Dear ladies and gentlemen, Welcome to Continental AG Preliminary Results for the Full Year 2021. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty seeing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Bernard Wang, who will lead you through this conference. Please go ahead.
Thank you, operator. Welcome everyone to our FY 2021 results presentation. Today's call is hosted by our CEO, Nikolai Setzer, and our CFO, Katja Dürrfeld. Also here in the room with us is Stefan Scholz, Head of Finance and Treasury. If you've not done so already, the press release and presentation of today's call are available for download on our IR website. Before starting, we'd like to remind everyone that this conference call is for investors and analysts only. If you do not belong to either of these groups, please kindly disconnect now. Now let me walk you through our agenda on Slide 2. Niko will start off with main messages and business highlights. Then Katja will review financial highlights for 2021 and close with our expectations for 2022. We'll then conduct a Q&A session for sell side analysts only.
To provide a chance for all to ask questions, we would ask you to limit yourself to no more than three questions. This will help us conclude our call on time. With this, let me now hand you over to Niko.
Yeah, thank you, Bernard. Let me begin today's presentation from my side on Slide 3, starting with a review of 2021 and our priorities for 2022. Despite all the challenges in 2021, from the continuing pandemic to the significant volatility in our end markets, as well as the ongoing industry transformation, I'm very proud of what our global team, our global Continental team, has accomplished. This includes two major milestones. The successful completion of the Vitesco Technologies spin-off and the implementation of new structures for the Group and for Automotive. Another important milestone in 2021 for our long-term sustainability path, our annual sales for emission-free mobility has reached roughly EUR 1 billion sales for the first time.
Diving deeper into our businesses in Automotive Technologies, supply chain constraints were the dominant topic, constraining volumes and affecting profitability through volumes, premium freight and more expensive semiconductors. On the other hand, our restructuring program is progressing as demonstrated by the year-on-year decline in headcount by 3%. Order intake also was a highlight, with EUR 18.6 billion in new bookings to drive growth in the coming years. In Rubber Technologies, we demonstrated our operational excellence in manufacturing and distribution, achieving both a solid volume recovery as well as gains in price and mix. Like in Automotive, restructuring at Tires and Conti is also progressing, with headcount down 2% year-on-year.
While these achievements were not enough to mitigate the significant cost inflation in raw materials, energy, labor, and logistics in the second half of last year, they were sufficient to support a year-on-year increase in both the Tires and ContiTech margins. Looking ahead, even though we are now quite experienced with living and operating with COVID, our top priority remains people. Putting people first is even more relevant now due to geopolitical crisis and risks, which we are doing with our support for the people of Ukraine. In Russia, we will be stopping production in our Kaluga facility until further notice, while continuing to support our 1,300 employees over there. Outside of Russia, the geopolitical situation is also already making operations more difficult in numerous ways, from procurement to logistics.
We have put in place adept teams and specialists to assess the situation and respond with countermeasures to minimize disruptions. Aside from this, our focus is firmly on improving performance from the strategic management of semiconductor related constraints to the continued implementation of our structural program. Also crucial to our performance is the implementation of sustainable pricing measures to mitigate the broad inflationary headwinds. In terms of portfolio, with the realigned Automotive organization in place, the priority is on leveraging its combined strength in technology such as high-performance computing as well as in operations. In addition, we will continue carrying out portfolio actions in line with our growth and strategy. Last but not least, our long-term priorities in technology and sustainability include not only winning orders for and launching innovative new products, but expanding revenue streams through new business models. More on this shortly.
We also will continue expanding our activities and offerings for emission-free mobility. On to the Slide 4. Before turning to our strategic priorities, let me address the dividend on that chart. As addressed at our 2020 capital markets, we are committed to distributing a dividend commensurate to the development of our net income. This commitment underpins our dividend proposal for EUR 2.20 for fiscal 2021, corresponding to a payout ratio of 30%, at the upper end of our target range. Let me now turn to business highlights on Slide 6. We are pleased to see that our newest display solutions for Renault and BMW have received very positive reviews, not only for our displays themselves, but also our cockpit HPCs, high-performance computers, that power their user experience.
Further, new display solutions such as the one shown here for Great Wall will be launching soon. We acquired more than EUR 3 billion in 2021 alone, bringing the total backlog to more than EUR 5.5 billion, with several SOPs starting already in 2022. These launches will boost our outperformance, especially in the second half of this year. Our newest innovation and winner of the CES 2022 Innovation Award, the ShyTech Display, keeps us at the forefront of user experience. The ShyTech is an alternative to large visible display designs, a screen that appears only when it is needed, as if by magic, seamlessly integrated into the surrounding surface, visually as well as haptically. Business acquisitions of ShyTech are already underway, with the first launches planned for 2023, it means next year.
On the next slide, we are going to high performance compute. This covers our latest development in this area. You're already familiar with our first-to-market in-car application server, the ICAS1 for Volkswagen. As the digital heart of around 500,000 vehicles in all major markets, ICAS is not only a successful product, but also growing installed base for additional value as we continue to deliver software maintenance and functional improvements to these vehicles. With around EUR 5.5 billion cumulative order intake since 2018, our installed base for HPC, high performance compute, will further grow in the coming years, including our latest order for the Body HPC for a second Chinese customer with SOP in 2024.
