Dear, ladies and gentlemen, welcome to the conference call of Continental regarding the H1 Results 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. May I now hand over to Bernard Wang, over the Jifrudis conference.
Please go ahead.
Thank you, operator, and welcome everyone to our Q2 2021 results presentation. Today's call is hosted by our CFO, Wolfgang Schafer. Also here in the room with us is Stefan Schulz, Head of Finance and Treasury. If you have not done so already, the press release and presentation of today's call are available for download on our Investor Relations website. Before starting, we'd like to remind everyone that this conference call is for investors and analysts only.
If you do not belong to either of these groups, please kindly disconnect now. Following the presentation, we will conduct a Q and A session for the sell side analysts. To provide a chance for all to ask questions, we would ask you to limit yourself to no more than 3 questions. This will help us conclude our call on time. With this, I would now like to hand you over to Wolfgang Schafer.
Thank you, Bernard. Let me begin today's presentation on Slide 3, starting on the left. On the whole, we had a solid second quarter with a year on year operating leverage of 39 At the group level, it was supported by the recovery in demand, continued cost discipline and restructuring savings. However, the operational situation varied across the different group sectors. Starting in automotive, The shortage of semiconductors continues to be a challenge, specifically restraining volume growth, higher supply chain costs and operational inefficiencies due to volatile customer call offs.
Our teams continue to work closely with the customers and suppliers to minimize disruptions As much as possible. In parallel, we continue to win new business with Innovative technologies, including a high volume pillar to pillar display solution for more than €1,000,000,000 of lifetime sales. In Rubber, sustained operational excellence delivered substantial growth and profitability. Tires was particularly strong due to volume recovery as well as double digit year on year price mix development. ContiTech also performed well operationally, Though margins were sequentially impacted by reduced and volatile OE volumes and by increased raw material headwinds.
In powertrain, electrification technology almost tripled its sales versus a year ago. Additional bookings for e axles And inverters will sustain this growth momentum. Switching to our current priorities. We do expect The semiconductor situation to improve over time. However, there still remains a considerable amount of uncertainty and volatility.
New events like the COVID related stoppages in Asia, specifically Malaysia, have constrained deliveries from multiple suppliers. The supply of semiconductors will remain, therefore, very tight in the coming months and continue into next year. Accordingly, We have lowered our growth expectation for global light vehicle production to 8% to 10% versus 2020. Also, supply chain costs are incrementally worsening. The expected headwind from logistics for Automotive Technologies is now about €200,000,000 and prices for electronics and commodity inputs are rising.
We are working with our suppliers and customers to mitigate these challenges. However, The offsets will only become more effective starting in 2022. Inflationary effects are also affecting Rubber Technologies. Prices for butadiene and other oil related materials have increased substantially, while natural rubber remains on a high level. Thus, we have increased our raw material headwind forecast for rubber from EUR 350,000,000 Previously to now €500,000,000 Put it in another way, the impact in H1 was about €75,000,000 but it is expected to rise in H2 to around €425,000,000 On the tech side, we With Continental and Electrobit as the first suppliers in the market with an in vehicle integration of Amazon's Alexa Customer System.
This complements well our offerings in high performance computing, software and integration services. It is also an extension of our collaboration with Amazon coming on top of our already announced cooperation on the Continental Automotive Edge platform. Also, Biteesco recently launched their 4th generation EMR4 de axle product. I'll come to that later. We remain on track with our cost reduction program to achieve our cost target of greater than EUR 1,000,000,000 gross cost savings from 2023 onwards.
Agreements have been reached in nearly all locations and are in line with our communicated targets. And to confirm, the spin off Ovidescu Technologies is set to be completed in September. Our teams are working hard to finalize the prospectus, which should be available early next month with a listing Expected mid September. Please note that the spin off will result in a negative onetime impact on adjusted EBIT of around €80,000,000 That is included now in the outlook for Automotive Technologies. This is due to an accounting treatment of the spin off that will, Upon its implementation, allocate profit generated by effective parts of automotive technologies to both discontinued operations and to the new segment, Contract Manufacturing.
The accounting treatment has no effect on the net income. Let me use the next slide, now on Slide 4, to run you through some of our technology and business highlights, Starting with user experience. As we have discussed at our Capital Markets Day in December, our transformation to a supplier Our rich and immersive in vehicle digital user experiences is well underway, as seen here on this slide with some of our recent launches. Unique L and C shaped display solutions will be introduced in the next month, both complemented with cockpit high performance computers for advanced functions Like all the updates and driver monitoring. The recently announced high volume order for a pillar to pillar display solution is the latest addition.
