study, connectivity, automation and the user experience play a decisive role when purchasing a new vehicle. For further information, feel free to use the link in the presentation.

I will now cover Tires on Slide 10. Reported sales increased by 17.1%. Organic growth was up 11.4%. The impact from FX was positive 5.7%. Overall volumes decreased by minus 5.3%, mainly due to a significant decline in demand in the replacement business. For example, demand in the Chinese business did not pick up as hoped following the ending of the key COVID-19-related lockdowns. On the other hand, we were unable to fully meet demand in the North American market due to a lack of high availability. Price/mix was very strong at 16.7%, with around 10% attributable to pricing, predominantly from our replacement tire business in Europe and the Americas region. Adjusted EBIT decreased by €48 million, equaling to a strong margin of 13.8%. Price/mix was able to nearly compensate for cost inflation of around €450 million. In addition, inventory valuation supported with high double-digit amount in the second quarter.

For the second half of this year, we rather expect a further decline in replacement volumes due to weakening purchasing power of consumers that might, for example, lead to shifts in demand from premium brands to lower-priced brands or from winter ties to all-season tires. In addition, we assume that the retailers have already stocked up tires at the start of the wafer price increases. We expect the adjusted EBIT margin to decrease in the following quarters. Besides the volume effects mentioned above, we expect the greater part of the inflation costs to be incurred in the second half. Also, we expect higher cost in connection with efficiency improvements and an increase of labor costs, particularly in North America.

Moving on to ContiTech on Slide 11. ContiTech showed a solid organic growth of 6.4%, supported by the Industry and Aftermarket business, especially in conveying Solutions and Industrial Fluid Solutions, whereas the volume in OE business went down, burdened by the decline in Europe and China. The high volatility in call-offs remains challenging. Profitability was impacted by inflationary headwinds from raw materials, energy and logistics of around €150 million. Positive contributions from pricing activities for industrial and aftermarket business were only partly able to compensate the inflationary effect. Price negotiations with OE customers on inflation topics are ongoing, and we expect seeing positive contributions as a result by the end of the third quarter. Worth mentioning here is that on July 1, 2022, ContiTech fully acquired WCCO Belting LCC, USA, a manufacturer of belts for the agricultural and industrial sectors that are sold in 20 countries worldwide. The customer and product portfolio strengthens our agricultural business and the conveying solutions business unit, and thus the strategic growth area of highway.

Let me now continue to the overview of free cash flow for the second quarter 2022 on Slide 14. The main driver for the decrease of the operating cash flow to negative €279 million were working capital headwinds. For example, the price agreements with our customers that were signed at the end of the second quarter did not have a cash impact yet. The sales increase in June versus the 2 months before led to a strong increase in accounts receivable. Furthermore, higher material prices and operational stock increases due to prebuys and to build up a safety stock for critical components drove working capital amounts up. Investing cash flow was negative with minus – with €490 million, mainly influenced by higher capital expenditure on property, plant and equipment and software.

Let me now move on to our market expectations for 2022 on Slide 13. Our expectations are based on currently foreseeable effects. In the event, that the geopolitical situation, in particular in Eastern Europe remains tense or even worsens. It could result in further lasting consequences for production, supply chain and demand. In addition, further negative effects may result from the ongoing COVID-19 pandemic as well as possible disruptions to the energy supply in Europe, particularly in Germany and the associated supply situation.

Depending on the severity of the disruption, this may result in lower sales and specialty earnings in all group sectors as well as for the Continental Group compared to the prior year. Given these assumptions, we are anticipating a year-on-year increase in light vehicle production by 4% to 6%. For commercial vehicles, we anticipate that production in 2022 will decrease by 14% to 10% in Europe and increase by 11% to 15% in North America. For passenger car replacement tires, we still expect demand to be minus 2% to 0% globally. But in our main markets, Europe and North America, replacement tire demand should be flat or slightly up. For truck tires replacement demand, our expectations remain unchanged for our main markets in Europe and North America.

Let me now turn to our outlook on Slide 14. Despite the volatile market environment, we confirm our outlook for 2022 that we published on May 11, 2022, and refer to our disclaimer under the heading on this slide. Due to the extraordinary non-cash impairment incurred in the second quarter, we have only updated the amount of special effects from around €150 million to around €650 million. This does not affect the outlook for adjusted EBIT margin.

With this, I would like to end today’s presentation.