In parallel, we are working with customers on the next generation of HPCs that involves cross-domain solutions with over 15 active acquisitions in progress. Here, our competitive advantage is our complete portfolio and our newly realigned Automotive organization. Through these aspects, we can combine our technologies and expertise across multiple domains to offer our customers unique, innovative, and cost-effective solutions across the entire hardware and software stack. Not to mention, unlock more future value streams across the vehicle lifecycle. Slide 7 shows our tire highlights. Starting with the chart on the left, this shows our significant growth in scope for our business EV, electric vehicle tire business. We are now qualified to be fitted on around 300 different homologations, covering many of the world's most successful global EV manufacturers.
Given the more challenging requirements for EVs, the growing homologation shows the trust that these customers place in our technologies. On the right chart, you can see the two further drivers of our mix improvement. One is the ongoing expansion of ultra-high performance tires in our passenger and light truck mix, whose growing share of sales has well outpaced unit growth, demonstrating the overproportional growth contribution from UHP. Also contributing to our mix are our cutting edge technologies like ContiSilent and ContiSeal, as well as our advanced compounds for increased mileage. These examples demonstrate the core of our value over volume approach to driving growth and profitability. With this, I would like to hand over to Katja for the financial review.
Thank you, Niko, and also a warm welcome from my side. Let me now review our performance KPIs for fiscal year 2021 on Slide 8. Reported sales came in at EUR 33.8 billion, up 6% year-on-year on a reported basis, and 7.4% higher organic growth. The sales increase was the main driver behind the increase in adjusted EBIT to EUR 1.9 billion and the improved margin of 5.6%. Unlike in past years, when special effects included goodwill impairments and restructuring charges, this figure in 2021 was + EUR 123 million. The figure benefited from one-time effects, including the disposal of business activities in ContiTech and the reintegration of our Osram joint venture.
The higher EBIT and more favorable special effect figures supported the EUR 2.5 billion year-on-year improvement in net income to EUR 1.5 billion. The margin also improved significantly, reaching 10%. Free cash flow before acquisitions, divestments, and carve-out effects reached the upper end of our guidance, coming in at EUR 1.2 billion. Cash flow in Q4 supported a sequential decline in net debt, which was roughly EUR 3.8 billion at the end of the year. Let me now move on to the Q4 performance by Group sector on Slide 9. The substantial decline in light vehicle production due to the semiconductor shortage caused a year-on-year organic sales decline of 13.8% in Automotive Technologies, as well as the corresponding margin decline of 310 basis points to -3.2%.
In Rubber Technologies, organic growth of 4.4% reflected strength in replacement tire markets and ContiTech's industrial business, which together more than compensated for the weakness in OE volumes. Despite this organic growth, adjusted EBIT decreased by EUR 253 million year-on-year, weighed down by more than EUR 375 million in cost increases related to raw materials, energy, and logistics. Finally, contract manufacturing declined year-on-year by 32% organically, restrained both by soft vehicle production volumes as well as the gradual phase out of its business with Vitesco. Let me now review organic sales performance for Automotive versus regional vehicle production in the Q4 on Slide 10. Segmented by region, Automotive organic growth was able to significantly outperform vehicle production in our important European market, while our organic growth in North America matched local vehicle production.
Our underperformance in China was due to customer mix as our customers were disproportionately affected by the ongoing semiconductor shortage. Taken together, Automotive slightly outperformed its regionally weighted average by 250 basis points. Now continuing to a review of the individual business areas starting on Slide 11 with Autonomous Mobility and Safety. AMS reported sales total EUR 2 billion impacted by organic growth of -15.7%. This was driven by the considerable volume shortfall in all product areas, especially in North America and Europe. The adjusted EBIT margin for AMS decreased substantially by 580 basis points to a margin of -1.4%. In addition to the volume decline, semiconductor cost increases, higher R&D expenses for ADAS, and premium freight were the main causes for the lower profitability.
As for order intake, a strong Q4 in business acquisitions resulted in bookings for the period totaling EUR 2.9 billion. The product categories where the biggest contributions were electronic braking as well as ADAS, which recorded the first business win with our joint venture partner, Horizon Robotics, for the level 2+ capable smart camera solution. Vehicle Networking and Information is covered on Slide 12. Organic growth at VNI was -11.7% in the Q4 , constrained by continuous semiconductor shortages and the resulting production stoppages, in particular in Europe and North America. In spite of the headwinds, VNI was slightly ahead of last year's level in terms of adjusted EBIT. This improvement was achieved through a significantly higher level of R&D reimbursements compared to the year-ago quarter.
As for the order intake, the value of EUR 2.6 billion included the first order from a Chinese customer for a second-generation HPC platform. As part of our commitment to the Chinese market, its development is supported by our newly founded development center in Chongqing. I will now cover Tires on Slide 13. Tire sales ended the year on a strong note. Reported sales increased by 11.3%. Organic growth was up by 9.3%. While overall volumes were down 1.5% caused by OE weakness, replacement volumes were near 2019 levels in all regions. Price mix remained very strong at 10.8%, with about half attributable to pricing predominantly from our replacement tire business in Europe and North America.