Our total order intake is now around €5,000,000,000 in lifetime sales for new display solutions with SOPs starting mid-twenty 21. With customer demand for our innovative solution remaining high, we are confident that this figure will continue to grow. Continuing on Slide 5 with a spotlight on our tire business. Recently, many investors have asked us If our tires can also be found on electric vehicles, yes, they can. Actually, we have been active in this market for a long time, being one of the first movers in our industry As the initial tire outfitter for the Tesla Model S, in the meantime, we have become a broadly positioned leader in the field.
As you can see here on the slide, our tires are fitted onto many of the world's most popular EP brands and models ranging from premium and sport cars And SUVs to volume models. Actually, the Ford Mustang Mach E and the BYD HEN Adjust the latest successes we have had. As the EV share of vehicle grows, we expected that this list will continue growing as well. Now moving to Powertrain, Slide 6, you're already familiar with our very successful EMR3e XL product, which can be found on over 20 vehicle models worldwide in more than 200,000 vehicles with the introduction of The 4th generation of our EX, we have taken all our expertise and Experience over the past decade and put it into the new EMR4. It significantly expanded Scalability provides customers with more flexibility, so that one platform can cover small to large vehicles from mass market to premium.
We have improved on the best in class characteristics of the EMR3 by reducing weight by another 25% In the respective power classes and increasing efficiency by up to 5%. On top, the MRP embodies all of our learnings Over 4 product generations regarding standardization and manufacturing efficiency, which will provide competitive economics for us and for our customers. Business acquisitions for EMR4 are underway and Biteco looks forward to providing updates on this going forward. Let me now shift to our financials, starting on Slide 7. Reported sales came in at €9,900,000,000 50% above last year's comparable period, which, as you know, was heavily impacted by lockdowns in many of our geographies.
Excluding negative exchange rate effects of EUR 173,000,000 and change In the scope of consolidation, organic growth was 55%. Due to the volume recovery and ongoing strict cost management adjusted EBIT increased year on year by over EUR 1,300,000,000 resulting in an adjusted EBIT margin of 7.2%. Without the application of IFRS 5, the adjusted EBIT margin for the group would have been 5.9%. Special effects totaled negative €55,000,000 nearly half of the amount spin off related. Net income after taxes increased year on year by almost EUR 1,300,000,000 to EUR 545,000,000.
Trailing ROCE was at 4.8 percent or 4.2 percent excluding IFRS 5. Free cash flow, excluding acquisitions, Divestitures and carve out effects came in at EUR 327,000,000, a significant improvement versus minus EUR 1,800,000,000 in Q2 2020 when the lockdowns impacted both profitability and working capital. Let me now move on to the performance by group sector, Slide 8. In Automotive Technologies, we saw a strong year on year organic growth Of 57%, thanks to the recovery in European and North American vehicle production, this number was about 8 percentage points ahead of the increase in global vehicle production. This growth drove a sizable improvement in profitability, but was restrained by higher supply chain costs.
The adjusted EBIT margin was negative 1.6%. Rubber Technologies, we achieved a very strong recovery in sales and adjusted EBIT. Organic growth was 50% and the adjusted EBIT margin reached 14.6%. The raw material headwind in Q2 was still moderate with €75,000,000 Powertrain Technologies achieved an organic growth of 64%. The continued robust demand for electrification technology products was the main driver here.
This growth as well as IFRS 5 helped the adjusted EBIT margin to increase from negative 16.3% in Q2 2020 So positive 9.5% in Q2 2021. Excluding IFRS 5, the margin would have been 3.5%. Slide 9, AMS. Sales came in at more than EUR 1,800,000,000 with solid Organic growth of 63%. All product areas had the impact of the semiconductor shortage, especially Advanced driver assistance systems and electronic braking, the effect was most pronounced at European and North American customers.
Reduced volumes affected the adjusted EBIT margin, which was minus 1.4 percent. In addition, higher year on year premium freight charges of around EUR 30,000,000 And operational inefficiency caused by demand volatility influenced profitability. These Factors diluted the operating leverage to 23%. Others R and D increased year on year by about EUR 25,000,000 in Q2 And by about EUR 40,000,000 in H1. We have revised our expected increase in advanced driver Systems R and D to about €150,000,000 to €200,000,000 for the full year, which means about €60,000,000 to €70,000,000 in quarters 3 and 4 each.
Despite customers continuing to delay the sourcing decisions due to market uncertainties, EMS recorded an order intake of EUR 1,900,000 in the quarter. The biggest order wins were related to electronic brake systems as well as for passive safety and Sensorics. B and I is covered on Slide 10. Just as in AMS, the semiconductor shortage affected all product areas, Especially connected car networking, regionally, we saw the most significant vehicle production stoppages among European and North American customers. The sectors restrained organic growth to 53%.