Thank you. Hi, it’s Tom Narayan, RBC. Thanks for taking the questions. I have three. First one, on your comments on H2 caution on tires that you called out consumers shifting to all-weather tires instead of winter tires, dealers pre-stocking inventory, because, I guess, the price increases and consumers shifting to lower-priced cars. Just wondering, are these market-wide factors or specific to Conti? We haven’t really been hearing this from tire peers. Secondly, a U.S. supplier last week issued some cautionary comments on H2 expectations in Europe, specifically because of semis. You guys appear to be very optimistic on H2 with semis. Could you share us what is driving your confidence there in H2 semis versus H1? And then lastly, regarding the OEM price concessions that you talked about in the prepared commentary, so is securing these already included in your guidance? Thanks.

Okay. Yes. Thank you very much for your questions. Let me start with the first question regarding the shift in demand for the tire business. I cannot quote on how others perceive the demand situation for their businesses. We do see that some of these shifts are taking place and are happening, and we’ve also considered all these when we confirmed our guidance for the year. With regards to the semiconductor situation, we do expect also an ease in semiconductor supply for the second half of the year. And this is what we see when we discuss and negotiate with our suppliers. So therefore, that makes me confidence that makes me confident for the second half of the year. But that’s not the only point that makes me confidence. Also, we see the pickup in demand in general for our products. And I think also the high order intake that we have also confirmed that we have the right setup, the right strategy and the right structure to really benefit from the change in demand in the markets at the moment. And the third question that you had was about the OE pricing. Our expectations on the pricing developments are already part of our current guidance.

The next question is from Gabriel Adler of Citi. Your line is open.

Hi, thanks. It’s Gabriel from Citi. I’ve got two questions, please. The first is, again, on the automotive market outlook but this time concentrating on China. I just wanted to understand the decision to upgrade the China market outlook. It’s a little bit ahead. You’re flat to 30% a little bit ahead of the IHSs. So any color on what’s driving this confidence? And whether you are factored any risks of further lockdown in the second half in China would be helpful? And my second question is on tires price/mix. Your European peers are quite comfortably managing to pass through raw material prices and other inflation to their customers as your price mix in Q2 wasn’t recovering inflation. So I know if you could explain why you think that might be and whether you have any more price increases planned in Q3 to compensate with that? Thank you.

I have to say, I’m sorry, but I think we have some technical issues with the line. I’ll try to answer what I understood, yes? Let me put it like this. The first question was referring our outlook for China for 2022. I think so far, we are pretty much in line with our past expectations. For sure, we had the big drop in volumes in April this year during the course of the lockdowns. But we have also seen, as I illustrated, quite strong rebound, especially in June from the China market, and we do not see any further issues that would asked us to have a more negative outlook on the potential development of the Chinese market for the second half of the year. So overall, this is according to our expectations so far. And I think the second question you had was either on material price development or on pricing developments with our OE customers. So I’m not 100% sure if you would like to talk about material price or price negotiations with our customers.

It was on why you think your price/mix isn’t fully compensating for costs, whereas we’re seeing your peers in Europe pass through their cost to customers quite effectively through price mix?

Okay. So I think – you look – okay, now the picture is back sized. I think you asked why we are not able to fully compensate potential cost inflation at the tire side. And we’re not focusing necessarily purely on cost recovery on the tire side, but what we are looking at is what kind of pricing measures we are able to implement in the different markets that we are currently working on. And the cost inflations do not only include material price effects, but they also include effect from the logistics side and also from the energy side. And then it’s a different picture from supplier to supplier, which depending on the footprint, for example, that we have, and this then drives the ability to fully recover or not fully recover potential inflationary impacts that are out there.

Okay, thank you very much.

The next question is from Horst Schneider of Bank of America. Your line is now open.

Yes. Good afternoon. It’s Horst from Bank of America. I just have got two questions left. One relates to your cost inflation guidance, which is very clear, but I just want to understand what are the components now exactly of this cost increase. I know you talked about semiconductors, you talked about energy costs, logistic costs, but would it be possible that we get some more color? I mean what is the precise – or not the precise amount, but at least an indication what is the share of energy cost? What is the share of logistic cost and also the share of metal costs and chips, for example? Because the background of my question is we see by now that the metal prices basically have declined again substantially. And I’m asking myself as of which point you will benefit from that. And for that, I want to know what is the share of this metal cost increase in your guidance, I think it has more impact in 2023, not yet in 2022. That’s number one.

The question number two is more a strategic question. And we have seen here lately at Volkswagen basically a change of the CEO position. And with that, also, they have come up questions if, for example, Volkswagen could outsource again more software business. In that context, I just want to understand if that is for you, maybe an additional opportunity. And also maybe you can provide an update what has been the latest order intakes in the software business that you have got. Is there anything major you can tell us? Thank you.