Despite the strong sales increase, adjusted EBIT was down nearly 200 million against an extraordinary strong Q4 2020, equating to a margin of 11%. Price mix was insufficient to compensate for cost inflation in raw materials, logistics, and energy of more than EUR 300 million. In addition, labor costs and labor-related capacity constraints were also headwinds to profitability. Moving on to ContiTech on Slide 14. ContiTech sales in Q4 recorded organic growth down 5% year-on-year. On the OE side, volumes were sharply down with declines in Europe and North America. In contrast, industrial and aftermarket developed well, supported by solid growth in Surface Solutions and Power Transmission. Sales were only minimally affected by the disposal of business activities in December with annualized sales of around EUR 150 million. This effect will be more noticeable in 2022.
Profitability was challenged by lower volumes, volatile demand, as well as inflationary headwinds of EUR 75 million from raw materials, energy, and logistics. Positive contributions from pricing activities as well as capacity adjustments were only partly able to compensate. Let me now continue to the overview of free cash flow for fiscal year 2021 on Slide 15. Operating cash flow was up versus 2020 by EUR 240 million, despite higher inventories reflecting higher material prices as well as higher stocking levels to support upcoming volume growth. It also included cash outflows for restructuring of EUR 355 million as well as a positive contribution from discontinued operations of EUR 464 million. Investing cash flow, excluding an inflow of acquisitions and divestments, was - EUR 1.8 billion.
The figure includes an impact of -EUR 162 million from discontinued operations. However, it excludes the inflow of EUR 343 million resulting from disposals of business activities, as well as of a minority stake in financial investment. The resulting free cash flow before acquisition, divestment, and carve-out effects thus amounts to EUR 1.2 billion. Let me now move to our market expectations for 2022. Our expectations are based on currently foreseeable effects related to supply chain challenges, primarily for semiconductors. However, our expectations do not include potential effects related to the current geopolitical crisis, in particular in Eastern Europe. Should the situation remain tense or even worsen, it could result in lasting consequences for production, the supply chains, and demand.
Depending on the severity of the disruption, this may result in lower sales and earnings in all group sectors, as well as for the Continental Group compared to the prior year. Given these assumptions, we are anticipating a year-on-year increase in light vehicle production by 6%-9%. For passenger car replacement tires, we expect demand to be -1% to +1%. For commercial vehicles, we anticipate that production in 2022 will decrease by 0%-3% globally, driven by a strong decrease in the China market. Meanwhile, truck tire replacement volumes in Europe and North America are expected to be up 0%-2% year- on- year. Now on Slide 17. As shown on the previous slide, we expect volume growth in all our underlying markets, though the fragility of the supply chain and geopolitical risks may be restraining factors.
We also expect above-market growth in all group sectors. Driven by business mix, regional mix, and sustainable pricing measures, we expect Automotive sales to substantially outperform light vehicle production. We also expect Tires to record sizable outperformance, predominantly from continued advancement in price and mix. ContiTech should also outgrow its markets in terms of volumes and pricing. Although the business disposal in December last year will have a negative impact of about EUR 150 million for the full year. Lastly, assuming that the exchange rates at the start of the year persist for the entire year, we expect a sales tailwind from FX of about 3% for Automotive and 2% for Tires and ContiTech.
Combining these elements result in a sales expectation of EUR 18 billion-EUR 19 billion for Automotive, EUR 13.3 billion-EUR 13.8 billion for Tires, EUR 6.0 billion-EUR 6.3 billion for ContiTech. This adds up to EUR 38 billion-EUR 40 billion for the Group. Moving on to the EBIT bridge on Slide 18. Overall, we expect a Group-adjusted EBIT margin of 5.5%-6.5%, a similar margin compared to 2021, but representing an absolute increase in adjusted EBIT by about EUR 450 million at the midpoint. In terms of the individual sectors, starting with Automotive, improved market conditions, outperformance, and cost savings from the structural program will support a year-on-year improvement in EBIT.
On the other hand, we also expect inflation to drive costs higher by about EUR 1 billion versus 2021, mainly due to higher prices for semiconductors and other components, as well as higher energy and logistics costs. Meanwhile, just as in 2021, we also expect that the difficult state of the supply chain will require a similar level of premium freight expenses of about EUR 200 million. Please note that neither of these estimates account for potential effects from geopolitical risks. In addition, R&D expenses for Autonomous Mobility are expected to increase by about EUR 100 million. Taken together, we expect Automotive margins of between 0% and 1.5% for the year.
In Tires, though we expect sizable top-line growth, we do not expect that adjusted EBIT will grow at the same rate, predominantly due to an expected inflation effect of around EUR 1 billion from raw materials, energy and logistics, but excluding potential effects from geopolitical risks. On the other hand, we are very active with pricing attainment, having already adjusted pricing in key markets in both January and March, where market conditions currently remain favorable for further adjustments. Based on these price actions, as well as continued improvement in volume and mix, we feel confident that we can more than compensate for this inflation in absolute terms, though margins are expected to be diluted by the higher sales. This is the premise behind our expected Tires margin of between 13.5% and 14.5%. The situation in ContiTech is similar to Tires.
