Operator: Good afternoon, ladies and gentlemen, and welcome to the Continental AG Analyst and Investor Call regarding the results of the fiscal year 2023. [Operator Instructions]

Let me now turn the floor over to your host, Anna-Maria Fischer. Please go ahead. :

Anna Fischer: Thank you, operator, and welcome, everyone, to our fourth quarter and full year-end 2023 results presentation. Today's call is hosted by both our CEO, Nikolai Setzer; and our CFO, Katja Garcia Vila. A small reminder that both the press release and presentation of today's call are available for download on our Investor Relations website.

Before starting, I'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. [Operator Instructions] :

With this, let me now hand over firstly to you, Niko. :

Nikolai Setzer: Thank you, Anna. It's a pleasure for me to wrap up 2023, so to say, which was a very exciting year again, and it was exciting as well for our touch points with the capital market, as we had in-person meetings first at the tech show in order to show what, in our era of calibration, as we called it at our Capital Markets Day, what we have developed in those 3 years, which had been, based on COVID, difficult years as well as for technology, but we showcased and one of the feedbacks which we got that we did a lot, that we brought great technologies forward. And on the Capital Markets Day, we explained how to turn those technologies into value and how to help via technological steps to outperform the market and increasing our profitability going forward towards our midterm targets. And we announced key decisions which we have taken and we referred further to that.

So looking on the KPIs, how did the year end? Sales, EUR 41.4 billion, which is an organic growth of 6.9%, so roughly 7%, with FX burden of 1.9%. So reported is 2% lower. And the 7% organic growth was highly supported by the volumes in OE. Automotive organically at about 12% growth, so 2% higher than the light vehicle production on a global scale, which was, latest figures, at 2%. And to Rubber sector, Tires and ContiTech has performed as well positively in terms of sales despite weak replacement markets still until the end, and industrial markets, which were as well, in the second half and the fourth quarter, still muted and going forward.:

So therefore, we are happy that with 6.1% adjusted EBIT margin, we have been slightly above the midpoint of our guidance, as sales as well as the adjusted EBIT margin improvements were strongly supported by solid pricing management in all sectors. In Automotive, we see the results in highest profitability, which we had quarter-over-quarter in that year. So we reached 4.7%, close to 5%. In the fourth one, still we're facing higher inflation. Once it comes to pricing, we have to say that some of those -- a substantial part of those pricings, which we achieved agreements last year, are not fully sustainable. So we have to rediscuss certain parts. And discussions already started as we speak. :

On the Tires side, solid, stable, strong results, which we see in that environment. So we did good in terms of supply in short order flow. And ContiTech has finished solidly stable as well in the year despite, as said, the industry demand, from 4.7%, here the adjusted EBIT margin '22, 2% up, 6.7%. So it's out, the adjusted free cash flow. Coming to last item, which I want to pick out, out of the chart, EUR 1.3 billion, which is slightly above the upper range of our guidance.:

Why did that happen given there's strong operational performances, as I mentioned, out of different sectors. On the one hand, inventory turned into as well lower cash, or supported the cash flow, and we achieved our target over there with smart management and in-time payments of our customers helped us in order to get there. So overall, as a Board, we deem those results as satisfactory there. The right step towards our midterm targets. :

However, there is more to be done, as you know, and we started this already in 2024. As you know, and as I mentioned before, our year of execution, we have lots on our agenda. First of all, for all sectors, you see underneath operational excellence and cost control is the scheme, as we announced in Capital Markets Day, we have to further improve debt base. There are lots of reasons and lots, of course, in particular premium freight on Automotive where we see improvements going forward, and we have to pick a door. :

First of all, the last of the bullet points, drive portfolio measures in a dynamic environment. As we have announced on the Capital Markets Day, we have made substantial decisions to adjust our portfolio. You might remember the EUR 1.4 billion bucket which is under review on the Automotive side, as well as making the business area UX independent. And by the way, as well, on ContiTech, on the right bottom, OESL carve-out, which we drive further as well a portfolio measure. So all of those -- this is our priority going forward, and we have started executing on it or we are successful in our plan. :

And of course, we do not stop here, but we continuously review the entire portfolio, which is always our responsibility. The market is dynamic as we say here, and we have to be dynamic as well. Dynamic we have to be as well on the cost reduction measures, fixed cost reduction. You might remember the bucket which we had announced at Capital Markets Day, EUR 400 million savings from 2025 onwards. So 5,400 positions have been identified to be reduced, program in said countries are selected and is now executed.:

Same is true for the R&D efficiency, a set of 1,750 individuals have been announced. Same story here. We go ahead with that part in order to achieve the single-digit R&D percentage of sales in 2028, which we are targeting. In the middle, improved operating leverage. Already mentioned the operational excellence measures, commercial as well as operationally. Volume per car we have to increase in order to outperform market with the new products which we are bringing in and with the higher value coming along with that. So this will be executed here.:

As an odd, electrification, digital services, UHP growth is as well, for 2024, on our radar screen, and we will further focus here. The investments will be predominantly to strengthen the setup in Asia Pacific as well as in the Americas, where we are still -- whereas in Europe underexposed. So ContiTech, just to add, industrial markets, as I said, a bit muted coming to year. However, we worked strongly on our outperformance there, outperforming the market. And the key focus on improving operational excellence is clearly on the ContiTech side with the Automotive business; OESL, where we're working on operational and commercial excellence, whereas at the same time we are working on the carve-out as mentioned at the beginning. :