Higher sales and an operating leverage of 36% helped Drive the year on year margin increased to minus 1.8%. This was achieved despite higher logistic costs of around €30,000,000 and Like in AMS operational inefficiencies from volatile demand. B and I recorded again a solid order intake of EUR 2,400,000,000, including more than EUR 1,000,000,000 for our pillar to pillar digital display. As mentioned before, other business wins include further Head up displays as well as new orders for telematics and commercial vehicle products. Moving to Rubber Technologies, starting with tires, Slide 11.
Organic growth in the tire business was up 55% versus the year ago period. FX remained a material headwind of 4% in Q2, primarily related to the strong euro versus the dollar. The FX headwind is expected to recede in H2. Volume growth in Q2 was 43%, led by a broad market recovery for truck and passenger car replacement tires in North America And Europe as well as pre buy effects ahead of announced price increases. On the other hand, while OE demand is up year on year, It was down sequentially due to production stoppages.
Price mix achieved plus 12%. This reflects the favorable business environment, particularly in EMEA and the Americas, specifically the main contributors were a higher share of ultra high performance tires as well as price increases in replacement. This resulted in an adjusted EBIT of EUR 550,000,000, a margin of 17.8%. Please note, this includes a one off And EBIT relevant tax benefit of €25,000,000 from South America, Brazil. Excluding this one off effect, operating leverage was at 46%.
Raw materials in Q2 accounted for a negative impact of EUR 50,000,000 balanced out by positive inventory revaluation effects. Different to H1, we expect a large headwind from raw materials in H2, as As already discussed in prior calls, which is currently estimated to be about EUR 350,000,000 Given the magnitude of the increase, we anticipate that pricemix will only be able to partly compensate. Moving to Contitec, Slide 12. Contitec showed a very solid organic growth of 43% supported by all segments, while OE grew strongly year on year, it declined sequentially due to the semiconductor shortage. In Industrials and Aftermarket, while demand remains stable overall, Surface Solutions and Powertrain Transmission continue to grow.
China, once again, was our strongest growth driver. Volume growth, strong pricing and further progress on restructuring supported the year on year margin increase to 8.2%. At 29% operating leverage was affected by production volatility in the OE business and raw material headwinds of €25,000,000 We expect pricing to only partly compensate for increasing raw material headwinds, which We expect to be about €75,000,000 in H2. And now Powertrain Technologies, Slide 13, sales of roughly EUR 1,800,000,000 were up organically by 64%. Electrification Technologies sales of €150 €2,000,000 tripled versus the year Go quarter, thanks to booming Demand for eXs in Power Electronics, Especially in Europe.
Electrification Technology has not limited by semiconductor supply
The main reason for
the strength of the business
is because of the strength of the business,
the business areas were affected as evidenced The adjusted EBIT margin achieved 9.5 percent or 3 point 5% if I include IFRS 5. It mainly benefited from higher And then on Page 16, Let me conclude today's presentation with our updated outlook. As a reminder, all the parameters shown here are only for continuing Let me Some of the changes since our last update in May, starting with Automotive. We have lowered the revenue bandwidth to EUR 16,000,000,000 to EUR 16,500,000,000 to reflect our lower expectations For vehicle production, the adjusted EBIT margin has also been lower to account for Not only lower volumes, but mainly for higher anticipated supply chain costs and as well as a spin off accounting treatment of EUR 80,000,000, which all are included in the 0.5% to 1% bandwidth. And rather, the revenue bandwidth is now EUR 17,200,000,000 to €17,800,000,000 basically confirming our existing expectations.
However, based on our strong performance in H1 and market expectations for H2, Including the updated raw material headwind of around EUR 500,000,000, we have lifted the adjusted EBIT margin bandwidth for RUB to 12.5% to 13%. The spin off of Vitesco in September will result in some effect. This includes the creation of a new contract manufacturing group sector To account for what currently are intercompany sales. From spin off completion to year end, we expect Contract Manufacturing to contribute Sales of around EUR 250,000,000 with an adjusted EBIT margin of 2% to 3%. Additionally, Note that the net income for the fiscal year will include the result of discontinued operations, which mostly consists of Powertrain up until the spin off date.
Lastly, We have made some minor adjustments to our expectations for financial result and BPA amortization. With it, I end today's presentation, and I open the line to your questions.
Dear ladies and gentlemen, We will now begin our question and answer session. 21. Our first question is from Tom Narayan, HBC. The line is now open for you.
