Contl Ag S/Adr

Good afternoon, ladies and gentlemen, and welcome to the Continental AG analyst and investor call regarding the results of the fiscal year 2023. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Anna Maria Fischer. Please go ahead.

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, Niklas Etzer, 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. Following the presentation, we will conduct a Q&A session for sales site analysts. To provide a chance for all to ask questions, we would kindly ask you to limit yourself to no more than three questions. This will help us conclude the call on time. With that, let me now hand over firstly to you, Nico.

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 touchpoints 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 three years, which have been some COVID-difficult years as well for technology, but we showcased, and that was as well the feedback 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 outperform the market and increasing our profitability going forward towards our mid-term targets and we announce key decisions, which we have taken and we refer further to that. So looking on the KPIs, how did the year ended? Say it's 41.4 billion euro, 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 a 2%. And the two rubber sectors, tires and Contitech, have 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 a 6.1% adjusted EBIT margin, we have been slightly above the midpoint of our guidance. So 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 the the highest probability which we had quarter over quarter in that year, so we reached 4.7%, close to 5%. In the fourth one, still this facing high 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 re-discuss certain parts and discussions already started as we speak. On the tire side, so that's stable, strong results, which we've seen that in the environment, so we did good in terms of supply in the short-order fill. And Quantitech has finished solidly stable as well. The year, as Biden said, the industry demands from 4.7% yearly, adjusted average margin 22%, 2% up in 6.7%. So this helped the adjusted free cash flow. Coming to the last item, which I want to pick out of the chart, 1.3 billion euro, which is slightly above the upper range of our guidance. Why did that happen? There's strong operational performances, as I mentioned, out of the three sectors. On the one hand, inventory turned into, as well, lower cash or supported the cash flow, and we achieved our targets 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. They're the right step towards our mid-term 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 era of execution, we have lots on our agenda. First of all, for all sectors, you see underneath operations of excellence and cost control is the scheme. As we announced Capital Markets Day, we have to further improve that base. There are lots of reasons. and lots of costs in particular premium freight on automotive where we see improvements going forward and we have to tackle those first of all the left up 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 1.4 billion euro 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 Quantitech, on the right bottom, we have a path out, which we drive farther. This is 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 have announced capital markets pay 400 million euro savings from 2025 onwards. So 5,400 positions have been identified to be reduced. Program is set, countries are selected, and is now executed. Same what's true for the R&D efficiency. A step 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. Value per car, we have to increase in order to outperform the 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. The entire side, tapping new profit pools, as in our electrification, digital services, UHP growth is, as well as for 2024, on our radar screen, and we will further focus here. The investments will be predominantly strengthened to set up in Asia-Pacific, as well as in the Americas, where we are still, where Europe is underexposed. So, Contitech, just to add, industrial markets, as I said, still a bit muted coming into the year. However, we work strongly on our outperformance there, outperformance in 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, and whereas at the same time, we're working on the CAFA, 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 there. You remember, we have announced that we increased the payroll ratio from 15 to 30 of 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 to Euro 20 per share, which is the same amount as we had in 2021. 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're well invited for April 26 to participate. And with that, I hand over for further details, information to Katja.