Okay. So regarding the guidance, you know that we are guiding for €3.5 billion headwinds in 2022. Those €3.5 billion mostly relate to material, but they also include elements of logistics and energy costs. You especially ask for metal. So I would like to point out that the two major categories that we are really looking at in the automotive sector are the semiconductors or electronic components. So this most important driver for material cost inflation in the automotive sector. On the rubber side, and I take ContiTech and tires as rubber, really the rubber supply, so to say, the natural rubber and the synthetic rubber supply. So those are the major drivers for our material price increases that we have and that we have into our guidance so far.

With regards to Volkswagen, I can only probably confirm what I’ve also said before. So we are working closely with Volkswagen also on the software side already, and we have done so in the past in case there will be potential changes. We will see what kind of effects this might have this might have on us. And specific software or like really specific, specific software order intake, I can’t give you an update at the moment. But if you look at the €6 billion order intake that we’ve just spoken about on the automotive side, all these include software components overall. So I think that is what drives our current development. And also one of the major drivers for the order intake is that we do have these capabilities in-house.

Okay. Just to follow-up on this cost question. So I mean, just to make it clear, you don’t benefit from the recent decline in steel prices, aluminum prices and also the chip prices have not really declined so there is an ongoing burden for you, correct?

So the chip prices have not declined.

Yes. Alright. Increased, you want to say. Okay, thank you.

Yes. Also there, we are in constant negotiations with our suppliers.

Yes. Alright. Excellent. Thank you, good luck.

The next question is from José Maria Asumendi of JPM. Your line is open.

Thank you. It’s José. Hi, Katja. A few questions, please. The first one, can you comment on your restructuring cash outflows for auto and tire in 2022 and 2023, if you have some figures? If you cannot split it by division, maybe for group, restructuring cash outflow? Second, can you comment on – in terms of the potential gas shortage, which proportion of plants are using significantly gas for production, either in auto or in tire? And what’s the assessment of Continental, what’s the – what plan do you have in case of a gas shortage? And then three, on the display business, big orders there, a lot to here, please, which region. And from the restructuring actions you are taking, how are these restructuring actions going to help the display business improve the profitability? Thank you.

Okay. So, I have to admit that on the restructuring cash flows in detail for 2022 and 2023, I don’t have the figures on hand right now, but I would like to ask Anna to provide you with the respective answer later. Regarding gas shortage, I hope you understand that I cannot comment on individual locations that we have. What I can say is that we are assessing all options to stabilize our production size in Europe, depending on where in Europe we are, there is a different dependency on natural gas supplies coming from Russia. I think that is what the question definitely is about. We are implementing measures right now to make sure we have alternative energy sources available. That is what we do to make sure that we have possibilities to balance potential shortages and get less dependent. Also in this context, I would like to mention that we, as Continental, have already for a longer period of time, the task and the goal to reduce our emissions and our energy consumption overall as a group and a company. And for example, our ambition for this year is to reduce our year-over-year average consumption by 20% in average here in Germany, for example. So, I think that is a strong statement, and that we are working on being prepared to manage the situations that might arise during the course of the coming months. For UX, you are totally right, we do have a promising order intake for the new technologies here. The restructuring that we have taken on the decisions on restructuring that we have taken are definitely playing into the game when it comes to an improved overall profitability for this kind of business. We are executing our restructuring program or the transformation program 2019, 2029 and are fully in line with our originally set expectations for the year 2022 and to come. So, that will play a role when we look at improved profitability levels.

Okay. Thank you very much.

The next question is from Tim Rokossa of Deutsche Bank. Your line is open.

Yes. Thank you very much. Katja and Anna, hey. Thank you for hosting this call. So, I have also three questions, please. The first one is you implicitly answered this already, Katja, but given that Aptiv said this last week and spoke to a few people, you said semi availability is improving. Just to specifically come back to that, you would see no change in the OEM production schedules in Europe at this point in time? That’s the first question. Second question, don’t get this wrong, I think this is actually positive, but I struggle a little bit to say something interesting to investors that really buy your stock because I just think there isn’t that much exciting in your quarter results. And this is probably the first time in many, many quarters, is it the right? And I can sense this from the questions also already so far, there isn’t really anything spectacular and there is almost sort of like maintenance stuff that we are trying to understand here to improve our models really. Is it the fair interpretation that you seem to come into a little bit calmer waters now, that you feel that you have the majority of the negotiations with the OEMs customers done, semi availability is improving a bit, everything sort of got it back to somewhat easier environment despite all the problems that are still out there? Is that true? And secondly, if that is true, when do you think given that we discussed the market probably struggled a bit to understand your equity story? And particularly on the automotive side, when do you think you will see it in a position to perhaps explain this again in a bit more detail with potentially even a few new targets? And then as a final question, I think you are probably not – you don’t want to get this, but obviously, it’s quite important for us to understand the underlying financials, the compensation that you did get from the OEMs. A little bit into Gabriel’s question as well, how much of the €1 billion cost inflation you think you can offset? Are we talking about €500 million? Are we talking about €800 million to €900 million? Thank you.