Yes, Tom Narayan, RBC. Thanks for taking the questions. First on tires, how does Q2's replacement to OE ratio compared to historical levels. My sense is that it was probably above normal given the soft OE tire market and this might have boosted margins for tires. 2nd, a number of automakers over the past few months have made statements suggesting they want to in source EV components like e motors, inverters and others, how concerning is this for your powertrain business?
And lastly, Michelin is benefiting from its Exposure to high margin specialty tire businesses, including mining, ag and construction. Are these end markets something Conti would like to grow bigger into? Thanks.
Thank you for the question. 1st, replacement OE was somewhat lower in Q2, But the question is what do you compare it to, which quarter you compare it to, but over the average of the last year, it was a little bit lower, Has hedged the margin, yes, but it's not the main driver of our margin improvement, what we have seen. In sourcing of the EV components, what we are finding out in the discussions with the OEs, yes, there are OEs which are considering to in source, but what they are considering to in source is mostly The big majority, the big volumes is the assembly of the products, which in the end make up an E X. We still have The discussions ongoing on delivering, in principle, the design and delivering as well the overall products. And some of them might do the final assembly This is our actual take of it.
We are not talking about DC DC converters and other products, which Anyway, it seemed to be a product which the majority of the OEs wants to buy from suppliers. And finally, correct, I mean, we envy Michelin for their specialty tire business, specifically With these very big mining tires, though this market, specifically the latter one, is Very much taken with many, many years of buildup by Michelin, and I think Bridgestone is very strong there as well. Nevertheless, yes, The off road tire market is something we are we started already 2, 3 years ago to stronger focus on. We have a production Fractal in our Portugal fraction, we have a production site in Sri Lanka where we are Producing for these segments among other production smaller production spots. And yes, we are trying to grow there faster.
And if there would be a possibility, I would not include as well There's some external M and A, but at the moment, we don't see any opportunity there.
Okay. Thank you.
Our next question is by Gabriel Alter of Citi. Your line is now open for you.
Thank you very much for taking my question. This is Gabriel from Citi. My first question is on cost inflation. In the auto business, How confident are you in recovering some of that increased input cost you mentioned for electronic components? And given the prices are continuing to rise, do you think even if you take into You may recover by passing through to customers.
Will it still impose an incremental cost headwind next year? And then my second question is on tires again on price mix. Maybe you could just comment please on how you expect price mix to develop in the second half. Do you expect to fully compensate raw materials on a full year basis even if you can't manage it for the second half in isolation? Thank you.
While the price increases in automotive, which we are seeing on the one hand side on semiconductor, On the other hand side as well on other raw materials and parts which we are buying It's something which in the at least midterm, we cannot carry on our own P and L. We have to pass it over to the customer. There's no question to that. At the moment, though, the discussions with our customers are still concentrating on delivering the right volume and at the right time And the sufficient volume, what they want to get from us. And so the discussion about this price Compensation, which we see in our input costs, is something which will start soon but did not really start at the moment.
To your second question, pricemix for tires, we expect pricemix to continue positively In the second half of the year, and our guidance basically includes a 3% to 4% pricemix increase in the second half of the year, Which actually, if you do the actual numbers to the midpoint of the guidance, which show you that there is No significant volume growth expected, but the main increase in the top line, which came out would come out of such an arithmetic is Price mix. Nevertheless, just to continue on that because this would be or will be one of the other questions. This comparison, if you take this €300,000,000 additional raw material costs, which we will see in the second half of the year, this is 5% to 6%. And therefore, there is an uncompensated part still in the second half of the year, which is roughly 3.5% to 4% Of raw material price increase hitting the P and L on the one hand side and pricemix improvement on the other hand side. And this is something then which most probably should come in the beginning of 2022.
We don't have any reason to assume that we cannot pass it on. But there will be a time lag in between the year 2021 2022 pass over. So expected 3% to 4% It's in the pricemix with an EBIT effect of 2% to 3%.
Okay. Thank you. Could I just follow-up on the cost side of things? Is the reduction in the ADAS R and D in any way related to the cost pressures you're seeing elsewhere in the business? Are you Finding ways to reduce the R and D requirement for ADAS to offset other cost pressures?
Or were there real savings there on the ADAS
The reason that this number is not as high as we thought in the beginning of the year is that part of it, As we discussed and you might remember as well going into corporations, potentially doing even partnerships And the discussions on that side are somewhat more delayed than we had expected in the beginning. This is the Main reason, a little bit of it is as well availability of engineering capacity, but the major part is this somewhat delayed partnership.
Okay. So we could see some of that come back in 2022?
Yes. Correct.
