Contl Ag S/Adr

Good afternoon, ladies and gentlemen, and welcome to the analyst and investor call Q3 Results 2024 of Continental AG. At this time, all participants have been placed on a listen-only mode. The flow will be open for questions following the presentation. Let me now turn the flow over to your host, Max Wexmeyer.

Thank you, operator, and welcome everyone to our third quarter 2024 results presentation. Today's call is hosted by our CFO, Olaf Schick. A small reminder up front that both the press release and presentation of today's calls are available for download on our IR website. And before starting, we'd like to remind everyone that this conference call is for investors and analysts only. If you do not belong to either of these groups, please kindly disconnect now. Following the presentation, we will conduct a Q&A session for sales site analysts. To provide a chance for you all to ask questions, we would ask you to limit yourself to no more than three questions. This will certainly help us to conclude our call on time. And with this, let me now hand over to you, Olaf.

Thank you very much, Max, and to all on the line. Thank you for joining us here, and we appreciate your time and being with us today. Yeah, I would like to get going with a brief update on where we are regarding automotive sector spin-off. We are still in the detailed evaluation phase, after which my colleagues on the executive board and I will take a final decision in Q4 on whether to go ahead with the spin-off. Next steps would then be the supervisory board decision in March, followed by the annual shareholder meeting approval in April. What are the main criteria? we will use for this decision. Here our focus is on ensuring that both standalone organizations are fully functional with a good underlying performance and strong balance sheets. Additionally, we aim to ensure to have a clear picture on topics such as tax implications, legal requirements, which are in such a complex undertaking as a spin-off. And I can tell you we are working very hard around the clock on these topics. In parallel, we actively started the preparation to complete the spin-off in time. So, should we decide for the spin, we can therefore complete it, as we said, by the end of 2025. So, we will keep you in the loop. Now, let's move forward to the third quarter results you see here on page three. Starting on group level, I'm pleased that despite the persistent headwind from the REIT market environment, we have significantly improved our adjusted EBIT margin by 260 basis points year over year. A part of that was driven by the 125 million euro cash inflow from Vitesco Technologies. We made an announcement on that. But the core of it shows that we can actively execute our self-help program even in the most challenging circumstances. Let's look at some highlights. From each sector, starting with automotive, the team successfully concluded almost all the remaining pricing negotiations with just a few remaining topics to close in Q4. The automotive result was underlined by two other key factors. Firstly, we continue to be well on track with our strategic self-help programs, and I have more details on that in just a moment. Secondly, we began to see slight improvements on the outperformance as some previously delayed SOPs and ramp-ups started to gain traction now in the quarter. For tires, our colleagues delivered a strong quarterly result. We could capitalize on the improving passenger vehicle replacement sell-in in our core markets in Europe, North America, and China. In addition, we benefited from the beginnings of stabilization in the European North American truck tire replacement markets. To Contitech, our business remains particularly weighed down by persistently weak industrial markets and weak light production volume, weak light vehicle production volumes. We continued with our focus on our self-help program, particularly in our OESL business area, which combined with a slightly positive material development helped to at least offset labor cost inflation. Overall, we have achieved a good set of results, especially in automotive and tires. While for Contitech, I will share with you in a bit later the needed adjustment to accommodate for this enduring weak market situation. And then finally, to free cash flow, here we had elevated working capital on the back of stronger sales in the month of September after rather soft sales in July and August, and thus higher accounts receivables. Due to lower sales in July and August, which define the cash inflow for the quarter, we are below the priority figures. Further to that, we had faster progress on the restructuring side, where we benefited from the one time under 25 million euro cash inflow from Vitesco. As I have done in our H1 reporting, I would like now to share with you our progress now at nine months on our automotive transformation program on the next page. We have made good strides across all our focus fields, starting with operating leverage. Our main instrument here is concluding the price agreements, which