thank you very much nico 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 six our quarter four 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 tyres, 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 ContiDict faced continued headwinds and weaknesses in the industry. Our team delivered a solid adjusted EBIT margin of 7.3%. On the next slide, slide seven, 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 demonstrate 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 from 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 networking delivering strong double-digit organic growth. And SEM, SMY, and UX also contributing in line with our performance expectations. Now back to the fourth quarter here on the slide. Adjusted email 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 are referring to. 2022 was still north of 200 million euros, while last year we managed them down to more than 100 million euros. with still further potential for further improvements in 2024. Now talking about the full year, our adjusted EBIT performance was 1.9%, at 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 pre-investments continued to impact autonomous mobility, all other business areas positively contributed to the automotive result. They achieved that even though they were all impacted on the EBIT side by currency translations. 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 100 million euros. Sharing details on our full year R&D to sales ratio result, 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 mid-term 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 20 million euros. To slide eight, Overall, in the fourth quarter, we grow 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 nine, but no need to go through the numbers. So let's move then to page 10, where we show a 7.3 billion euros order intake, bringing the total for the year to above 77 billion euros. Highlights for the fourth quarter include 3.4 billion euros order intake from our colleagues in safety and motion, with continued success in our latest generation of brake systems, with all five awards won with Asian customers. User experience received around 1.1 billion euros worth of new business and multi-display solutions, as well as a key award with a German customer for a next-generation head-up display unit. Our colleagues at Autonomous Mobility brought in €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. Now let's move on to tires on page 11. Importantly, We saw an overall strong end of the year result with 3.6 billion euros 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 effects in the fourth quarter, and we'll see that run into 2024, and in the quarter-on-quarter comparison, we face 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 chains. our ability to participate over proportionate in the seasonal market of winter and all season tires further supported our positive 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 our e-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 increased from the fourth quarter of 2022, although quarter four 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 result for adjusted free cash flow on page 13. At 1.3 billion euros, our result was even slightly above our guided corridor. That concludes the review of our results for 2023. I know everyone's 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 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 is minimal growth expected from the market across all sectors, leading us to a consolidated sale of 41 to 44 billion euros. We are guiding using corridors. The difference between mathematically adding up the sectors and the group is the consolidation. There have always been consolidation effects. 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 is 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 the corridor between 0.7 and 1.1 billion euros. 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 extending innovative head-up display business into volumes markets. And in autonomous mobility, we are launching more innovative ADCU control units to the market, as well as sixth-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 have to be price improvements as we expect a significant gross labor inflation in the magnitude of around 250 million euros. Secondly, through operational excellence, we will continue to focus on further manufacturing efficiencies and year-on-year reductions in premium freight. 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, from today's perspective, we expect a low triple-digit net effect in 2024. Although we strictly follow our R&D efficiency program, 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 recovery, 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 logistic 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 markets 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 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. To even further transparency, we want to share with you an extract of the main extraordinary effects we expect so far for this year to impact our free cash flow. Let's look on our final page together. It's page 20. Starting with the first item, the repurchase of Contitex shares, we will have a 500 million euros effect in the first quarter 2024. Some cost-saving measures we announced will lead to restructuring payments amounting to around €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 €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 markets. I would like to reiterate what I stated at the Capital Market 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?

Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press 9 and the star key on your telephone keypad. In case you wish to cancel your question, press 9 and the star key again. And the first question comes from Sanjay Bhagwani from Citi. Please go ahead.

Hello. Thank you very much for taking my question also. I've got three questions. And my first one is I think, Katia, you already touched a little bit upon on this elimination line item. which you say that it's nothing new and it's always there. But 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 400 million of negative elimination line item, which seems like a big step up versus 214 of 23. So could you maybe confirm that that you are just being conservative and there is no, let's say, significant reason to believe that this HQ 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 illumination 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 two after this, if that is okay?

That is totally okay. So, let me answer that question first, Sanjay. You just mentioned the figures, and I think calling it conservative, this is how you call it. There is nothing hidden there. There's no transfer of any cost position from automotive to group level, and there's for sure also no doubling of group costs 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. I fully understand that you are always referring to the midpoint. 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. Let me just reinforce on the strategic side. It's clearly and that's our strategy. Sectors are responsible for their 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 the 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.

Thank you very much, Katya and Nico. That is very, very helpful. So it just seems like conservatism and grounding of 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 are 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 you 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, Nico, maybe you touched upon the new products which are coming at a higher content. And yeah, so if you could please elaborate on this topic a little bit more.