Okay. Thanks very much. I'll pass it back.
The next question is by Thomas Besson, Kepler Cheuvreux. The line is now open for you.
Thank you very much. It's Thomas Besson at Kepler Cheuvreux. I have three questions, please. First, I'd like To have a few more comments, please, on the level of star dealer inventories by region and on the pricing Environment by region, if it's possible, given how strong Prismic has been for you and competitors in the first half? The second question would be about the contract manufacturing Group that you're creating as of now, what kind of revenues should we expect and contribution margin should be expected for 2022.
Is it the right assumption to just double the H2 'twenty one for 2022 or is it going to be declining already versus the 2 times H2 'twenty one? And lastly, You've mentioned the CapEx of around 7% for the year. You've had your lowest level of CapEx for Almost a decade in H1. So are you really going to spend double digit CapEx in H2? Or should we think that around 7% may mean like 6% or 5.5%.
Thank you.
Thomas, to start with a latter one, I think the 7% is the around 7% is the maximum we will spend this year. And there's a good chance that we Achiever number which is lower probably in the range which you were mentioning. The car dealer inventory In all regions, and we are talking about I'm not so sure if your question goes on inventories
For tires?
For tires? Yes, for tires. It was on the tires.
Okay. So low in Europe and too low in the U. S. Actually. We are Fighting to get the tires in time to the dealers, which have very low inventory.
So in the end, good situation. Our delivery rate, It should be even higher than it is at the moment. It's at a lower point than normal just because we cannot deliver the tires. We don't cannot produce the tires at the moment, Always in that range in time and obviously not only us, and this is one of the reasons why the pricing is in good shape. Pricing by region, U.
S, very strong further Europe, strong China, good. No change to what we had reported in the years before for China. So overall, good pricing environment. This is The reason why I mentioned that pricemix expectation for in our tire guidance is still 3% to 4 And actually, there is a bigger part of this is price increases. As I mentioned as well, We think this is a P and L effect of 3% to 4% of 2% to 3%.
So you see there is a high element of price increasing there and Not even so much more mix. So we are confident we can pass it over, but there are limits. And this is why we will not compensate fully this The high amount of raw material price P and L hit, which we see in the second half of the year. Contract Manufacturing, To make it even more complicated in our reporting, I mean, we have now the €80,000,000 for the Automotive segment. We have introduced now the contract manufacturing.
As soon as we have completed the spin off, we have to change Our reporting again different than it is in the guidance. At the moment, we are only allow or we have to include in our guidance For existing segments, the whole effect of the spin off. So the automotive segment is now including This EUR 80,000,000 profit shift, which goes directly into the net profits. For the contract manufacturing, as this is not a segment which In the actual numbers is existing, we can only report on those numbers, which will be shown After the spin off is done. So the numbers we are talking about here are those numbers starting mid of September to December.
As soon as we have done the spin off, the contract manufacturing will be changed to report about a backward total year The contract manufacturing number. This number will be around EUR 600,000,000 to EUR 700,000,000. This number now, Thomas, is strongly decreasing over the next 2, 3 years Because we are more and more shifting those production sites at Conti, which are producing for Vitesco and those At the same, by the way, and Vitescu, which are producing for Conti, we'll shift them to where they belong to those legal units where they belong to. The profit margin will be quite low as the transfer prices will allow for some margin but not For a significantly high margin. I'm not sure if this was more confusing than helping, but unfortunately, this is IFRS 58, and we have to follow that.
May I just make sure I understood correctly? And maybe I'm done better than average, but at least it will be clear for everyone. So do I understand correctly that this contract manufacturing only starts after the spin off mid September? So but you are going to retroactively say it's €700,000,000 of revenue this year compared with what you are Talking about is that correct?
Well, the now reported in our guidance not reported, our guidance stated contract manufacturing Sales and profit volume is the volume we expect starting after spin off until year
end. Yes.
As soon as we have done the spin off, We will report the contract manufacturing for the whole year. So there is type of a synthetical number, Which assumes that contract manufacturing was already done from January to middle of September. Therefore, the number then will increase.
Okay. Clear.
The pro
form a number will be okay. Thank you very much for the time.
Yes.
Our next question is from Thor Schneider, Bank of America. The line is now open for you.
Yes, good afternoon. Thanks for taking also my questions. The first question that I have is that relates to The raw med price increase, the third in OPPO Technologies, maybe I missed it and sorry for that, but can you maybe say or repeat What was the burden from that in Q1, H1? And what do you expect the burden to be in H2? That's the first question.