Okay. So, the first question you had posted was about demands that we do see from our customers. So far, we don’t see significant changes in our call-offs, and we are constantly exchange with our customers. So, overall, also looking at the IHS figures, we do feel quite confident that what we have defined to be the target picture for our relevant markets is still the 4% to 6%, which we have also used this base for our guidance. So, that’s clear. Then you spoke about our stock being a little bit uninteresting. I think that is how you phrased it. And I think with the second quarter, especially on the automotive side, where we have a lot of headwinds from the market, I think showing a minus 2.3% result for the second quarter being relatively on the same level as last year, while facing the significant headwinds that we had is a quite strong statement that we are moving into the right direction now that we do deliver at what we have promised. And we feel personally pretty much in line what we have set as expectations for this year. So, to me, personally, that is a strong sign, which should generate some more interest in our ability to move back into better areas. And I don’t see an easier environment for us at the moment. But what I do feel is that with the pickup of the production in the second half and our ability to become more resilient to all the changes and the challenges that are out there have made us do a good step into the right direction. We will see further impacts coming in the third quarter. I think I mentioned that already during the course of my speech. So, we are not done with the negotiations with our customers yet, but we are on a good way. And the effects that we could generate already in the second quarter also made me quite confident with regards to the effects we will be able to generate for the third quarter. And with regards to what we have already achieved and also accounted during the second quarter, I would say, Tim, that with what we were able to finally negotiate and so to say, conclude in the second quarter, we probably have achieved half of our expectations with regards to price adjustments for the year 2022.

And your expectation was €1 billion or you never expected to get €1 billion?

The expectation is what we have used for our guidance so far, Tim, with regards to profitability improvements.

Okay. Alright. Thank you very much Katja. It’s great to see that you feel like you are stabilizing the business a lot.

The next question is from Giulio Pescatore of BNP Exane. Your line is now open. Mr. Pescatore, we can’t hear you at the moment.

Hello. Can you hear me?

Yes, but not very good.

Not very good. I will try to [Technical Difficulty] in the second quarter, I was wondering what’s driving that and can you maybe give us a bit of a product mix and your…

Giulio, I am sorry, the words come all together and at once. I just heard entire second quarter. That’s all I understood. I have to admit.

Okay. Well, I apologize for that. I will pass on to the next person then.

Okay. So, the next question is from Philipp Konig of Goldman Sachs. Your line is now open.

Yes. Thank you very much for taking my questions. My first question is on the tire business. You were mentioning that you are seeing some softness from higher inventories across the industry. I think you didn’t increase your price as of the 1st of July. Just wondering if you could share your thoughts on general industry pricing. And as sort of demand starts to decline that you potentially could even see some competitors cut their prices as raw materials start to decline. And then my second question is on the auto business. I know you probably don’t want to quantify the exact pricing in the second quarter, but do you expect – or at what point do you expect your pricing to offset or more than compensate for the inflation that you are facing? Is it already in Q3? Is it in Q4? Is that more a story for next year? And then my last question is just on the R&D in the auto business. I think for the first half, it was sitting around €150 million above last year. Where can we sort of expect – what can we sort of expect the R&D to go? Do you expect further increases or more of a normalization in the second half of the year? Thank you.

Okay. Thank you very much for your questions. Maybe – well, I do start with the first one. So far I have not seen any tendency for lower pricing in the relevant markets. You have pointed out correctly that we have already increased our pricing in multiple steps earlier this year. And I think so far, I don’t – I think so far, there is no big tendency in the markets to reduce pricing again as raw materials also have not declined significantly so far. In the opposite, we do expect more headwinds coming, especially on tires and ContiTech in the second half of the year, in fact, which will have an impact on our performance as already described. So, that is the first question. For the second question, so I – as I just said to Tim, I think what we have achieved so far with regards to our negotiations is that we are able – were able to conclude for about half of our expectations for 2022 with regards to pricing adjustments. So, this means there is more to come in the second half of the year, which will hopefully manifest then in the third quarter with retroactive effects. That is our statement with regards to the OE pricing negotiations on the automotive side. And for R&D, I think you still probably have in mind that we have decided to invest additional R&D into our ability to move from a component business in AM. So, Autonomous Mobility towards a more system supply business, that additional R&D expenses are definitely there and are manifesting, I think they were around €100 million additional expenses compared to prior year, and this is what we also do see in our figures right now. We assure that we work heavily on increasing our overall R&D efficiency and effectiveness in Continental. That’s one of the measures to get our costs under control and that we are definitely working on this arena quite strongly in our new setup in automotive.