Okay, first of all, if you look, take the midpoint and take then the implied organic growth it's 3.5% growth on 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 where you have been And with CHI last year, in terms of outperformance, you've seen as well that particular UX in third quarter had a lower share as well on the geographic side. We had certain mixed items on North America. Those we see to turn. New products are coming in with a higher value. We assume that the partly as well negative mix which we had with in the regions next year turns with the customers and with the platforms which are coming in. And a last point, we have addressed on the Capital Markets Day that this 1.4 billion euro bucket, and I specifically take this one because there's many businesses which are underperforming and strongly underperforming as well from our point of view on the value, it means on the price side. Those we will have to address and we will address towards 2024 for repricing, which then would suggest as well top line growth and support. So those three 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've been given.

Thank you. That is very, very helpful. And my last question is around, so now that we are already in March, I understand you don't guide for quarters, but could you maybe provide some some conceptual understanding on the Q1, mainly because let's say on the organic growth outperformance, which you like maybe around three to 5%, is it likely to be backend 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 250 million of gross costs, negotiate this year probably much lower. So how should we think of the setup in Q1? Like a bit more, conceptual explanation, if you can, please.

I thought that the general remark, and Katja might add then more details on this. In general, to what you said before, the two items, particularly on the automotive sector, are important. The one part, again, coming to what I said before, repricing as well as pricing the applications, 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, FG&A. The low three-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 part much stronger than the first half. How the first quarter will play out remains to be seen. Markets just started, and you know the most important month is the March month, which is due to come where everything is on full steam. First quarter to month, in particular January, then the Chinese New Year is kind of distorted. So Katja, maybe you want to.

I don't think there's much I can add, Nico. 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, yeah, and that is also something that will be a way on the margin for the first quarter. Yeah, but as Nico said, our expectations 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 two years.

Thank you very much. That is very, very helpful.

And the next question comes from Christoph Lascavi from Deutsche Bank. Please go ahead.

Thank you for taking my questions as well. 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 as 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. Thank you.

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 two years, quality before speed. So we have to, in particular for the 1.4 billion euro 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, take another 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 as well careful after those last two years. It took very often longer than at the beginning of the year we expected. However, we made it in those two years, so we are very confident that we will find, as well, agreements in 2024. On the contract side, 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 or employee representative negotiations, they started, we are in those talks in order to find common agreements there, and we are confident that we get relatively soon agreements here, but we use obviously all opportunities um retirements or fluctuation and as well in those areas where you can swiftly eliminate certain positions or reduce your headcount and be able to conduct 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 have this will be a staggered approach as it

is spread all over the world and we take every opportunity to adjust thank you and the next question comes from mark renee ton from varbook research please go ahead yes good afternoon thank you for taking my questions first one would be on on free cash flow which i think is very solid when particularly when considering the the one billion headwind you have from from these extraordinary effects you you alluded on My question would be, I think there would be some positive, and I think you mentioned a couple of millions, the three-digit number in the lower part from the Tesco repaying some receivables. I have 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 side in 2024. That would be the first question. Second question, When I look at order intake at automotive, safety in 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? Thank you.

I thought maybe with the second question, and then you go to the best note. No, what Sam is, safety in motion It is the regular order intake for our new products. This is the one box NKC2, 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 they are new coming in. So this is not influenced by pricing. It is purely influenced by new technologies coming up in the market and suggests as well with 1.4 book to build that we have a further expansion and it contributes. But this is in line clearly what we assumed as well at the capital market stay of the growth of this business area.

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 Bitexco Technologies. And you also 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 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're expecting some positive contribution during the course of 2024 to support the stronger free cash flow performance.

Thank you.

And the next question comes from Thomas Besson from Kepler-Chevreux. Please go ahead.

Thank you very much. It's Thomas Besson from Kepler-Chevreux. I have a few questions as well that I would like to ask one by one as well. Starting with the one-offs in Q4 in automotive and your guidance for the one-offs 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?