from Q3 standpoint we have more than 90 done i strongly support our quality over speed approach here which has enabled us to ensure that the majority of the pricing is now sustainable moving forward as there remains market volatility in some core component groups and we have new projects going into sop it remains in our interest to monitor and adjust again to the reality of the situation then in 2025 but first and foremost we will of course work hard on closing the remaining 2024 negotiations with our customers. In operational excellence, here it is noteworthy to highlight our manufacturing performance improvements supported by gains in fixed and variable cost reductions contributing to our target of achieving 1% of sales reduction in the short term. In our fixed cost reduction program, the automotive management has made significant progress as well. Year to date, we have reduced over 3,000 employees. On the back of this good result, our previous target of achieving 150 million Euro cost savings this year is so assured that we have decided to increase the target yet again, aiming now for around 200 million cost savings within this year. Looking to 2025, we also confirmed that the remaining 200 million Euro cost savings of the program are already to 90% assured. That means we have the necessary exit contract signed or other measures defined. To R&D efficiency, we are making good steps towards our goal of high single-digit R&D to sales percentage by 2027, achieving a 30% basis points reduction in Q3 2024 compared to Q3 2023 on net are the excluding restructuring costs. And this ratio improved despite the sales drop. Further to that, we are continuing our focus on the use of AI, especially in the development phase of our projects to bring sustainable efficiency gains. For example, by expanding its use in requirements engineering, where we can use AI to automatically derive the product requirements from the customer's tools and documents, which can be hundreds of pages heavy, then break them down on system hardware and software levels from the requirements we can further utilize ai to support the generation of code and test cases these tasks today demand significant mental work and through ai we will be able to cut the development time for these tasks by around 20 or by up to 20 and finally to asset efficiency and complexity reduction first This year, we already adjusted our capex spent with a notable reduction seen here in Q3 to adjust to the weakening market situation. However, we will not stop here. 2025 will not come as anyone originally expected. Vehicle production volumes will presumably further decrease in Europe and North America. And as a result, we are ready to consider additional measures. Our next steps towards reduced complexity is through merging the two business areas, software and central technologies, and architecture networking. Bringing the full architecture and core software capability under one roof to better coordinate how these two core building blocks of the vehicle interact. The new organizational setup of this BA is already done as of November 1st. So, we are moving fast and at some we have now streamlined the automotive setup from six business areas at the time at the time of our capital market day, almost one year ago, to now to lean for business areas. So, we are on the move. Now, on to Q3 group sector highlights. In more detail, if you go to the next page, in automotive, the top line was burdened by continued weak global production volumes, while our focus on self-help measures delivered a strong 140 basis points improvement on the adjusted EBITDA. Notable next is tires bringing 350 basis points in organic growth, which translated into a 120 basis point increase in the adjusted EBIT margin. Intercontinental Tech, with a persistent industrial market weakness coupled with particular weak European automotive production volumes, resulted in significant headwinds on both sides of the business. which we could only partially offset through our self-help and cost-focused programs. Finally, to this page, the ramp down of our contract manufacturing activities is progressing as planned. Now, we will look now to the detailed sector-by-sector, starting with automotive. Starting with the top line, we could achieve to compensate some of the market-driven volume drop in FX headwinds through finalizing most of the remaining pricing agreements, also help directly on the bottom line. But let's look deeper into each business area where we see varying performances. Let me shed some light there, starting with autonomous mobility and safety in motion. Here, we were burdened by sizable volume drop linked to weaker market performance in the quarter for key car lines with our content. For architecture networking, we benefited particularly from the finalization of key price negotiations in the quarter positive customer mix and an accelerated ramp-up curve of new launches, all of which had a positive drop-through effect to the bottom line. And then the user experience where we have the continuation