Which gets me to the last point of our Capital Market -- my last chart and the last update from the Capital Markets Day. You remember we had announced that we increased the payout ratio from 15% to 30% over the past to 20% to 40%, so increasing it upwards, which confirms as well our commitment to the shareholder community. And as you see our payout ratio, we proposed to the AGM EUR 2.20 per share, which is the same amount as we had it in 2021. We reached thereby the upper end of our bandwidth with 38%. However, as I indicated before, we met our targets on cash. We have been a bit up, so we deem this as appropriate. And of course, this is subject to the approval at the AGM, which is, by the way, this year in person, again, in Hanover. So you are all invited for April 26 to participate.:

And with that, I hand over, for further detailed information, to Katja. :

Katja Durrfeld: Yes. Thank you very much, Niko. Talking about meeting our commitments. I'm happy to now dive further into our 2023 results and show you what we have achieved. Let's continue on Slide 6.

Our quarter 4 results reflect the hard work of our management team and all employees worldwide. We achieved a solid performance. For Automotive, we saw strong organic growth of 8.4% year-on-year and an adjusted EBIT margin of 4.7%, 280 basis points above last year's comparative quarter, finishing the full year at around 2%, as we indicated last December. For Tires, we had a very satisfactory end to the year, with a 13.6% adjusted EBIT margin result, supported by volume recovery in the replacement markets. Even though ContiTech faced continued headwinds and weaknesses in the industry, our team delivered a solid adjusted EBIT margin of 7.3%. :

On the next slide, Slide 7, we go to Automotive fourth quarter sales and adjusted EBIT results. As a short reminder, we will report today Smart Mobility, SMY, as an independent business area for the last time. As explained in our Capital Markets Day, SMY will be integrated into the other business areas as shown here in the graph. To give you an indication, approximately 50% goes into Autonomous Mobility, 20% into Architecture and Networking, and 30% into software and central technologies. This supports our approach to setting up a leaner organization and raising synergies, especially in the truck business.:

Now to the numbers. Fourth quarter sales broken down by business area demonstrated strong organic growth across the board for the comparative period, supported by volume growth, especially in Europe. User experience sales were back on track after the technology generation change, which we saw back in Q3. We did have, however, notable headwinds for all form of FX in the quarter. In parallel to the fourth quarter details, I'd like to also give you verbally some of the full year figures for the sector.:

On the top line for Automotive for full year 2023, we had an overall organic growth of 12.3% with our strategic growth fields of Autonomous Mobility and Architecture and Networking delivering strong double-digit organic growth, and SAM, SMY and UX also contributing, in line with our performance expectations.:

Now back to the fourth quarter here on the slide. Adjusted EBIT margins saw positive contributions from pricing, R&D reimbursements, as well as continued improvements in premium freight, all of which helped compensate headwinds from inflation and currency translation effects. Regarding premium freight costs, let me give you a magnitude of what we're referring to. 2022 was still north of EUR 200 million, while last year we managed them down to more than EUR 100 million, with still further potential for further improvements in 2024. :

Now talking about the full year. Our adjusted EBIT performance was 1.9%, a 260 basis points higher result compared to 2022. This demonstrates here our steady approach to turning around the business and working strongly towards our next performance goals. While planned preinvestments continued to impact Autonomous Mobility, all other business areas positively contributed to the Automotive results. They achieved that, even though they were all impacted on the EBIT side by currency translation. :

We usually only report FX weighing on the top line, but last year, we were heavily impacted on the EBIT side as well. For Automotive alone, this was in the ballpark of around EUR 100 million.:

Sharing details on our full year R&D to sales ratio results, we landed at 11.8%, a 60 basis point improvement compared to 2022, which shows we are well on the way to our short-term commitment of around 11%, and midterm of around 9%. Please keep in mind here that we capitalize R&D only when required by accounting regulations. In 2023, for us, it was below EUR 20 million. :

Now to Slide 8. Overall, in the fourth quarter, we grew with the market for the comparative period of 2022. We had significant strength in Europe linked to price/mix, weakness in North America because of our specific mix, and in China, our performance was impacted by the current market dominance of vertically integrated OEMs. I'm also bringing you the details on the full year-on-year comparison on Slide 9, but no need to go through the numbers. :

So let's move then to Page 10, where we show a EUR 7.3 billion order intake, bringing the total for the year to above EUR 27 billion. Highlights for the fourth quarter include EUR 3.4 billion order intake from our colleagues in Safety and Motion, with continued success in our latest generation of brake systems with all price awards won with Asian customers. User Experience received around EUR 1.1 billion worth of new business, and multi-display solutions as well as a key award with the German customer for a next-generation head-up display unit. :

Our colleagues at Autonomous Mobility brought in EUR 1 billion worth of wins in short- and long-term radars as well as in assisted and automated driving control units, with complete software and hardware, all of which play into our strategic positioning in those fields. :