Here, we expect inflationary effects of around EUR 300 million, also excluding potential effects from geopolitical risks. We expect to be able to compensate for this at the absolute EBIT level through sustainable pricing measures, volume growth, and mix optimization, albeit with a slight dilution in terms of margin. Based on this, we are expecting ContiTech margins for 2022 to be between 7%-8%. Continuing on to our expectations for cash flow on Slide 19, again excluding potential effects from geopolitical risks.
While we expect upper end of free cash flow to be approximately at the same level in 2022 as in 2021, there are many moving parts. First, please note the 2021 figure included a one-time positive net cash flow of around EUR 300 million from discontinued operations. The year-on-year improvement in EBIT should be supportive to cash flow while a restructuring outflow of around EUR 300 million is expected, slightly below the outflow of EUR 355 million in 2021. Just as in 2021, working capital may have a noticeable cash effect depending on demand trends and input cost inflation. As for investing cash flow, we expect higher capital expenditures than in 2021, but below 7% of consolidated sales, including leasing.
Tires is the primary business sector behind this increase, driven by a brownfield expansion of our capacities in China, as well as tooling for further mix enhancement. Automotive investments will be focused on growth businesses and in ContiTech on investments for the industrial and aftermarket businesses. In total, we expect Group free cash flow before acquisitions and divestments to be between EUR 0.7 billion and EUR 1.2 billion. Slide 20 covers the remaining elements of our expectations. While the provisioning for the structural program and carve-out effects now behind us, we anticipate special effects to be about - EUR 150 million. Likewise, PPA amortization is also expected to be negative EUR 150 million. The financial result is expected to be below - EUR 200 million, while the tax rate is expected to be around 27%. This concludes today's presentation. Operator, could you please now open the line to questions?
The first question is from Tom Narayan, RBC. Yo ur line is now open.
Hi. Yes, Tom Narayan, RBC. Thanks for taking the questions. I have two. The first one, if I take the midpoint of the 2022 operating income margin guidance, it's 6%, and if I add back the EUR 2.3 billion in higher procurement and logistic costs, I get a 12% margin, but your medium targets are calling for 8%-11%. Wondering if the medium targets include some higher procurement logistic costs, and if not, why they wouldn't be higher. The next question on Russia, Ukraine, I understand the guidance does not incorporate this, but it would appear that there's a very real risk that global auto production could go below your market guide. I think some 90% of neon gas, for example, for semiconductors, is sourced from Russia, Ukraine. Also, palladium is used for chips.
We've already seen what limited chip supply can do to auto production. Just wondering if you could comment at all on what you're hearing on further semis related production cuts as a result of what's happening in Russia, Ukraine? Thank you.
Hi, Tom, it's Bernard. Let me just clarify your question. The first question is about how you can connect our expectations for 2022 to the midterm guide, right? Whether factors that are included in our 2022 expectations are also included in our midterm guide. The second question is regarding the risks from Russia, Ukraine, whether we see that affecting our semi supply. Maybe Niko, pass it on to you.
I start with the second one.
Yes.
I mean, obviously, yes, we are at neon gas, palladium and as well other raw mats which might affect not only the semis, but as well others. As you refer rightly, as the semicons are already in a critical situation that might have effects on supplies. So far, we have no indication from our semicon suppliers that there's any material risk happened so far. However, still too early to judge. Monitor the situation as well via risk management, and let's see what can be done. So far, we don't have an indication that anything material is there at the horizon. The second question was whether our midterm guidance have included those substantial increases in raw mat as well as in logistics costs.
I mean, at the time where we established the midterm targets, December 2020, obviously the world was still different than it's currently right now. One of our large challenges for this year is obviously as well to establish sustainable pricing. We are in constructive discussions with our partners, or be it on the Automotive side, on the industry or on the consumer side. We are what you see as well, which is substance of our guidance for sure, before the geopolitical risk, which we cannot quantify so far. We are confident that we are capable via partnership solutions with our customer to cover and cope with those price increases sustainably going forward. That's why we believe that our midterm targets are still valid.
I guess what I was getting at is if the procurement and logistics costs, if we're assuming those go away, the margin should come in above the 8%-11% range. Is that a fair way of thinking about it?
I mean, you know how the market works. First of all, once we sit here in the current situation, and that's why we put a risk disclaimer, so far, we don't see any short-term, mid-term view that those costs might ease. Looking in particular at semicons going forward, that might be the case depending on demand and supply. Again, we have no indication that this should come soon. On the one hand, on the other hand, you know, if there should be a market which is getting long again, obviously we are in a competitive environment. We have to assume that other market players have as well to play according to those, and that's why we still believe that an overshoot in this respect would be by far too progressive right now, we see it's still rather cautious than optimistic.
Okay, thank you. I'll turn it over.
The next question is from Thomas Besson, Kepler Cheuvreux . Your line is now open.