of ramp-down of older display technologies and delayed or slow start of ramp-ups of car lines with our latest generation displays. The pricing negotiation gains could not offset this persistent volume and content situation. Despite the difficult market environment, our bottom line result underpins our ability to successfully execute our self-help programs even ahead of schedule, as you saw in the scorecard. We are ensuring our automotive group is in the right shape for its future. Looking to the full year and knowing that multiple headwinds will persist in the automotive market, we expect to land in the lower end of the sales guidance corridor. Due to that, we expect to come out in the lower half of the adjusted EBIT margin guidance corridor. Now, let's look at the regional view. It was again a difficult quarter with all key market volumes well below the comparative period in Q3 2023. However, it's important to note that even against this backdrop, we still achieved a notable worldwide outperformance of 200 basis points due to our strong performance in Europe, as you can see. Here, we beat the market with a sizable 8% outperformance stemming from pricing and some ramp-ups finally getting underway. In North America, our performance here is very much tied to the persistent challenges that will not resolve themselves in the short term. Effectively, throughout 2024, we are burdened by customer mix, technology change cycles, vehicle mix favoring lower options versus versions being produced, and higher inventory levels at some customers delaying production. And finally to China, where the well-known situation burdened our sales scores versus the market also in Q3. Now, let's look to our future and our quarterly order intake result on page 8. Our new orders of 3.7 billion lifetime sales in the quarter were below our expectations, reflecting the challenging market environment of our customers, resulting in delays in their new project and sourcing decisions, something I think we have seen throughout the reporting period so far. Nevertheless, I would like to highlight the notable achievement from our safety and motion team, who secured €1.8 billion worth of new business with major awards from Asian customers for electronic parking brake, as well as contributions from our airbag and wheel speed sensor portfolios. I'm pleased to note that it includes new awards with four key Chinese OEMs, further growing our position as reliable partner of safety solutions in the market. Certainly, a positive sign for future growth, especially considering the current Chinese market dynamics. That completes auto. Now let's move to our group sector tires on the next page. Starting with the top lines, our tires team achieved good organic sales growth of 3.5% versus the comparative period on the back of solid passenger vehicle replacement market sales and truck tire business improvements. Although global OE passenger car market remains globally very weak, our overall volume development for the quarter was a positive 2.0%. And this was possible due to stronger replacement volume worldwide, particularly in APEC and in Europe. Especially good replacement volumes in winter and also the all season tire business in Europe was very important, not only for the sales development, but also for the bottom line as well. Further, Sales price mix finally turned positive at 1.3%, supported by the end of indexation effects, as well as an overall positive channel mix and product mix, however, slightly negative impact from regional mix in APEC and Americas. Looking to the bottom line, the momentum in the passenger car vehicle replacement business contributed positively, as well as overall positive mix, where we capitalized on the good start to the winter and all season tire business in EMEA, And this overcompensated the fact that raw materials started to turn into a slight headwind, something that we expect to be even stronger in Q4, as well as persisting labor inflation effects. In addition, we are carefully observing the North American market, where one of our key customers in the replacement market is going through Chapter 11 proceedings. But it is too early to determine the comprehensive findings of this process. Looking at the full year, we are confident that for tires, we will achieve at least the profitability level of H1 in H2. And now, with a good tire quarter in the books, there may even be some further upside to that, depending how the markets continue to develop. Now, let's look at Contitech. The persistently weak industrial and automotive markets heavily burden Contitech this quarter on both top and bottom lines. First sign of recovery, we're seeing only in the aftermarket and construction home markets, in almost all other key markets, and where in fact we are much more prominent, for example, energy, off-highway and manufacturing, we do not yet see any signs of recovery. Against this backdrop, we continue to double down and focus heavily on our self-help program, where our OASL team here particularly is steadily improving the bottom line