Alexandra, could we try to get Giulio Pescatore back again, maybe the line is better now.

Yes, of course. Maybe he can press zero and one again, and I can pick him up.

Maybe while we wait for Julie, let me just make one comment because you asked or I was asked about the cash outflow for restructuring measures. For 2022, we do expect a cash outflow of €300 million roughly and for 2023 of additional €200 million.

And so the next question is from Giulio Pescatore. Your line is now open again.

Okay. Thanks for letting me try again, and let me know if he doesn’t work, and I will just tell you next time.

Okay. Great. So, my question was on mix for tire. It was quite resilient, the fact in Q2, and I was wondering what was driving that? And what should we expect in the second half of the year? And then can you give us an idea always still within tire of your energy cost in percentage of sales? And can you remind us of your hedging policies when it comes to renegotiating or hedging with financial instrument energy costs? I think this will be particularly important as we head into next year. Maybe one last one on the guidance, can you remind us of the FX benefit of tailwind that you have embedded within the guidance? Thank you very much.

Okay. I am sorry that I didn’t get the first question correctly with regards to tires second quarter. So, I think Giulio, you were asking what to expect in regards to tire – the mix in tires for the third quarter? Was that…

In H2, yes, in H2, yes. Thank you.

Well, I think that’s a difficult question to answer at this point in time because we do not exactly know how the markets overall will develop. What I can say is that what we have achieved now in the first half, you can look at the guidance for the second half more or less, they are more winter tires playing into the game there. But I can’t give you an exact figure on price/mix expectations. What I can say about the second quarter is probably 10% of what we have achieved in price/mix now was attributable to price in the second quarter. Yes. And in fact, probably we have to expect that things are going down a little bit, yes. With regards to energy, I can’t give you a figure in relation to sales. But what I can give you as a figure in relation to our variable manufacturing costs and tires. So, the portion of energy cost is less than 5% of our variable manufacturing costs in tires overall. So, that is what I can tell you. And with regards to potential benefits on FX, I am not 100% sure what you mean with potential benefits from FX. With the changes on the FX rates, we do have favorable impact on the sales side, but we also do have cost increases with regards to procurement. And for us in Continental, these effects kind of balance each other overall on group level. So, we could call ourselves to be kind of naturally hatched in this area.

Okay. That’s it. Thank you.

The next question is from Edoardo Spina of HSBC. Your line is now open.

Good afternoon. Thank you for taking my two questions. I have one first on the tires. If you can give us an idea about the capacity utilization in the first half, especially for the light vehicles? And how much more unit capacity are you planning to add in the next 12 months or so? Perhaps you can exclude Russia at this point from these calculations. And the second question on the semiconductor in automotive. If you can remind us how often you do price reviews with your suppliers, I understood it was once a year, but maybe now it’s more frequent? And whether basically you are seeing strong pricing, but more availability of the units of semiconductor? And finally, still on semiconductor, do you make any direct purchases from Taiwan? And how much is it? And would your business be disrupted if there was a short-term interruption from the supply chain from Taiwan, assuming it’s short-term?

Okay. So, with regards to the tires capacity utilization, I think I referred during my speech to the fact that we would have been able to sell even more tires in the North American market than we will currently have in availability, which should give you kind of an impression on how we manage or how far we are setup with regards to capacities at the moment. And spontaneous increase in capacity is always difficult you know that investment projects in tires do take a long time. I think what you do see with Continental is that we have invested heavily also in the expansion of our facilities during the course of the last year. So, we have set up new facilities. We are consequently investing in improving our mix potentials that we have on the tires side, and we have also decided to take decision to expand our production facility in China in Shanghai [ph]. But that is what I can tell you about the current capacity utilization and capacity increases in tires. So overall, in North America, we are trying to drive it up to be able to meet the market demand that we have at the moment. With regards to semiconductors, I think price negotiations are a constant topic at the moment within the entire industry. And for sure, a disruption of production in Taiwan would have an impact on the entire industry significantly with TSMC being located in Taiwan.

Okay. Thank you, Alexandra and thank you everyone for participating in today’s call. As always, the Continental Investor Relations team is available if you have any remaining questions. With that, we would like to conclude today’s call. Please stay safe and healthy. Thank you and goodbye.