Thank you very much. I have a few, I would say, general questions to start. There has been press reports that your chairman is looking at the potential for spin-offs. While you seem to be supporting the current structure of the company, that's what I understood from the press call this morning. Niko, could you clarify on that point whether it still makes sense, as the company has said over time, to keep Rubber and Automotive as different businesses with different cycles? Or whether you think that eventually, like in the case of Powertrain to spin into Vitesco, there could be more spin-offs? That's the first question. The second is about the dividend.
I think 15%-30% has been your message, but you have distributed more than 30%, most of the time, over the last decade, apart from 2020 when you had to cut it. Basically, my question is, do you indicate to us that there's a decent chance that it could be closer to 15% or is there no message at all in that reiteration? Thirdly, not too far from Tom's questions earlier, it's clear that European production is not going to go up 15%-20% in 2022. Could you just give us an idea of the sensitivity of your earnings if, for instance, European production is up by one point less, five points less, 10 points less than you currently assume?
'Cause we're already seeing a lot of Northern German plants close for wiring harnesses or other issues. I think it makes some sense to give us some sensitivity to European volumes given the current context. Thank you very much.
Hi. Hi, Thomas. Just to reiterate your questions, let me start with the dividend first. The payout ratio is 15%-30%. If the 30% that we have this year should be something to be seen for next year. I think we'll give that to Katja. Then the other questions regarding the press reports regarding spin-offs and such, that as well as the sensitivity to auto production, European auto production that we have in Automotive, that we'll hand these over to Niko. Katja.
Okay. As you already said, the dividend proposal that we have laid out is fully in line with our current dividend policy of 15%-30% of our net income. We do not see any reason to deviate from this policy in the upcoming years.
Okay. Coming to the spin-off part, which you could read in the press. First of all, typically, we don't comment on rumors in the press. You know very well that we have used last year to strategically align Automotive and the Group. First Automotive, which was speculated in the press, Autonomous Mobility, but you could see it as well on Architecture and Networking, meaning high-performance compute. Both areas are an integral part of our strategy. In particular, this market-oriented structure which we put in place. Now, our structure follows clearly the strategy, and we see in the interplay of those six action fields which we have, the core strength we do have. There is no strategy right now or no plans to go for one area solo or having any plan therefore for other spin-off.
In fact, we want to use and leverage our organization in order to get stronger going forward as one Automotive. If it comes to Group, we see in the Group with our markets which we serve on the one hand, the Automotive, on the other hand, the fleet management and the industry and consumer business. In particular on the two last part, fleet management, consumer business, strong synergies on the technology, on customer side, on talent, use on interplay between the different sectors.
Besides the fact that obviously, we can profit as we did as well last year from the different cyclical cycles, sorry for that, in those different businesses, which clearly helped us to still invest and do our portfolio management, clearly invest into the growth part, allocate our resources on those areas such as Autonomous Mobility going forward, by strong performance of our value business. Again, there is no plan of spin-off, and going forward, the Group as well is foreseen to perform as is better going forward. With regard to sensitivity, very honestly, still all too early. We see so far that customers call us in the short term as well in the mid- and longer term, relatively stable.
There's one or the other going a bit up and down or down, but you see as well others going up. There are different mix in terms of region. So far, we are not able to give any indication how the geopolitical situation will affect the vehicle production. Obviously, if Europe should produce less car, we are exposed, and our European exposure is known to, let's say it. Again, so far, we are not capable to perform any scenario, as mentioned before.
Thank you very much.
The next question from Horst Schneider, Bank of America. Your line is now open.
Yeah, thanks for taking my questions as well. It's Horst here from Bank of America. The first one is also a little bit regarding your midterm targets in Automotive. Can you please remind us what level of light vehicle production these targets require? If now the market volume is gonna be structurally lower because we have got general inflation in the industry, and that could also curb car demand. Is there maybe a need to enforce restructuring going forward? That's number one. Number two, it's about cost inflation. I understand that you cannot yet incorporate the current geopolitical conflict, but can you maybe provide a split of this cost inflation in the guidance that you have provided?
What are the various sectors, for example, in autonomous driving, then the cost inflation that we can maybe calculate ourselves what the impact would be right now after the recent surge in some prices. On the back of that as well, what is the negotiation with the car makers? I mean, if we see now the cost inflation surge, it takes now, again, something like six months, nine months before you can then pass on to the car makers, or has the contract structure that you have changed by now? Thank you.
Okay, Horst, let me summarize. First was about the midterm targets. What level of vehicle production would be needed to the targets and if any restructuring would be needed to achieve the targets. Second question, cost inflation. We can give more detail and color on that and how we could be able to pass that on to customers. Maybe the first one on midterm targets to Katja. Yeah. The second one on inflation to Niko.
Okay. Thank you, Bernard. To be able to achieve our midterm targets, we anticipate the car production to come back to around 90 million pieces. This is the basis for us to be able to achieve our midterm targets with regards to volume. The other elements of us achieving our midterm targets are for sure the execution of our transformation program. Increased performance also by higher R&D efficiencies and, in addition, continuous working on a differentiated product portfolio.
The question was as well enforced restructuring. May I [crosstalk]
Yeah, so far not. Yeah.