results. With OESL now in a stronger position, we have decided to pursue the start of M&A actions already within Q4 this year with the target to start the transaction phase at the beginning of 2025. In addition to that, we are investigating additional measures across Quantitech to safeguard our results for both the short and the long term. Looking to the full year, however, we do not We do need to adjust the guidance to reflect the little or no recovery expected in our key markets for Contitech. For this, we will reduce the outlook for the top line by 400 million euro to the new guidance corridor of 6.2 billion to 6.6 billion euros. And on the bottom line, we need to take out 70 basis points from the corridor with the new guidance now 5.8 to 6.3%. Now, switch back to group level and look at the free cash flow despite the improved operational results operating cash flow was down due to higher working capital from strong september sales and lower cash in from the week months of july and august cash outs for restructuring were faster as expected as you saw in our scorecard today of course resulting in higher cash outflow on the positive side As mentioned, we benefited from the one-off cash inflow from Vitesco Technologies. As you can see, on the investing cash flow side, we continue our strict path of cost management and investment decisions, further adjusting to the weak market situation, and this resulted in significantly lower capex versus the comparative period. We remain confident that we will achieve our three-year guidance, given our typically strong cash generations in the fourth quarter. The revisions we have made to our market outlook on slide 12 are in line with our messages today. With our Q2 update in August, we already reflected most of the changes that we are currently seeing in the market. However, North American passenger vehicles production is still developing below our expectations, so today we lower our outlook. On the truck OE side, we reflected the further worsening in European and North American markets with the new corridors, while we just more optimistic corridor for the north american truck replacement market and on the industrial production side dimension persistent weakness particularly in europe is now reflected in the update now let's look at the adjustment we have made to our guidance our q3 performance showed our considerable resilience against the challenging automotive market while the persistent weakness in our industrial markets could not be compensated any longer by internal measures alone It is on that basis that we adjust down our Quantitech sector outlook as I mentioned on both the top and bottom lines to the new corridor for sales from 6.2 to 6.6 billion euro and adjusted EBIT margin between 5.8 to 6.3%. Given that change, we have adjusted the group sales line down as well to 39.5 billion euro to 42 billion euro where we anticipate we will likely land closer to the bottom end of the guidance while leaving group adjusted EBIT untouched. I would like to reiterate my previous comments for automotive and tires. Firstly, on automotive, the volume situation will lead us to likely land at the lower end of the sales guidance. Due to that, we expect to come out in the lower half for the adjusted EBIT margin guidance also. For tires, Q3 has shown there could be some upside to our current assumption that for H2, we anticipate a similar margin performance to H1. Finally, to this page, we have an update on our tax rate, adjusting it to 30% rather than previously assumed 27%. The increase compared to the previous assumption is mainly due to the allocation of the group result for the various countries in relation to the overall result. Tax burdens that are not directly dependent on earnings also have an impact. This includes foreign minimum taxes with a different assessment basis and foreign withholding taxes that cannot be offset in Germany. The mentioned effects will be put into perspective once the earnings situation improves, meaning that we do not anticipate a sustained increase in the group tax rate. Furthermore, we built provisions within Q3 for tax risks in connection with investigations by Italian tax authorities highlighted that last topic already in the annual report report 2023 as a precautionary measure we have recognized provisions in the low to mid double digit million euro range for probable financial charges the subject of the investigations is the possible failure of the continental companies concerned to comply with declaration requirements vis-a-vis the italian tax authorities to put opinion of the tax authorities continental should have paid taxes for the activities in question Italy, which the company paid in other European countries in the period 2016 to 2023. So after that detour into tax accounting, let me reiterate overall Q3 was a good quarter for us, and we're confident that we will achieve our guidance as we have laid out today. So with that, I'd like to hand over now the rest of the time to you, Operator, could you please open the line for Q&A? Thank you.

Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press 9 followed by a star key on your telephone keypad. Has your question been already answered meanwhile, press 9 followed by a star key again to cancel your question. Please press 9 star now to state your question. So the first question comes from Horst Schneider, Bank of America. Herr Schneider, you're live.

Yes, hello. Good afternoon. Hope you can hear me. I have got a few questions on automotive, please. First one relates to pricing. When you say that most of your pricing has been done by now, could you maybe tell us what proportion of the contracts have been now permanently repriced? and on what percent you need to do again negotiations also next year. That would be number one. Then number two would be on this 400 million euro cost-cutting target. And you still aim for the 200 million euros then in 2025. And if I got it right, you are saying there could be more savings. So could you maybe remind us what is included now in this existing plan of 400 million euros and where you see scope for more savings. I always struggle with how I accommodate these savings in R&D because you also reduce employees there. But I think these savings are more considered in this R&D ratio that you are guiding for. But maybe you can clarify that. And last but not least, now on your auto guidance for this year, because you say the EBIT margin could be in the lower end of the, or in the lower half of the guidance range. That means that Q4 could be even stronger than we think. So I want to understand what now Q4 basically depends on. What kind of visibility do you have? Does it just depend on production schedules or what could make you basically not meeting the guidance? Thank you.

Yeah, thank you. Thank you, Horst. Let me start with the first question, pricing. So as I said, 90% successfully closed. a good portion is sustainable. So with regard to 2025, the uncertainties in the market remain. It's not normalized yet. That also means further rounds will be needed. On to your second question. Maybe let me start. We have said that we reduce headcount we will target to reduce headcount to 7,150. So far, end of September, we have reduced, on the administrative side, more than 4,500 to date. That was back to end of June, 2,800. And on the RD side, we reduced so far by end of September, 1,500. So that's 3,000 again on the administrative side, 1,500 on the RG side, and that is together 4,500. That means we are on good track as we have scheduled actually a bit faster. So that means now if we look at our savings, we have achieved so far 100 million Euro savings year to date end of Q3, and we target to save 200 million Euro by end of the year 2024. And we have, as I also mentioned, most of the measures already signed and clarified, so we are on good track to fulfill the additional 200, to achieve the additional 200 million then in 2025. To the guidance, Yes, we have adjusted it. Sorry, yes, we will end up in the lower half of the auto guidance. What is this depending on? On the one hand, we see after very weak production volume, we see better volume in Q4. We see we make further improvements on the cost reduction. Rd efficiency and we will see Rd reimbursements coming in in the fourth quarter. That's why we believe we will end up in the lower half of our guidance corridor.

Just to add on what Olaf just said, the 400 million are really on administration alone, right? For R&D, we have laid out a separate target to bring it into high single-digit figures by 2027, but the 400 million savings per se are purely related to the admin functions.

Yeah, you're right. That was also your question. Thanks for the clarification, Max.

Yes, just to the administrative side.

But, Olaf, if I got you right, then eventually you aim to upgrade the cost-cutting target for 2025. I got that right or not?

No, no, no, we're keeping it. We're just saying we're making good progress that we signed the contracts. We have the measures defined for us to show that we are on, I mean, this is now beginning of, this is now Q3, right? So we are on good, we are making progress a bit faster than planned. But we are on track to achieve the additional 200 million we need then in 2025 to achieve the target of starting from 2025 to achieve the or 100 million Euro target on the administrative side. Okay, that's great. Thank you.

Thank you. Next question comes from Christoph Lascavi, Deutsche Bank. Your mic is open.

Hi, it's Christoph from Deutsche Bank here. The first one actually a follow-up on what Horst just asked. You highlighted that you're progressing faster than initially expected on the fixed cost savings. In the process of that, did you... discover more scope to do more potentially next year and sort of have a second round of that program? Or is it too early to comment on that yet? The second question would then be just on tires and the US import share. Could you give us a rough outline how much is local for local in the US in terms of volumes? How much do you import from Mexico and what's imported from the European Union? And then lastly, probably you don't want to comment or can't for now, but it seems that the breaking issue with BMW is progressing quite okay. Is there a final timeline when you expect the claim to be settled and when we would have the clarity around that issue? Thank you.

Thank you, Christoph. Again, for us, it's important that what we have announced, that we implement and achieve our saving targets, and we are making good progress. Of course, we always look at the sales development and then the markets, and then we will see whether further measures are needed. But currently, the focus is on executing what we have announced, and there's nothing else to communicate at this stage. To your second question, regarding tire sales in the US. A portion of our sales in America is covered by European production. This helped us over the past years to make optimum use of our existing capacities in Europe. In addition, tires from South America are partially also sourced to the US. We are now, of course, carefully monitoring the situation, but the US cannot supply itself exclusively via the domestic market as the capacities in the U.S. are not sufficient for this. And I think you also asked about Mexican imports. Look, I mean, at the end, the Mexican market is, of course, very relevant for us. So we need to monitor the situation and then investigate potential measures. On the brake issue, look, important with the agreed and implemented measures, the vehicles can be delivered with the brakes to the customers. That is important. And everything else we clarify with BMW. There's really nothing else to communicate. Obviously, we have reviewed the provision that we had built up already in the first and second quarter. We have reviewed. We have adjusted that. That's, of course, normal process. when you conclude financials for the quarter, and that's it.

Understood. Thank you very much.

Thank you. And the next question comes from Monica Boisio in Tesa, San Paolo. The floor is yours.

Yes, good morning, and thanks for taking my question. The first one is on county tires and on the 2% increase in volumes, which was due basically thanks to the better trend in replacement in Europe. And I was wondering, do you expect a similar trend also in Q4 and, above all, entering 2025? Or do you see sign of a slowdown in replacement in certain areas? And my second question is a follow-up on the manufacturing footprint in USA. Maybe it's too early to answer, but are you planning some capacity addition into USA as for tires, maybe changing some manufacturing footprint assets existing now in Europe? And the third question is on the third quarter performance in automotive in USA. I fully understand that you were impacted by the inventories, high inventories from some customers, and the situation is still challenging. So should we expect some improvement by year-end, or it would be more likely in the first part of 2025, also on the back of the launches? Thank you.