2nd question is more on some better sequential guidance basically. I mean, I realize that you took down the market assumption, But what is now expectation volume wise Q3 and then Q4? Is it more flattish Q3 and then a strong increase in Q4? And I assume that the outperformance again will be around 0 then in H2. And the last one that I have that relates again to margin strength in automotive because it's not getting stronger as I personally hope for, Probably also as you personally hope for.
So I remember at the CMD, we talk all the time about best ownership reviews, Etcetera. So what's now the management answer to this kind of margin crisis? Is it that you're going to do more disposals? Would you consider more disposals? Or that you have got to step up again the restructuring efforts in Automotive?
Raw material burden in H2 Automotive, I understood. I did not you didn't miss anything or so I did not quantify that number. But Well, if you think of something in the very low triple digit numbers, so around SEK 100,000,000, probably a little bit more, including ship prices, including other raw material price increases, I think that there will be an average which is built into our guidance.
That is H2 or that is full year now, the EUR 100,000,000 you took away?
This is H2. In the beginning of the year, the number first half is Significantly lower for the chip anyway and for the rest as well. I mean, we are always talking when does it hit our P and L, not When the raw material prices might increase. Q3 versus Q4, your assumption is right that the Q4 It's the one which will see the stronger increase. Q3 will be somewhat in between Q1 and Q2 numbers As far as the top line is concerned, and only Q4 will then show the high increase.
Very similar, I think, to what other markets observers, IHS or so, are expecting. And finally, I agree that we would like to see better improvement in the profit margin of Automotive. I think I we talked in the presentation, we talked about the reasons. If you want to do a bridge From H1 to H2, and again, if you go to the implied midpoint of our guidance, mean, there is a strong increase in sales of EUR 500,000,000. We just discussed it more of it to come in Q4 than in Q3.
If you take, I'd say, a 30 percent also leverage on that, about EUR 150,000,000 EUR 160,000,000, EUR 70,000,000. Then we have this €100,000,000 plus material against it. We have the €100,000,000 plus advanced driver assistance system, Additional R and D into account and then we have this EUR 80,000,000 of automotive accounting change because of the spin off. And if you add all this up, we get to this guidance as we have it sitting here on the paper. Yes, we are doing the review Horst, I mean, this is what we have committed to.
We talk about it now on a quarterly basis with the Executive Board, but there is nothing to report on that at the moment.
All right. Thank you.
Yes.
The next question is by Vashar Gommel, Jefferies. The line is now open for you.
Good afternoon. Thank you for taking my questions as well. First one would actually be a bit of follow-up on Hart's question on the restructuring in Automotive. Given where the margin is right now, how much of the EUR 1,000,000,000 restructuring program has actually been implemented already? And How far through are you, I.
E, how many benefits do we see in the current margin level? That will be the first question.
Well, there's a few of us. The majority of the program in as it was discussed was the negotiation now on each single location Down to the 80 or so locations, most of it is done, and it is starting to be implemented. First people have been affected about, I think, 1 quarter of the total number of people, which we mentioned, has been affected as an Indicator of the cost effect of this, obviously, is then only starting to be seen, I think, in Q4 and then next year until we get to this EUR 1,000,000,000 or EUR 8 €50,000,000 excluding Vitesco in 2023. And at the moment, all the negotiations and everything We can achieve, I think, is targeting in that direction with EUR 850,000,000 for currency without Vitesco.
Understood, very clear. The second question is on your order intake in AMS. It has been quite weak for a few quarters now. And I was just wondering if this is kind of broadly across the all the businesses And or what the reason is for that and given that there is quite some M and A now in the ADAS space with Qualcomm now bidding for Veoneer, Do you think you might need to kind of strengthen your ADAS business through M and A as well?
The last question, do you think what was the question?
If I mean, I basically linked the order weakness maybe with your ADAS business and if you think you need to do M and A given that there is no consolidation happening.
I see. No, we don't think of any you think of a consolidation, bigger consolidation in the automotive industry as we saw one announcement recently, we don't believe that this would be helpful for our business. And we think that these tech additions to it, as we discussed when we talked about this EUR 200,000,000 to EUR 250,000,000 additional R and D In specifically Vision and High Performance Computing and Artificial Intelligence, those three areas, this is What is for the business the right boost to get to the targeted volumes in the years to come? And this is what we are concentrating on. I don't think it would be helpful to do any larger M and A transaction with very high multiples To basically buy an order book with customers, which we anyway know and have.
That's helpful. Thanks. Last question, just a technicality. You raised your midpoint of the EBIT guidance by about SEK 100,000,000, but you left your cash flow unchanged. And any reason why you didn't also raise the cash flow range by EUR 100,000,000?