Yeah, exactly. Because though, the greater than 90 million cars you've seen, but again, this is all before the current situation that IHS was still suggesting in 2024, 2025 to have similar vehicle production as before. Based on those scenarios that the recovery comes under then, so far there is no additional transformation-free measures necessary. Obviously, all the other items [crosstalk]
Nikolai Setzer, if now the forecast from IHS was coming down, it could not be ruled out. Of course, if the market is structurally lower, you have to do more. That's right. Correct?
If the market is structurally much lower, I mean, you answered the question already on your own. We have to review our situation, our capacity then as well in terms of mix, in terms of products, and then we have to be agile and adept. That is, I would say, in general, correct.
Okay. All right.
The split of cost inflation, I mean, looking on the Automotive side, a large portion is coming from the semiconductor part as well known. Another, and this affects even more the Tires and the ContiTech part as we are more energy-intensive, is the energy part, which is strongly as well on the logistics part. Those are still referred to the material increase, which we have in Automotive. The semiconductors are on the Automotive side, a bit lower on the tire side, in particular, as you have more heavy products there and more energy intense, more on the higher side.
If it comes to negotiations, we have to split our business, obviously, in those different customer bases. You have seen that in particular on the more B2C markets such as Tires, where we are directly selling, so to say. We have applied already several pricing measures, and there are, as we speak, next price increases going on in the market in order to cope with those increases. We have as well on Tires as well as in some business on the Automotive side, raw material indices, which means that they are following with a certain lag time, like the raw material parts, and they are getting then affected in the pricing for good and for bad. Right now, obviously, it goes rather upwards than downwards.
With regard to the semicons and those substantial material increases which we have on the Automotive side, we are in constructive discussions with all our customers, and we are confident to close those. However, so far, we are not yet far enough in the process that significant effects are visible in the Q1 of this year.
I just want to get a feeling of the mechanism, right? If there's now unexpected increase of steel, of aluminum, of some other precious metals, so there is then a kind of automatic pass-through, and just when it comes to freight costs and labor, that has got to be extra negotiated and can probably be compensated then more in 2023. That is correct, right?
That is correct. Raw material indices are mainly, and those automatic price adjustments for clear indices which are linked to raw materials or very specific materials. Those materials which are labor or energy costs, which are now rising, have to be negotiated with the customer individually. That's correct. Which are by product as well, very individually, depending on content.
All right. Thank you.
The next question is from Gabriel Adler of Citigroup. Your line is now open.
Hi. Thanks for taking my questions. I wanted to stay on the point of the relationship that you currently have with your customers and the OEMs, because I think it's an important one. Then we're hearing from some of your customers now that there are suggestions that the suppliers need to be sharing more of the industry content costs that we're seeing from the EV transition, in addition to the cost headwinds that we're seeing elsewhere in the industry. I'd love to hear your thoughts there on whether you think that the suppliers and yourselves are already sharing that cost efficiently or if you agree with that statement from some of your customers. The second question is on the software opportunity. We hear a lot again from the OEMs about the long-term opportunities from software-enabled revenues.
There is a real concern among investors that we speak to that the tier one auto suppliers are going to perhaps end up playing a less important role in the future when it comes to providing innovative software solutions. Niko, I'd be really interested in particularly hearing your thoughts on where you think Conti will add the most value to its customers when it comes to the automotive software opportunity over the next decade.
Hi, Gabriel. Question number one, customer relationships, whether suppliers should share more of the burden of the transformation of the industry. Number two, the software opportunity, whether or not tier ones will be able to continue to contribute value as the software-defined vehicle becomes more the norm. I think both should go to Niko.
Yeah. I mean, coming to the first one, you know our results and you know how much burden we can take on. With no doubt, and that gets us well into the direction of the second one, software-defined vehicles and high-performance compute and those software-centric vehicles. Obviously, there is a high level of resources needed. That's why, and we mentioned this before as well, different business models might be needed in the future, in terms of software as a product on the one hand. On the other hand, on how to share company those development costs and those establishing those platforms.
As you've seen, we are in discussion basically along with OEMs, how can we find right partnership and cooperation models in order to apply for those, knowing that with the high complexity of software, and we've seen it as well on the ICAS project, which we have there. We have to find good ways to be efficient on the invest side and on the software development side, getting scale. Finding then a platform which we can use as well, along with others in the market. As for e-transition, as you mentioned, cost efficiency can only become if platforms and partnerships have been found, and we are able to scale those solutions rather than having always individual solutions which are not for us and for the customer really affordable.
Okay. Thank you.
The next question is from Sascha Gommel of Jefferies. Your line is now open.
Good afternoon. Thanks for taking my questions. I've got three as well. The first one is on your kind of legacy restructuring program. Can you update us how much have you achieved in 2021? How much is there to come in 2022 and 2023 in terms of benefits? Because I understand the headwinds, but there should be some tailwinds from that. Second question is on Tires. Your guidance implies that you also step up CapEx spend on Tires. When we listen to key competitors in Europe but also the U.S., everyone is talking about significant step up in tire CapEx. Are you worried that this kind of leads back to an environment with overcapacity in Tires and therefore more price pressure?