Importantly, we saw an overall strong end of the year result with EUR 3.6 billion sales for the quarter and positive organic growth. How did we achieve that? We were able to take advantage of our ability to meet short-term demand in the replacement market, giving us a moderate volume increase effect. Price/mix was slightly negative this quarter for the first time, weighing on the top line. This was driven by multiple factors, including, for example, regional specific effects, where demand was higher than what we could deliver; index prices, which started to have first effect in the fourth quarter, and we'll see that run into 2024. And the quarter-on-quarter comparison, we faced global truck demand being weak. :

Please note, however, that on the bottom line, we significantly improved year-over-year. On the adjusted EBIT margin side, we achieved a 330 basis points increase versus the fourth quarter of 2022. Here, price/mix had a positive effect, backed by low triple-digit raw material effects. Our continued strong performance in the UHP market as well as our ability to benefit from short-term order fill in the replacement market because of our strong supply chain.:

Our ability to participate over-proportionate in the seasonal market of winter and all-season tires further supported our positive EBIT development. Overall, positioning across all our markets minimized the impact of labor inflation effects. In a nutshell, despite the minimal volume growth from the market, we gained strongly in our profitability. :

Finally, let's check now with ContiTech and their fourth quarter performance on Page 12. Top line sales were flat, though we had positive effects from our price negotiations. We continue to follow our strategy towards the industry business and turning around the Automotive part. Therefore, we are disciplined in following a selective approach to OE business in general and, therefore, we are not pushing growth here in sales.:

Unfortunately, the markets did not support us in the quarter as industrial volumes continued to be weak. Instead, self-help drove our adjusted EBIT margin result of 7.3% with price gains overcompensating the labor inflation headwind. Overall, a strong 480 basis points increase from the fourth quarter of 2022, although quarter 4 in 2022 was impacted by one-off effects skewing the comparison somewhat. All in all, a result that showcases our performance improvements focus for ContiTech. :

Now let's move on to our full year results for adjusted free cash flow on Page 13. At EUR 1.3 billion, our result was even slightly above our guided corridor. :

That concludes the review of our results for 2023. I know everyone is eager to deep dive into 2024, so let's get started. :

On Page 14, we begin with passenger car light vehicle production. From today's standpoint, we see year-over-year lower demand expected in Europe, and though comparatively to Europe slightly positive developments in North America and China. On the commercial vehicle production side, we are looking at a significant decrease in demand in both relevant regions.:

For replacement tires, firstly on the passenger vehicle side, we expect an overall moderate increase through 2024, which we saw at the beginning of -- in the fourth quarter last year. On the commercial vehicle side, from today's view, Europe is expected to be stable, while in North America we see some recovery after very weak development in 2023. To the industrial production, please be aware that numbers seen here do not precisely mirror our portfolio where we are focusing on the markets of construction and home, off-highway mobility and energy management. :

Now to Page 15. As I have just mentioned, there's minimal growth expected from the market across all sectors, leading us to a consolidated sales of EUR 41 billion to EUR 44 billion. We are guiding using corridors. The difference between mathematically adding up the sectors and the group is the consolidation. There have always been consolidation effect. This is not new. :

On group level, our adjusted EBIT margin is between 6% and 7%. And absolute figures, this is a broad range. We typically round group guidance to 50 basis points. So there's no hidden message here. There is nothing exceptional. For Automotive, our ambition for 2024 is to achieve an adjusted EBIT margin between 3% and 4%. Bear with me a minute, as I will bring another slide with further details. Tires should contribute with an adjusted EBIT margin between 13% and 14%, while ContiTech, considering the current split between industry and automotive business, will slightly improve in the corridor to reach between 6.5% and 7.5%. Adjusted free cash flow includes some exceptional topics for the year ahead, which I will explain in just a minute. In total, we are looking at a corridor between EUR 0.7 billion and EUR 1.1 billion. :

Let's get into those details I just mentioned, starting with Page 16. Here, we continue to bring more transparency into our business as promised. We shared with you at the Capital Markets Day that most of our improvements in the near term will come from self-help and not volume. Therefore, I won't further elaborate on volumes in these bridges.:

Let's look at the graph on the left side, our sales for 2024. Here, our growth is expected to come from both outperformance and pricing. On the adjusted EBIT side, I want to focus today on the following areas. Firstly, operating leverage. It will be mainly driven by increasing our content per vehicle through launching innovative new products such as the introduction of new zone controller and ultra-wide band-based digital access businesses. :

Also, we are bringing new technology to the market through another premium OLED double display, while expanding innovative header display business into volume markets. And in Autonomous Mobility, we are launching more innovative ADCU control units to the market as well as 6 generation radars, among other technologies. In addition, our ambition is to improve pricing. In our declared business under review, we will look for better commercial conditions. And overall, there has to be price improvement as we expect a significant gross labor inflation in the magnitude of EUR 250 million.:

Secondly, through operational excellence, we will continue to focus on further manufacturing efficiencies and year-on-year reductions in premium freights. And finally, we will achieve impact through the reduction in fixed costs, with the first effects coming in 2024, and the rest in 2025. To give you an indication for this year [Audio Gap] effect in 2024. Although we strictly follow our R&D efficiency programs, we will not see yet a significant net effect this year. :

Now to tires on Page 17. Here, on the top line, as mentioned earlier, we expect some volume recoveries, some from price/mix. Here, leaning more on the mix side. For adjusted EBIT, again, we expect to have some support from volume as well as price/mix versus cost, including, for example, raw material, energy and logistics costs. However, those gains will be partially diminished by the labor inflation we foresee and further negative effects from cost indexation clauses kicking in. :