I would say yes, they are. We announced at the Capital Market Day that we will it now invest into structural adaptations especially in the um in the administrative side in automotive which will contribute positively to overall 400 million euro as of 2025 going forward yeah end of 2025 going forward and that's what we've built accruals for um in the fourth quarter 2024. in the first quarter 23 and in 24 that's what you're you're doing right because you're I'm sorry. I mean, we built it in the fourth quarter of 2023 and we'll work our way in 2024.

Thank you. Thank you. Second question. Could you talk about the client mix in automotive, please? Can you give us either your top three or your top five 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?

So number one, our client mix has not changed 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 at 2023, as we have seen it as well in the years before, our order intake with Chinese OEMs is above the part within our portfolio. So we are growing faster with the Chinese OEMs than with the internationals in this market. However, it will take some time until we are balanced in the market.

Thank you, Nico. Last question for me. Could you share with us a new update on the timeline for the structural changes you've commented upon during your presentation and namely the car vote separations and eventually disposal of assets whether they are within automotive or within quantitech do you have any greater visibility on the timing of these structural changes please so for quantitech side the oesl part

is and that's why we call it route 2025 we want to be finished with the independence in 2025 and then offering obviously optionalities um on time the automotive two areas the 1.4 billion euro bucket as well as business area ux is still in conceptual 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 market is dynamic, further decisions might be further developed for the 1.4 billion euro bucket and wherever. Better options, of course, might be considered once they come into play. And obviously, once there's something new, same as with the business area UX, we will inform you in UCOS. Thank you, Nico.

Welcome. And the next question comes from Monica Bosio from Intesa San Paolo. Please go ahead.

Good afternoon, everyone, and thanks for taking my questions. 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 for China in terms of performance in 2024? My second question is on the replacement tar market. You are guiding for a plus zero, 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 the 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 bank magnitude for 2024? Thank you very much.

Okay, the first part, our underperformance 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 the largest one, as well as Tesla, have grown quite substantially. That is the reason, with all others I said, we have a farther 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 that was a clear customer mix 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 light positive development. Can be a 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. Particularly on 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 the way that we just say it will be 0% to 3%. 0% to 3%. 0% to 3%. And we inform over time how this further develops. Premium freight coming on 200 million 2022 to 100 million 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 100 million.

Okay. Thank you very much. Thank you.

Ladies and gentlemen, just a quick reminder, if you want to ask another question, please press 9 and the star key on your telephone keypad. And the next question comes from Akshat Kaka. Please go ahead from J.P. Morgan.

Thank you. Yes, Akshat from J.P. Morgan. 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? Thank you so much.

Maybe I'll start with the R&D expenditure and what to expect here 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 market stay, and there we said until 2028, will come down relatively to around 9% R&D in percent of sales, and you will see consecutive improvements in the years to come. Regarding the split between price and mix and more to expect 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 on ultra-high performance. Tyrus mix definitely does play a role.

Understood. Thank you.

And the next question comes from Eduardo Spina from HSBC. Please go ahead.

Hi, thank you for taking my questions. I have four very quick ones. First, on semiconductor, on the price of semiconductor, 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 semiconductor do potentially decrease this year? And if so, would you have to negotiate with OEMs any sort of compensation to them if that happens? The second question is on the card about cash costs. I just wanted to ask if possible to clarify a little bit what they relate to. I just really start to understand that either the legal payments, are you paying some suppliers, consultancy, or other things related to this cash payment, please? And finally, on the Thai side, just to confirm if gross pricing moved in the forequarter or you expect it to move as a gross pricing itself. And finally, the mix, if you can... clarify the original effect impact. Is that because you did not grow in regions where you wanted to grow, or is it a currency impact that you not understand that part? Thank you.

Maybe it's 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 2023, we see a more calmed down market on the SEMI side once it comes to supply and demand. So that is as well true for us. However, we still see as well going forward certain structural shortages and certain structural semi-cons, which are important for us, which are as well going forward more in a difficult structural situation. They are obviously and certain pricing which might develop in that direction. And as I mentioned before, we are in pricing these 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. Carford Cashout.