Thank you. Yes, in Q3, it's correct. We had strong replacement business, in particular in Europe and in APAC. Also, our performance versus competition is strong. And so our focus is on increasing our premium business, in particular on the ultra-high performance tyre segment. For Q3, for the fourth quarter, And then 2025, it really depends now how the rest of the quarter is going. The winter season started well, as I mentioned. And that really depends now on the outlook for the year 2025. But if you look, for example, to China, we expect in 2025 over-proportional growth in the region. And we also want to stabilize our premium and UHP share. Second question on capacity addition to the U.S. Look, of course, we have, you know, basically we operate and we produce in the market for the market. But of course, for tires, we just talked about it. There's also import business needed because overall in the U.S. there's not sufficient capacity. We have in the last 10 years invested around 3 billion Euro in the US and we plan to continue to invest on that level going forward. We plan long term and we continue to do so. Everything else we now need to investigate and monitor the situation. Auto US affected customer inventories, I'm not really sure.

I mean, what we see there in the US is, let's say, somewhat of a persistent trend that we've seen throughout 2024, that maybe the versioning or all the products that you can bring into the vehicle tends to be at rather the lower end, maybe a bit of an affordability issue as well that we see there. So that's something that we do not expect to change really quarter over quarter.

It depends on the consumer behavior, right? Also now, let's see what happens in the U.S.

Yeah. Okay. Thank you. Thank you.

And the next question comes from Thomas Besson, Kepler Chevreux. The mic is open.

Thank you very much. I have three questions as well, please. First, I'd like to have a bit more on the transactions you're planning. So I think you've mentioned in your opening remarks that you were hoping to see the beginning of the QuantiTech transactions in early next year. I mean, clearly the dynamic of QuantiTech margins and revenues is not very favorable right now. Does it change anything to the plan for the timeline of the sale because the proceeds might actually be lower than expected? And can you say as well a few words about the taxation and overall cost of the automotive plant spin? Second topic, can you talk about tire pricing? You've mentioned that you face higher raw materials and labor costs in Q4 and in 2025. What can you say about the pricing environment today? And would you expect the industry to follow its usual path and potentially raise prices in some regions at least to offset input and labor costs? And final question, you've talked a lot about the savings that are planned in various businesses. Can you say a few words about what automakers are trying to get out of these savings? So I know that a lot of suppliers have engaged into more aggressive restructuring, notably as the European production environment has been dreadful. But don't you fear that automakers are going to try to grab part of these gross savings as a kind of participation and kind of retro commission of what they've compensated you for over the last two or three years? Thank you.

Thank you. For ContiTech. we see weak industrial automotive markets that have significant impact, that had a significant impact on the top and bottom line, low demand, in particular in energy, off-highway manufacturing areas, which are very relevant for quality tech. We do not see signs of recovery in the fourth quarter and in the first half of 2025. So actually, there are some American competitors who see faster recovery, but we are cautious. And that means we're looking at countermeasures, fixed cost reduction, best cost share needs to be improved. We're also looking at variable cost optimization.

On the spin,

we the tax cost for the auto spin look i i mean we are we are looking at the we are right now finalizing yeah the detailed analysis that obviously includes a spin-off costs that includes potential to synergies of a spin that includes tax cost everything is in the normal range what you would expect for such a transaction um and I don't have exact figures for that to communicate right now. On tires, raw material indexation slightly positive effect. Slight headwind now on the raw material side that we see in Q4 will be probably stronger in 2025. We also see labor inflation effects. We always look at at these raw material increases, and then we take our independent decisions on whether we need to come forward with a price increase or not. That's not the cause of business. To your last questions, are OEMs trying to capture part of our savings? Well, look, I think for... up in the supply industry the cost saving measures and cost pressure is normal cause of business that's nothing new but in particular in these times of the transformation our customers can expect from us that we are even more cost efficient and we're doing that and we're making progress and actually for our customers that's important to see and but then it's important to conclude our price agreements and we're doing that as we show right so we do both right achieving price agreements and lowering our cost base, I actually believe lowering the cost base is a condition to achieve price agreements with our customers. They need to see that, that we turn around every euro if we are doing so. Maybe let me come back to the question on the spin on the tax. Low triple digit million euro amount and one-off low to mid million triple euro amount. as a follow-up to that. Thank you.