Further to ContiTech on Page 18. As mentioned on the top line, we see limited potential growth linked to overall industrial market weakness expected throughout 2024. On the adjusted EBIT side, gains will be made through our self-help measures, which focus on accretive value improvements. On both the industry and the Automotive side, we expect to achieve this through a strict cost management discipline, which will slightly overcompensate labor inflation. :

Finally, diving into our free cash flow guidance and bridge for 2024 on Page 19. Operating cash flow will benefit from higher EBIT as well as improvements in our working capital. While on the investment side, we will invest accordingly to our strategy, particularly in Automotive and Tires. And in order to have even further transparency, we want to share with you an extract of the main extraordinary effect we expect so far for this year to impact our free cash flow. :

Let's look on our final page together, Page 20. Starting with the first item, the repurchase of ContiTech shares. We will have a EUR 500 million effect in the first quarter 2024. Some cost saving measures we announced will lead to restructuring payments amounting to around EUR 300 million in this year, mainly in Automotive. Cash-outs for ContiTech restructuring are in the magnitude of mid-double digits. For these, the accruals were already built. Finally, we are expecting carve-out payments of approximately EUR 200 million, with the full effect in the P&L this year.:

Consider a split of approximately 50-50 between Automotive and ContiTech. And remember, these amounts are subject to adjustment. For the time being, this is what we expect, and we will provide you updates throughout the year. As you can see, we will achieve our results in 2024 on the back of hard work with little support from the market. :

I would like to reiterate what I stated at the Capital Markets Day to this era ahead of us: We have the right team in place and laid solid foundations to support our pathway to sustainable profitable growth. I'm really looking forward to this year with you. As perhaps there are still some remaining questions on your side, I will hand over the rest of the time to you.

Operator, could you please open the line for the Q&A? :

Operator: [Operator Instructions] And the first question comes from Sanjay Bhagwani from Citi.

Sanjay Bhagwani: I've got 3 questions. And my first one is, I think, Katja, you touched a little bit on this elimination line item. When we actually look at the magnitude, which is implied by the group guidance versus the divisional sum, this gives me somewhere around at midpoint EUR 400 million of negative elimination line item, which seems like a big step-up versus EUR 214 million of '23. So could you maybe confirm that you are just being conservative and there is no, let's say, significant reason to believe that this additive cost can simply double in a year?

The reason why I'm asking you this question is because there are always pushbacks around, let's say, if somebody has to look at it differently, it may be that you know what there is no real margin expansion story in Autos, because there can simply be reclassification of the cost. So on this elimination line item, if you could be a bit more precise what is driving this significant jump? Is it just a conservative jump? Or is there anything else? That is my first question. And I'll just follow up with the next 2 after this, if that is okay? :

Katja Durrfeld: That is totally okay. So let me answer that question first, Sanjay. So you just mentioned the figures, and I think calling it conservative, this is how you call it. There is nothing hidden there. There is no transfer of any cost position from Automotive to group level. And there's for sure also no doubling of group cost anticipated for 2024. It's just that we do have a broad range that we are guiding, and we are guiding a range for each and every sector, yes? I fully understand that you are always referring to the midpoint, yes? But here we are really talking around 50 basis points of rounding for the group guidance. So there is no hidden message, nothing exceptional to worry about. It's just our view.

Nikolai Setzer: Let me just reinforce on the strategic side, Sanjay. It's clearly -- that's our strategy. Sectors are responsible for that business. And as much as we can bring down to the sectors, we will do. I mean, the accounting principles, first of all, that you cannot put whatever you like on a holding part, that's for sure. However, our strategy is having as independent sectors as we can. So there is no intention whatsoever to go the other way around.

Sanjay Bhagwani: That is very, very helpful. So it just seems like conservatism and rounding off around the elimination line. My second question is on the organic growth outperformance. I think -- because again the Auto sales guidance is very broad, and my feeling is this is probably to do with baking in, let's say, more adverse Auto production. So maybe could you please confirm that the organic growth outperformance targets of 3% to 5%, which is what you basically mentioned on the CMD, is valid for '24, that is 3% to 5% organic growth outperformance?

And if this is the case, then what is going to drive this? Because when we look at the organic growth outperformance in '23, this is 2%. But then if we take out the pricing, it probably says there is no real organic growth outperformance in '23. So could you please mention what is going to drive the uptick in the organic growth outperformance? And I think, Niko, maybe you touched upon the new products which are coming at a higher content. And yes, so if you could elaborate on this topic a little bit more? :

Nikolai Setzer: Okay. First of all, if you take the midpoint and take then the implied organic growth, it's 3.5% growth of the Automotive sector year-over-year, which is within the 3% to 5%. So the first answer is yes. The second answer is where does it come from? And I refer to what I mentioned before, new products coming in, particularly on one or the other area. We have been a bit shy last year in terms of outperformance. You've seen as well that particularly UX in the first quarter had a lower share. As well on the geographic side, we had certain mix items on North America. Those we see to turn.