Well, this is, I would say, in the range of the volatility of Finally, the working capital at year end, and we said we leave it where it is. As well, we talked about in another question, I think from Thomas about the potential investments. It might be that there are some chances. But then again, Let's see how Q4 is going and how working capital is developing there.
Very clear. Thank you.
The next question is by Jose Maria Azumendi, JPM. The line is now open for you.
Thanks very much, Jose, JPMorgan. Hello, Wolfgang. A couple of questions, please. The first one, can you give us an update please on the restructuring of the tire division? How far have you got there?
Yes. Any update on the state of the cost structure of the tire division? And then second, on again, on the automotive division. I mean, Obviously, the comparison with the other peers out there is quite substantial in terms of margins. The question is a bit more sort of medium, longer run.
What are the levers to basically to improve the profitability, let's say, 1 or 2 years out? What is the normalized margin of VNI and AMS? And how do you see these additions, let's say, on a 12:18 mark view? Thank you.
Restructuring tires is on its way. The negotiations, as you know, with Afton are terminated, are signed, Find a closure to be done end of next year. We have now a voluntary leaf program installed as Production can be reduced if people would voluntarily leave. At the moment, it seems that there is more than we expected of people taking this. So this might add to the fact that the cost benefit, At least partially, it's a little bit earlier than we thought.
So overall, it's running in the right direction and the target of next year closure is now written in contract and There should be not any possibility to further delay that. While the automotive target is the 6% to 8%, though I know we are far away On that, our guidance makes us far away from that. What are the levers? Well, I mean, one thing is, if you just take out these additional costs, which at the moment, we see with extra freight With the material additional material costs, which as we discussed in the beginning, cannot be something which stays On our P and L all the time and when the top line is no longer restricted with these chip deliveries, I We are the biggest delever, I think, of all suppliers of electronics to the automotive industry. And I wonder that we are more affected than others With this ship under supply.
Yes, plus obviously Transformation
C plus
all the other actions which we are working on. But I think if you want bigger blocks, Transformation C, it is all the go away of this cost burden which we get through the chip crisis.
That's very helpful. Then just one final follow-up. Slide 4 has, I think, very interesting images and of basically of the product launches you have on this place in the coming years, which is the work you've done basically over the past years as well. How does this help the growth in the auto division? Is there a way to quantify this?
I mean, it looks very encouraging. It looks like you have joined into key vehicles. You're offering all the display shapes out there in the market. How does this help the auto growth? Can we quantify this Maybe in a number or in a yes, any form.
Well, it's the SEK 5,000,000,000 and more is lifetime sales. I think this should give you already An idea, as you know, lifetime sales is something which is a 4 to 6 year lifetime normally assumed in these numbers. So this is if you do the math, this is the type of annual additional sales which comes out of it. And by the way, to add that it is interesting To see that these type of displays are really something which goes to companies like us to the established suppliers and many discussions with investors Is that not a typical thing which then goes to the consumer electronics industry? And the answer obviously is no, Stays with us, the mechanics here.
The electronics are obviously as well possible in many cases for The consumer electronic guys, but the mechanics here with these very thin displays where room which they take as well as weight is of high importance It's something where we have, I think, a big advantage and a big USP versus other players in the market.
Jose, if I can add on, if you remember from Capital Markets Day, we talked about user experience. I think you and yourself also hosted the session, right? And Display Solutions was a Key growth area we peg that doing 30% plus outperformance in the next years. So what you see here in pictures and in numbers It's the proof behind the pudding.
Exactly. Very helpful. Thank you.
The next question is by Giulio Pescatore from Exane. The line is now open for you.
Hi, thanks for taking my question. The first one on the light vehicle production. I know that a lot of the focus is still on H2, but you did mention that you expect the impact To last until well into next year. So can you maybe share your expectations with regard to like vehicle production recovery next year? I mean, what are you expecting in terms of market growth?
Well, we do We expect that though we say the chip shortage is continuing that it would not be by far such a limiting factor As we see it now and we do expect quite a significant growth next year. And if you look at the high HS numbers For 2022, I think at the moment, this is something which is close to our expectations.
Okay. Thank you. And the second one on Vitesco. I mean, can you help us a bit with I know there is not formal guidance, Can you maybe help us understand if the current level of margins is sustainable or maybe there is copper for upside in H2? And maybe can we talk about margins without IFRS 5, so around about 3%, 3.5%.
If I do now any future looking statements for Ritesto, we have to put them in the prospectus, I should want to. The IFRS five effect is obviously, if you look at the Continental numbers, It's boosting their profitability, as you rightly stated. If you look at the Vitesco numbers, what they are talking about when they present their numbers to Vitesco does not have this effect, obviously. IFRS 5 is only to be applied at the company, which is Doing the spin off and not the company which is spin off. So their numbers are reflecting the type of right word without The IFRS numbers.