Maybe I take the Carford Cashout part first. 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 tech 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 cost that we are talking here about. And I have to admit that it does not fully get the third question that you have about, is it tires price mix or was it automotive?

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. In that part, I do not understand why.

Yeah. I mean, first of all, this is a year-over-year, which you compare, and during those four quarters, many things happened. So that's how you put it 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 car area. That's why you see there a significant year-over-year effect in the price mix. This is one of the contributors of 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.

Thank you. OK, so at the moment, there seem to be no further questions. So if you would like to state another question, please press 9 and the star key on your telephone. I will leave the line open for a couple more seconds. And we have a follow-up question from Mr. Besson. Please go ahead.

Thank you. 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.

Thomas, there is, so to say, nothing special about it. Part of that is remeasurement, and we have more people that have created pension obligations, pension obligations. There's nothing special in the pensions to talk about. Yeah.

Majority will be an exception to the interest rate development. Exactly. That's the remeasurement. Which took place.

Okay. Thank you very much.

okay since we didn't receive any further questions let me hand back over to your hosts for some closing remarks we should also take the last question from sandre the last minutes allow that thank you sanjay hi uh thank you thank you very much for for bringing me back again uh there's just one final question i received from some of the investors is uh 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 yeah, 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 two to three years?

Yeah, Sanjay. Nobody can predict the future. That is a difficulty. However, we have to get more flexible within our company. So that's why we have structure has to follow strategy and our business areas. This is in general our 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-creative. How much and when and so on is too many 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.

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 is more hardware loaded. Nevertheless, it's a great business.

Thank you. That is very, very helpful.

So we have a last question. It comes from Horst Schneider from Bank of America. Please go ahead.

Good afternoon. I made it. I pressed all the time nine star, but it didn't work. But now it worked. Just a 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 disposals, is that 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 tire business. Or can acquisitions on the tire side happen first and just thereafter come maybe some automotive disposals? Then just clarification on this guidance for automotive. When you say that H1 is weaker, H2 is stronger, just want to be clear if we can compare the pattern again to last year, really, that we have got a kind of break even 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 thank you maybe the second part first because this goes fast as well or we as you know we don't guide on the quarter and we will shed more lives during the course how the firm development will be Again, we are now beginning March. March is an important month, and we have to wait in order to see where they are here. So please stay tuned. We come with more information than during the course. For the first part, no. I mean, obviously, we have said clearly on the automotive side that we are now on a way 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 diversify certain parts which are not fitting in and not synergetically supporting our technology part. So that's why we consequently go on automotive parts in that direction, reduce the portfolio and make it stronger on those areas. Same what's true for the tire side. If there is a good opportunity, we consider this as well without having a new disposal on the automotive side already completed there. So there is the flexibility. And same what's true for ContiTech, by the way, where we look as well 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.

Very last one on tires. Since you guide for this 0 to 3% replacement tire 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?

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 there is a potential father stocking up in the market. That's what we mentioned last year. We have to be true we have with our prediction not being at the point so the destocking took farther in particular on the truck side than we predicted as well the underlying a little bit lower and that's why we have this range from zero to three 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. but but you are not seeing a restocking yet you still see more destocking even though it's more trucking right Yeah, correct. And honestly, it's 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.

Okay. And just what we said about the stronger Q4 demands on the winter-tider business. Yeah, so we saw some pull.

That means there has been already some restocking. reduces the potential for restocking in 2024. Do I get that right?

No, that's not what I said.

I just said that we had more spot requests. Okay. All right. Okay. Got it. Thank you.

And thank you also, everyone, for participating in today's call. As always, for further questions, your congratulations team is available anytime. With that, we're going to conclude today's call. Thank you, everyone, and goodbye.