New products are coming in with a higher value. We assume that partly as well negative mix which we had in the regions next year turns with the customers and with the platforms which are coming in. And the last point, we have addressed on the Capital Markets Day this EUR 1.4 billion bucket, and I specifically picked this one because there's many businesses which are underperforming and strongly underperforming as well from our point of view on the value, means on the price side. Those we will have to address and we will address towards 2024 for the repricing, which then would suggest as well top line growth and support the source. :

Those 3, 4 elements are there. What we can obviously not influence is the success of our customers. And that remains to be seen how this mix plays out. But for the time being, we assume that we are successful and within the range we have been in. :

Sanjay Bhagwani: That is very, very helpful. And my last question is around that. So now that we are already in March, I understand you don't guide for quarters, but could you maybe provide some conceptual understanding on the Q1, mainly because, let's say, on the organic growth outperformance, which you -- like maybe around 3% to 5%. Is it likely to be back-end loaded? Or this is more or less, let's say, similar in all the quarters?

And second thing, just thinking of the margins for Q1. If I understand it correctly, probably the cost item is much lower in this year Q1. Last year, you had EUR 250 million of gross cost. You negotiated this year probably much lower. So how should we think of the set up in Q1, like a bit more conceptual explanation if you can, please? :

Nikolai Setzer: I will start with a general remark, and Katja might add then more details on this. In general, to what we said before, the 2 items, particularly on the Automotive sector are important. The one part, again, coming to what I said before, repricing as well as pricing negotiations, they will take part as we speak. However, we assume as well that agreements will further come during the course of the year.

The second part is our restructuring efforts, which we are doing on the administration side, SG&A. The low 3-digit net effect, which Katja was referring to, will happen as well during the course of the year. So you should expect a similar profitability curve or development during the course of 2024, as we had it in '22 as well as in '23. So the second half much stronger than the first half. How the first quarter will play out remains to be seen. Markets just started. And the most important month is the March month, which is still to come, where everything is on full steam first, call it, 2 months, in particular January, then if the Chinese New Year is kind of distorted. So Katja, maybe you want to... :

Katja Durrfeld: I don't think there's much I can add, Niko. I think what we already said in the last quarter last year, Sanjay, is that we will also have to renegotiate a portion of the price agreements we achieved for 2023. We already told you that a part will not roll over, yes, and that is also something that will be a weight on the margin for the first quarter, yes? But as Niko said, our expectation is according to our strong position that we will be able to renegotiate those prices and then have the positive effects following in the second half of the year, as you've seen in the past 2 years.

Operator: And the next question comes from Christoph Laskawi from Deutsche Bank.

Christoph Laskawi: The first one would be a bit of a follow-up to Sanjay's question on the outperformance. You already alluded to that it will be driven by SOPs, but also by pricing. Considering that the pricing is more, as you said, H2 weighted, the outperformance in the first half will likely be driven more by the SOPs. Could you give us a bit of color on just when you think the big contracts that will drive that outperformance are expected to come in, is it in Q1 already or more towards Q2 and then H2 as well? That's the first question.

And then just on the visibility of the restructuring payoffs. Could you comment on how much is already negotiated there? How much do you still need to negotiate with, say, the unions, et cetera? So just give us a bit more clarity on the phasing. And if there is a risk of slippage towards early next year or not? :

Nikolai Setzer: For the first part, you're right. You basically answered that question in the right way that it will be more back-end loaded, will be coming during the course of the year and more in the second half. And I repeat the same as I did the last 2 years, quality before speed. So we will -- and we have, in particular, for the EUR 1.4 billion bucket, for those businesses which are, so to say, on the turnaround, we have to insist and find the right agreements, or eventually, as well, taking other consequence in those areas. That's why it will take during the course of the year and to happen more in the second half.

I'm very careful after those last 2 years. It took very often longer than at the beginning of the year we expected. However, we made it in those 2 years. So we are very confident that we will find as well agreements in 2024. On the contract side for our business, please be aware, this is around the world. So we have, in all countries, different situations. And of course, we have in some areas where we have union negotiations. Ancillary represents these negotiations. They started. We are in those talks in order to find common agreements there, and we are confident that we'll get relatively soon agreements here. :

But we use, obviously, all opportunities of retirements or fluctuation as well in those areas where you can swiftly eliminate certain positions or reduce your head count and be able to convert those. So we are confident that we don't have to wait for one single item in terms of negotiation. That's my basic message. Somewhere in Germany or France or U.S. or wherever you might have in your mind, this will be a standard approach as it is spread all over the world, and we take every opportunity to adjust. :

Operator: The next question comes from Marc-René Tonn from Warburg Research.

Marc-Rene Tonn: First one would be on free cash flow, which I think is very solid, particularly when considering the EUR 1 billion headwind you had from this extraordinary effect you alluded on. But my question would be, I think it would be some positive, and I think you mentioned a couple of millions, a 3-digit number in the lower part from the Tesco repaying some receivables. Perhaps some outlook in general what you would expect for the working capital a bit longer term and also how much additional support you might see from this half as well from this side in 2024. That will be the first question.