Thank you very much. And the last question in the queue right now is Eduardo Espina, HSBC.

Thank you. Good afternoon. I have three questions as well. First on semiconductor, on the pricing, if you could discuss how the semiconductor pricing you are seeing right now compares to last year. We understand it's probably flat, but is it actually flat here or near? And then secondly, still on semiconductor, but more with regards to the new contracts, the new pricing that you negotiated with the OEMs. Do the new contracts include a pass-through clause for the semiconductors, or will you have to negotiate, or will you be able maybe to keep any future price decline? And finally, on tire technology, Your competitor Pirelli has spoken recently about the cooperation with Bosch to develop what they call the Cyber Tire. It may be a long-term project, but I understand it's moving on at the moment. So can you discuss if you are developing anything similar to that product with or without Conti Automotive or somebody else? Thank you.

Thank you. To your first question on the Semicons, regarding potential price adjustments, Overall, this is currently still too early to talk about semiconductor pricing in 2025, since we are currently still in price negotiations. From a market capacity, we are expecting some trends that point in different directions, where we may see some inventory reductions, especially in the first half of the year. H2 might see higher demand also from a trend towards AI. How all of this will balance out, it's actually too early to tell. For the pass-through, for the pass-through in the contracts on the SEMICONs, there is no automatic pass-through and there are no indices for SEMIs. So it depends on the negotiations. On the Pirelli cooperation with Bosch on the CyberTire, I have to admit I need to get back to that. I don't know too much about that Bosch Pirelli Corporation. But I will look into that now after the call.

Okay, thank you.

And the next question is from Jose Azumendi, JP Morgan.

Thank you very much. I just had one question, please. To gain a better understanding of the potential of the automotive division, it would be great to gain additional visibility behind the financial targets within each of the subdivisions and understand a bit better the potential of the business maybe two to three years out. When do you expect to sort of be able to revisit this topic and gain a bit more visibility behind the underlying divisions within auto backlogs and the margin potential behind them?

Thank you. On the individual BAs, We don't break it down. Now let's look at the output. For me, what is important is we made a step forward in the second quarter. Now we made the next step in the third quarter. And we will make the next step for automotive in the fourth quarter for the reasons, actually, that we outlined in this call and answered some of the questions before. Next year, we will make further progress for automotive results. There will be the right time to come where we will then, around the AGM, that will be followed by capital market days. And then in particular, for the automotive division ahead of the listing in the second half of 2025, there will be then more announcements on the strategy and also on the midterm targets. But again, right now it's important to really make progress quarter by quarter, step by step, and execute all the measures that we have announced.

Very helpful. Thank you very much.

So ladies and gentlemen, if you have any additional questions, please press 9 followed by the star key again. No, there is one question, an additional question from Hans Schneider, Bank of America. Your microphone is on.

Yeah, thank you for taking one more from me. Just a specific question on R&D, because you made this good progress in Q3 and R&D dropped year on year. Can we expect the same trend also in the fourth quarter, R&D comes down year on year in absolute terms?

That should be the expectation. Obviously, Q3, we had the effect of the restructuring provisions. But yes, we need to improve step by step, quarter by quarter, to achieve our target of the RD ratio of 9% by 2025. Okay, that's great. That was all. Thank you. Sorry, 2027. Oh, sorry, 2027, right?

Okay, got it. Yeah, thank you. Thank you.

So there are no further questions. So back to Continental for the closing remarks. Thank you very much.

Thank you very much. And Ido, just let me quickly reiterate or come back to your question. I mean, obviously, I think the Pirelli CyberTire is a lot about sensors in tires, which is something, of course, that we have explored for a long time already. So also here, we will certainly look into further innovation to see what's possible. But of course, you have to consider multiple effects like technology opportunities, costs and benefits that you can see from there. It also depends very much on when you look into fleet versus, let's say, private solutions for replacement out there. So maybe just quickly to come back to that as a statement. Again, something we're always looking into on TIRES innovation side, but nothing to announce directly here from our end. And with that, also thank you, operator, for guiding us through, and thank you very much for participating in today's call. As always, the CONTIIR team is available if you have any remaining questions. And with that, we would now like to conclude today's call. Thank you, and goodbye.