The IFRS effect in Vitescu in powertrain, I have to Notice it is true in our powertrain numbers, this stopped depreciation is EUR 130,000,000 in the first half year.
Okay. But there is no reason why the current level of margins, it shouldn't be sustainable in H2 removing IFRS 5?
Well, if you take out the reported numbers and then deduct the SEK 130,000,000, yes, this is What we will say is the operational profit. And actually, if you look at the test score numbers, the test score numbers would not include those
Okay. Thank you. And then maybe just one last clarification. The order intake number for BiteESCO, so the EUR 900,000,000 for Electrification Technologies, that's So a Q2 number or an H1 number?
It's a Q2 number.
And do you have a number for H1 then?
About 1,400,000,000, 1,314,000,000 thereabouts.
Perfect. Thank you very much.
The next question is by Tim Okossa, Deutsche Bank. The line is now open for you.
Yes. Thank you very much Wolfgang and Werner. Thank you for taking my questions. The first one just be on the semi shortage. Again, we're hearing from a couple of semi guys and OEMs that this will last well into next year.
The big question for the sector overall is obviously when there will eventually be some sort of major restocking. When you look at your own Order situation, when you talk to your suppliers, do you feel there's any chance we're going to see some restocking in the next couple of months or even quarters? Or will this remain a very tight situation We're basically using up whatever you get on a daily basis for the time being. Secondly, when we think about the automotive performance, This goes a bit into also what Horst said and asked you, for how long do you let this run? I mean, you're not at least seemingly as an external observer, you're not making any progress with when it comes to the majority of your decisions that you have taken in these divisions.
Do you give this another year or 2 years, should we then prepare for another strategic review of that division once the Vitessco spin off is done? Or do you really feel like you're on the right track and This is just given all the external factors. We're not able to see that in your numbers yet, but it will come and we just need to be a bit more patient here. And then as a last thing more of a statement than a question, I think if you want to make it easier for investors to follow your Stock in your company and to do the work again, you might want to think about a restart of what you show us on the accounting side of things. I mean, you just said to yourself, this is incredibly complex, And it seems to be getting more difficult with more and more one offs every single quarter.
And the last thing you want is, obviously, to make it very painful for investors to follow your company. Maybe that's something that you could think about strategically in your reviews later this year.
Well, to start with Nathaland, I think as soon as the spin off is done, we come back to more simple reporting. Now this at the moment is a distortion, which I fully understand. It's complicated. I mentioned it before. It should be gone, I think, when we have done the spin off.
And then As we announced already, we will do the reporting, including Advanced Driver Assistance Systems starting next year With those numbers, I think, which are relevant and which you appreciate to hear and hopefully and I'm sure it will get better. Restocking for semiconductors is still not the discussion. I mean, the discussion at the moment is just get sufficient numbers. And well, this is basically coming back to when do we have sufficient supply, and only then we would start to do the restocking. And I think this goes well into next year before this situation is done.
What we hear from the OEs regarding demand From their customers versus what we hear from and get as information from our suppliers regarding their additional capacities, there still will be a gap in At least in the beginning of 2022, probably longer in 2022 and only when that is closed, restocking will start. And then our patients with automotive, As I mentioned before, I think when these special effects are gone, when the transformation C is working and when the top line It's no longer burdened with the effect of this chip shortage. We will see a significant positive leverage, which Should get the Automotive business into 6% to 8%. We will not look indefinitely on this situation. This is very clear.
Thank you.
Our next question is by Filip Konig, Goldman Sachs. The line is now open for you.
Thanks for taking my questions. I have two questions. First one is on your slide on the EV tires. You're obviously taking a lot of share in that segment. Could you maybe share how your market share and EBITDA is kind of compared to your share in the overall market and also if there's a large difference in the profitability between EV and normal tires?
And my second question is on the R and D. You changed your outlook on the R and D into ADAS for this year. You lowered it by €50,000,000 So now you're expecting €150,000,000 €200,000,000 of R and D into ADAS. Are you just investing less into the space? Or can we just expect the delta to Shifted to next year that you'll spend more into ADAS in 2022.
Thank you.
1st, market share of the EV tires It's not so different from what we do have in our in the rest of our Peskar tire business. Pricing is more attractive and margin is one more attractive than on an average tire of the same size. For the Advanced driver assistance system additional R and D, well, we will need this money To fill those efficiencies, which we think we have in vision, in Cloud Computing in Artificial Intelligence,