Second question, when I look at order intake at Automotive, Safety and Motion is again at a rather solid 1.2 given that I think a large proportion of the business is more value rather than growth. The question would be, is it mainly pricing driven? Or is that the growth for some of the products that's even a bit stronger than you would have expected before? :

Nikolai Setzer: I'll start maybe with the second question, and then you can go for the cash flow. No, what SAM is, Safety and Motion, it is the regular order intake for our new products. This is the one box MK C2, so the second generation which is coming in one box brake system, which is converting as well into a dry brake system over time, where we have already acquired the first orders and where there are new coming in. So this is not influenced by pricing. It is purely influenced by new technologies coming out in the market, and suggest as well with EUR 1.4 billion book-to-bill that we have a further expansion and it contributes. But this is in line clearly what we assumed as well at the Capital Markets Day of the growth of this business area.

Katja Durrfeld: Maybe then I can talk a little bit about the free cash flow topic. You already pointed out, and we had already mentioned that before that we expect some tailwind coming from the change in the payment terms with Vitesco Technologies. And you all know that we said during the course of the full year last year that we continue to work hard on improving our working capital to also have a support on that side for 2024 and moving forward. The reduction of our inventories is one of the key points that we are working on. This goes in line with our smart inventory program that we are having.

We still do have some effects also coming from not full supply on the semiconductor side. So we still have more inventory on hand than we had pre-COVID crisis. Nevertheless, also here we are expecting some positive contribution during the course of 2024 to support the stronger free cash flow performance. :

Operator: And the next question comes from Thomas Besson from Kepler Cheuvreux.

Thomas Besson: It's Thomas Besson from Kepler Cheuvreux. I have a few questions that I would like to ask one by one as well. Starting with the one-off seen in Q4 in Automotive in your guidance for the one-off in 2024. Could you give us a bit more details about what they cover? And whether it's fair to describe them as largely covering the necessary restructuring of your European operations, or is that not the fair description?

Katja Durrfeld: I would say, yes, they are. We announced at the Capital Markets Day that we will, call it now, invest into structural adaptations, especially in the administrative side in Automotive, which will contribute positively to overall EUR 400 million as of 2025 going forward -- yes, end of 2025 going forward. And that's what we've built accruals for in the fourth quarter 2024.

Thomas Besson: In the fourth quarter of '23 and in '24, that's what you're doing, right, Katja?

Katja Durrfeld: I'm sorry, I mean, we built it in the fourth quarter of 2023 and will work our way in 2024.

Thomas Besson: Second question, could you talk about the client mix in Automotive, please? Can you give us either your top 3 or your top 5 clients in Automotive in 2023, and mention any change versus 2022? And share as well with us the share of your Chinese Automotive revenues that is done in 2023 with Chinese automakers?

Nikolai Setzer: So number one, our client mix has no change over the years. We are still more heavily exposed to the European OEMs, which is still our core market. And we are a bit underexposed in China once it comes to the current market mix. So we are underexposed on the Chinese OEMs. However, looking as well 2023, as we have seen it as well in the years before, our order intake with Chinese OEMs is above the target within our portfolio. So we are growing faster with the Chinese OEMs than the internationals in this market. However, it will take some time until we are balanced in the market.

Thomas Besson: Last question for me. Could you share with us any update on the time line for the structural changes you've commented upon during your presentation? Namely the carve-out separations and eventually, disposal of assets, whether they are within Automotive or within ContiTech? Do you have any greater visibility on the timing of these structural changes, please?

Nikolai Setzer: So for ContiTech side, the OESL part is, and that's why we call that through 2025, we want to finish the independence in 2025, and then offering obviously optionalities on time. The Automotive areas, the EUR 1.4 billion bucket, as well as business area UX is still in conception and in progress phase. So there we have not a timeline to announce, but we do this in due course and this should happen soon once we have it clearly laid out, but progress started. Concept is there and now we go from there.

And as I mentioned as well before, there might be, as well, depending on market dynamics, decisions might be further developed for the EUR 1.4 billion bucket, and whatever better options, of course, might be considered once they come into play. And obviously, once there's something new with the business area UX, we will inform you in due course. :

Operator: And the next question comes from Monica Bosio from Intesa Sanpaulo.

Monica Bosio: The first is still on your performance versus the market. I'm just wondering if you can elaborate a little bit more on your underperformance in China in the fourth quarter? And above all, what do you expect as for China in terms of performance in 2024? My second question is on the replacement market. You are guiding for 0 plus 3%. I'm just wondering which are the regions that you see delivering the highest upside in the replacement business. And if you have an indication for the replacement for the ultra-high-performance tires? And very last is on the reduction of premium freights that you had in 2023. Can you give us an idea of the further reduction in term of magnitude for 2024?

Nikolai Setzer: Outperformance in the market China in Q4. The main reason is that those customers have been successful. As I said before, we are still underexposed to Chinese OEMs. And in particular, in the fourth quarter, to those which are, I would call it, higher vertically integrated, such as BYD, which is one, as well as Tesla have grown quite substantially. That is the reason with all others. As said, we have further order intake which is growing, and this will change our share over time. So we catch up, but it will take a certain time until we are able to mirror the market. And it was clear customer mix part in the fourth quarter in China.

Replacement business, where are the markets which are supporting? It's clearly the Asian market of China where we see the highest growth rates. The other markets are, honestly, relatively difficult to guide. We still assume a certain slight positive development. Can be little bit more, but we don't know. You remember last year we've talked a lot about destocking which took place. The replacement market was behind our expectations. We thought already it would turn around earlier, it didn't. Speaking of the truck side, we still see muted markets in our core markets, particularly in North America, but as well as in Europe. However, we believe that this year this will turn around. However, we are on a way that we just say it will be 0 to 3%. :

Katja Durrfeld: 0 to 3%.