The last question quickly on Q4 in Tires. I understand the input cost inflation, but even if I take that, and your top-line drivers, there still seems to be a bit of an exaggerated drop in the margin. Was there any special effect on top of that in Q4 in Tires? Thank you.
Hi, Gabriel. I didn't catch the first question, but could you repeat again? The second one with the talking about Tires and the competitive pressures there. I'm sorry. The first one is restructuring, right?
Yeah.
The cadence of restructuring this year and next year. The second one is Tires, competitive pressure. Are we seeing any changes there? The third was the margin in Tires in Q4. Any reason that it was sequentially weaker than in Q3? Maybe Katja, you can take the first and the third.
Let me first start with the first one, with the restructuring, with the status of the current program. I think I already mentioned that the current program's totally running according to our plan and we remain on track to generate the gross savings of EUR 850 million. There's a step up in 2022, which will be bigger than the one in 2021, and the step up in 2023 will be higher than in 2022. Sorry for not mentioning exact figures on the impact in the individual years, but I think this already gives you a flavor how we are progressing with regards to our program at all. The third question.
With the Tires margin Q4 versus Q3.
Okay. The Tires margin were basically impacted by additional raw material headwinds that intensified during the course and also with regards to additional headwinds that materialized for energy and freight. The pricing was sequentially better than in Q3, but the increase was insufficient to compensate for the increase in raw material, energy and logistics.
Sascha, your question number two was about the competitive pressure in Tires, if we're seeing any changing dynamics there, given all the different factors that are at play at the moment.
So far, we don't see this. We've seen as well, 2020 with the pandemic, obviously, certain investments and CapEx have stalled, and we see some recovery, but the recovery less on the volume part more. You've seen it on our base. We have strong mix improvements for the same amount of capacity in terms of Tires or amount of tires, pieces of tires. It needs more capacity, more machinery in order to be capable to deliver those UHP tires. Same holds true for electric vehicle tires, which are larger, which are more difficult to produce. You constantly have to invest in those new machinery in order to keep upscaling your plant.
That holds true for the majority of our investments, which we are seeing going forward, that we see a substantial amount for new materials, new mix, improved investments. We have to assume that the competitive field does the same. You have to account for a high portion of future CapEx, which has been announced and seen, which goes rather into mix than into a volume. Tire business will be competitive as well going forward. However, we don't see in any region right now an overflow in terms of pieces, I have to say, in tires.
Appreciate it. Thank you.
The next question is from Victoria Greer from Morgan Stanley. Your line is now open.
Good afternoon. Three questions for me, please. The first one is on the supply chain for Tires. I think you do source some carbon black and other raw materials for tires from Russia. Can you talk about, you know, whether you're seeing any pressure there and how easy it would be to switch around those tire raw materials in Europe if you needed to? That's the first question. The second question is really about mix for Tires. You showed us the UHP share for your passenger tire business. You know, how much higher do you think you can push this? Presumably, actually, it would even have been even higher in 2021 if OE had been as strong as replacement. Yeah.
Perhaps you can speak to that a bit and also a bit generally about your expectations for mix for T ires in 2022. Then the third thing, just a small thing really, but the contract manufacturing, you've guided to 0%-1% margin. I think previously you'd been expecting around 4%. Just an update on what's happening in that business, please. Thanks.
Hi, Victoria. Thanks for the questions. Maybe we start with your last one first, contract manufacturing. I'll pass that on to Katja. Then for the two Tires questions regarding the supply chain, the risk we see from the current geopolitical crisis, while our alternatives, that's the first one. The second is, how high can the Tires mix go? Both those two to Niko.
You start, Katja?
Yeah. I can start. On contract manufacturing, I don't know where you got the 4% from. In general, our expectation on contract manufacturing on the declining part of the business was always around 0%-1%, in general. That is also where our expectation come from. It's basically part of the business model that we do not expect higher margins on this business.
Okay. Thank you.
Okay. For the supply chain Tires, you mentioned carbon black, but that includes as well certain synthetic rubbers which are coming out of those region as well as some steel cord. Our risk management teams, our task forces are looking day and night for alternative supply, which is for all items possible. However, it has to be collected by different regions and being available as well through demands. The teams are on it. Obviously, it all depends how the situation now further continues, but we have alternatives, and we are working on them, and we are ordering already in order to mitigate potential risks of disruptions, which, if this comes from other places, might result as well in higher costs. With the mix, how much can the mix further go on? You've seen, there is still some room for improvement to further increase on UHP.
You might remember that not long ago, for us, UHP has been greater than 17-inch on passenger tires. In the meantime, we start with 18-inch, and maybe the next time it will be 19-inch. The inch size might move upwards, because clearly the performance and the technologies and with the EVs, you have another trend that the technology which is needed in order to produce those tires and thereby the additional value contribution which it's adding into our P&L and for the consumer is still farther growing. For the time being, for the next five years, and we cannot look much forward, we see that there is a constant trend that the mix, which we had typically in the years, depending on a 2%-3%, 4%, 5% area, depending on as well, where the mixes are and how the EV will accelerate. We assume that this continue as well in the future.