Nikolai Setzer: 0 to 3%, and we'd inform over time how this further develops.

Premium freight, coming EUR 200 million in 2022 to EUR 100 million in 2023. You always will have a certain kind of premium freight in order to balance, obviously, what you're doing in manufacturing. Keeping your plants all the time running, which is then saving costs on the other side. But we still assume that we can substantially reduce those to EUR 100 million. :

Operator: [Operator Instructions] And the next question comes from Akshat Kacker from JPMorgan.

Akshat Kacker: It's Akshat from JPMorgan. A couple of questions, please. The first one on R&D expenditure. Could you just share more details in terms of the net R&D spend expected in the Automotive segment in 2024, please? And how should this develop going into 2025, as per your current expectations and current order intake? The second one is on Tires. Could you just split out the price/mix impact of minus 1% in Q4, please? It would be good to get some details on pricing and mix separately. And also, other than the indexation clauses, have there been adjustments in absolute pricing in Europe and North America?

Katja Durrfeld: Maybe I'll start with the R&D expenditure and what to expect in 2024. You know that we don't guide on specific cost items separately. But overall, you can see that coming from 2021 until end of 2023, we were able to reduce our relative R&D net in percent of sales quite substantially, and we will continue to do so. This is also what we have guided for when we had our Capital Markets Day, and there we said, until 2028, we will come down relatively to around 9% R&D in percent of sales, and you will see consecutive improvements in the years to come, yes.

Regarding the split between price and mix and what to expect other than the indexation clauses, please let me say the following that we will not provide a detailed split of price and mix in detail. You know that both factors are of high importance to us, especially with, for example, our growing share of ultra-high-performance tires mix definitely does play a role, yes. :

Operator: And the next question comes from Edoardo Spina from HSBC.

Edoardo Spina: I have 4 very quick ones. First on semiconductors -- on the price of semiconductors. I believe they represent a very large share of cost for you, but I don't think it was mentioned on the call. Could you clarify if the price of semiconductors decreased this year? And if so, would you have to negotiate with the OEMs any sort of compensation to them, if that happens?

The second question is on the carve-out cash cost. I just wanted to ask if possible to clarify a little bit what they relate to? Just so I could understand, like is it the legal payments? Are you paying some suppliers consultancy or other things related to this cash payment, please? And finally, on the Tires side, just to confirm if gross pricing moved in the fourth quarter or you expect it to move as a gross pricing itself? And finally, the mix, if you can clarify the regional effect impact. Is that because you did not grow in those regions where you wanted to grow? Or is there a currency impact? I did not understand that part. :

Nikolai Setzer: I will start maybe with the semicon part and how is semicon developing. So over time, the supply and demand has been more in sync. After '21, '22, with heavy changes as well into '23, we see a more calmed down market on the semi side when it comes to supply and demand. So that's as well true for us. However, we still see, as well going forward, certain structural shortages and certain structural semicons, which are important for us, which are as well going forward more in a difficult structural situation there. Obviously, we are seeing a certain pricing which might develop in that direction. And as I mentioned before, we are in pricing negotiations with our customers already as we speak in the first quarter. On the one hand, sustainable pricing, but obviously always discussing what we have in our cost inputs over time. Carve-out cash-out part.

Katja Durrfeld: Carve-out -- maybe I'll take the carve-out cash-out part. When you do set a business that is highly integrated aside to enable new strategic options, this comes with some impact. You might have to -- and this is why I say you might have to set up new legal entities, for example, that need to be built. You might have to transfer lines from one production plant to another production plant because then you want to decide to separate the plant itself. You might have to split the plant into areas. There are tax topics coming with it. You need to set up new IT systems or at least separate IT systems. All that comes with certain cash-outs and those are the cash-outs that are related to the costs that we are talking here about.

And I have to admit that I did not fully get the third question that you have about -- is it Tires price/mix, or was it Automotive? :

Edoardo Spina: Yes, on the Tires. First on the pricing, if the gross pricing of Tires has moved? And secondly, you mentioned earlier, some regional effects that have impacted the mix. That part I did not understand why.

Nikolai Setzer: Yes. I mean, first of all, this is a year-over-year which you compare. And during those 4 quarters, many things happened. So that's how you put in relation. It's not a quarter-over-quarter, it's a year-over-year comparison which you are referring to. And yes, and I referred to this before, in particular on the truck side, we have seen still a relatively weak demand in the fourth quarter and truck price per tire is obviously much superior versus the past. And that's why you see there significant year-over-year effect in the price/mix. This is one of the many contributors which are playing a role. However, you have seen, in our profitability, we have been able to go basically stable forward. So this has not had a direct effect on our profitability.

Operator: Okay. So at the moment, there seem to be no further questions. [Operator Instructions] And we have a follow-up question from Mr. Besson.

Thomas Besson: Just a very quick one, please. Could you explain the strong increase in pension provisions in 2023, please? The headcount hasn't moved much, interest rates have increased, and the performance of financial assets has been strong. So it seems counterintuitive.

Katja Durrfeld: Thomas, there's, so to say, nothing special about it. It's a part of that remeasurement and we have more people that have created pension obligations. There's nothing special independent to talk about, yes.