Great. Thank you very much.
The last question for today is from Tim Rokossa, Deutsche Bank. Your line is now open.
Yes, thank you very much. Great to talk to you again. Before I come to my questions, I'd just like to say something to Bernard, and that is, Bernard, we will speak anyway again, but I was asked by many clients today to express what I also feel, and that is that you will be truly missed by the capital market community. You and I, we were very often in a bit of a disagreement as to how much high tech a certain product is. As I already told you, and I've actually heard it from many clients today, you brought a very refreshing perspective and some very impressive technology know-how to this discussion that will surely be missed. You are simply a really nice guy to work with. Thank you very much for that, Bernard.
If we do come to my questions, please, there would be three. I'm afraid it's a little bit into a direction that we've already touched on. Niko, I think it's fair to say that it's very rare to think about a CEO who joined in more difficult times than you to the group structure. I mean, you had COVID, you had the semi shortage, you have a war in Europe now. I can understand why some stability is important to you and to Conti. With everything that's going on in the automotive world right now, and also that you are saying that agility is very important to you, why do you rule out there could be a major change to the group structure that may be beneficial for everyone involved? Or was that just a misunderstanding, how we really understood your quotes here?
Secondly, Katja, we only met a couple of weeks ago. Back then, we started to touch on this. Now, this is your first earnings call. Welcome. Also, we knew Wolfgang Schäfer for many years already. He was a very stable guy, very focused on free cash flow. What do you see as your priorities, and how should we think about the KPIs that you put most focus on going forward? Then lastly, Ukraine, Russia, the guidance impact. Sorry, Niko, I know this is a bit annoying, and I don't wanna be in your shoes right now having to put out a guidance, but obviously we need to understand how you actually mean this. When we think about just how your situation is right now, if the war in Russia was to stop immediately, is the guidance that you gave us today still the right guidance?
How does your supply chain look like? Is just-in-time delivery still working outside of the chips? Do you still get all the components that you need? Thank you very much.
Hi, Tim. Thanks for the nice words. I can reflect that the same is likewise on my end, my wish to you and all the other analysts on the line and all the other investors. Now to your questions. I think the first and third questions are clearly for Niko. Why rule out structural change? Guidance is it still valid, or how valid would it be if the war were to end tomorrow? The second question very clearly for Katja and her priorities. Katja, maybe you start.
Yeah. Hi, Tim. Nice talking to you again. I think there are clearly three things that I have in mind when I look at my current job. The first one is performance. I think I've mentioned today also during the call that we are not satisfied with the current financial performance of our Group, and that we are not satisfied with the current financial performance of Automotive. Driving up this performance consequently and sustainably is the most important thing that I have in mind at the moment. The second thing that is a high priority in my job is the portfolio topic.
To differentiate our portfolio is a pillar of our strategy for Continental, and we are definitely reviewing our current portfolio and working on the portfolio differentiation according to growth and value quite heavily. The third priority that I have is related to our people, yeah. We are undergoing a fundamental transformation in our industry, and this also means that we have to take care that the people are able to drive this transformation to be able to emerge as a winner from this transformation. This is the third priority that I have. I don't think this will change the way how we measure our performance of Continental. I don't think that I will come up with a totally different set of KPIs, but I will make sure that we follow on the KPIs and also on the reliable reporting of these KPIs to the capital market.
Okay. To the two others. I mean, first of all, we'll obviously miss Bernard. However, to turn change into opportunity, we are happy to have Anna and Katja with us and take the opportunity going forward. Nothing is more sure than the constant change that comes as well to the answer to your first part. I mean, what I rule out, I have not ruled out that the Group will be in this shape forever. I mean, we changed a lot in the years. There will be most likely as well certain change to come. However, what I want to say that the current rumor, there is nothing planned currently, and we just started in the structure. Going forward, our full priority is now gaining profitability, gaining speed, going towards our profitability long-term targets and getting there.
Obviously, we monitor constantly our structure, whether this is value accretive, whether we add value as a group, and we will do this going forward. We prepare as well as we have previously as well announced, we apply carve-outs of our Automotive as well as our Autonomous Mobility. We adjust the legal structure to our organizational structure, which increases optionalities going forward. My comment was clearly, currently nothing is planned. However, we have to prepare for potential optionalities going forward. The last question from you. Clearly, if we should not see any effects of the current geopolitical situation, and so far, you heard me saying before, we still see the call of going and everything which is coming on the raw material is a risk going forward.
If there is no effect, then clearly our guidance is valid, yes. However, it's speculation to say whether this is now realistic or not realistic in the current given situation. You may understand that we are in a position like we are.
Thank you.
Okay. I think that was the last question. Thank you, Tim. Maybe it's my pleasure then to close the last analyst I have to do here, at least on this side of Continental. Thank you to everyone for your questions today. I know that we have not covered all the requests that have come through, but you know, please feel free to call us thereafter, myself, Anna, and the rest of the IR team. Also to ask that everyone supports Anna and the team, just as you guys have supported me over the last years. Let me just finally say please stay safe and healthy. Thanks again, and signing off from Hanover. Bye-bye.