Nikolai Setzer: Majority will be an exception to be interest rates, which took place.

Katja Durrfeld: Exactly. That's the remeasurement.

Operator: Okay. Since we didn't receive any further questions, let me hand back over to your hosts for some closing remarks.

Katja Durrfeld: We should also take the last question from Sanjay, the last minute to allow that. Thank you, Sanjay.

Sanjay Bhagwani: So then just one final question I received from some of the investors. So I mean if you think of the carve-out, right, and this is a significant amount being invested on the carve-out, so how confident are you that you will be able to, let's say, actually monetize this carve-out or unlock the value by selling this business? And yes, so if you could provide a little bit more color on that. Because at the end of the day, this is an investment, and how should we expect the return on this maybe in the 2 to 3 years?

Nikolai Setzer: Yes. Sanjay, nobody can predict the future. That is the difficulty. However, we have to get more flexible within our company. So that's why we have -- the structure has to follow strategy. And in our business areas, this is a general rule. We have in certain areas in the past reduced our flexibility in this case, and we have to increase it. We are confident from today's point of view that this offers optionalities which are value accretive.

How much and when and so on, it's too early to judge. This is what we have to look into market sentiment, what are the optionalities, however we see. And we review constantly our best ownership, and we are convinced that this creates value then going forward. :

Katja Durrfeld: And also, Sanjay, maybe to let me add especially for the User Experience business. For sure, you've seen that the business has taken a positive development with regards to profitability and has a really strong order book. So it is an interesting business that we have decided to set apart because it does not necessarily pay into our strategy of the software defined vehicle anymore, and it's more hardware loaded. Nevertheless, it's a great business.

Operator: So we have a last question. It comes from Horst Schneider from Bank of America.

Horst Schneider: Just few last questions remaining now. When it comes back to acquisitions, just to be clear, before you do any new acquisitions, before you have got to complete the disposal, is it right? Because you talked about it that, of course, you want to reduce Automotive exposure. On the other hand, you also want to strengthen the Tires business. Or can acquisitions on the Tires side happen first, and just thereafter coming with some Automotive disposals?

Then just a clarification on this guidance for Automotive. When you say that H1 is weaker, H2 stronger, just want to be clear, if you can compare the term again to last year, really, that we have got a kind of breakeven just in H1, and then very back-end loaded H2. Or is it a little bit more balanced this time? That we have got a really positive territory in Q1, Q2, and there's not that much catch-up to come then in H2? :

Nikolai Setzer: Maybe the second part first because this goes fast as well. As you know, we don't guide on the quarter, and we will shed more light during the calls how the firm development will be. Again, we are now beginning March. March is still an important month, and we have to take in order to see where we are. So please stay tuned. We come with more information then during the course.

For the first part, no. I mean, obviously, we have said clearly on the Automotive side that we are now underway to review our portfolio. If there would be something value-accretive where we can strengthen our Automotive portfolio, we would even consider that. But however, we see that we have all we need. We have the strength there and we have further the need in order to buy the certain parts, which are not synergistically supporting our technology part. So that's why we consequently go in Automotive part in that direction, reduced the portfolio and making it stronger on those areas. :

And same was true for the Tires side. If there is a good opportunity, we consider this as well without having any disposal on the Automotive side already completed there. So there is flexibility. And same was true for ContiTech, by the way, where we look at that constantly to strengthen our industry set-up, and this is what we are looking as well further. However, as you mentioned at the beginning, clearly, priority right now is on the flexibility on the Automotive side in order to open strategic opportunities there. :

Horst Schneider: Very last one on Tires. Since you guide for this 0 to 3% replacement via market growth, you talked last year all the time about this, not shortage, but basically that the dealers are understocked. So is there a chance that basically risk is more on the upside this year on volume growth in Tires? Or you would say not sure?

Nikolai Setzer: Just to recalibrate what we said, we said that the destocking at the dealer side, means the reduction of the inventory, should come to a stop, to a still stand. And then we assume from there, maybe, I mean, a one to one sell out to sell in, and as well a potential further stocking up in the market. That's what we mentioned. Last year, we have to be true, we have, with our prediction, not been at the point. So destocking took farther, in particular, on the truck side than we predicted, as well as the underlying upside a little bit lower. And that's why we have this range from 0 to 3%. Honestly, we don't know, but we assume that the destocking comes to an end and we see as well expanding replacement markets in 2024.

Horst Schneider: But you are not seeing a restocking yet, you still see more destocking, even though it's more trucking?

Nikolai Setzer: Yes, correct. And honestly, it's as well still too early in the year. Summer season basically starts with Easter. So we are able to confirm this then in April, May, more in particular for the European market.

Katja Durrfeld: Okay. And just to reiterate what we said about the stronger Q4 demand on the winter side of this year, yes. So we saw some pull.

Horst Schneider: That means that there has been already restocking, and reduces then potential for restocking in '24? Do I get that right? Or...

Katja Durrfeld: No, that's not what I said. I just said that we had more spot requests.

And thank you all to everyone for participating in today's call. As always, for further questions, your Investor Relations team is available any time. With that, we're going to conclude today's call. Thank you, everyone, and goodbye.:

Earnings Transcript for CTTAY - Q4 Fiscal Year 2023

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