Welcome everyone to our nine-month 2020 results presentation. Today's call is hosted by our CFO, Wolfgang Schäfer. Also here in the room with us is Stefan Scholz, 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 question and answer session for sell-side analysts. To provide a chance for all to ask questions, we would ask you to limit yourself to no more than three questions each. We know that many of you have another call directly afterwards, so it would be great if we can conclude this call on time.
With this, I would now like to hand you over to Wolfgang Schäfer.
Thank you, Bernard. Let me begin today's presentation on slide three, starting with an overview of market developments in the third quarter. In contrast to the lockdown-included downturn in the second quarter, the third quarter demonstrated a strong sequential recovery in car production and demand. Light vehicle production volumes rebound over the course of the summer, ending the quarter with only 3.5% below prior year. China continues to be the leading region with 11% year-over-year growth, always in the quarter. North America production was able to slightly beat its prior year level. Europe remains the lagging region at -8%, with our key German and French markets down by 16%, respectively 23%. We attribute this weaker production levels to conservative inventory management by our European customers, in principle, good news given the continued highly uncertain business environment. We saw demand growth mainly in line with production growth.
In replacement tire markets, we saw an equally strong sequential recovery with the same regional pattern as with vehicle production. Third quarter volumes in China were well ahead of last year's comparable period. North America also bounced back on prior year level, and European demand improved, though less than in the other regions. Weaker demand for winter tires had a major impact in Europe. Outside of automotive OE and replacement tires, activity in industrial markets also improved sequentially versus the second quarter, with demand in China especially robust and well above the prior year level. Major topics regarding the period are summarized on the right side of this slide. To meet the demand rebound, we were able to quickly and successfully ramp up our activities in all businesses and regions. In parallel, we maintained strict management of our costs. Example given here are our fixed costs as well as investments.
We are well on track to meet our full-year targets in both areas, namely a fixed cost reduction excluding D&A of more than 5% and a reduction in CapEx of at least 25%. In terms of restructuring, as announced on September 30, the supervisory board has approved the discontinuation of the German tire production site in Aachen, the electronic component production site in Karben, and the Transformation of the Regensburg site. This resulted in restructuring expenses of EUR 687 million for the period, also based on reduced business planning assumptions, mainly regarding light vehicle production, goodwill impairments of EUR 649 million were recognized in the business area VNI. A significant portion of the goodwill impairments is attributable to acquisitions we made before 2008. Slide four, the status of our ongoing structural program is covered on this slide. The implementation of our expanded Transformation program is making progress as targeted.
With the resolutions approved by the supervisory board end of September, further measures for reaching our target of EUR 1 billion of gross cost savings have been made. As seen on the chart, roughly 60% of the savings will accrue in Automotive Technologies, about 25% in Rubber Technologies, and the remainder in Powertrain Technologies. A sizable proportion of the savings will be realized during 2022 and 2023. One-time costs of approximately EUR 1.8 billion are anticipated. As a reminder, program expenses of EUR 788 million have been booked so far this year, and EUR 665 million were booked in 2019. Further expenses for restructuring and asset impairments related to this program are expected to be recognized in the fourth quarter of 2020, though the amounts are not clarified at this time.
As for cash-related effects, a cash outflow of over EUR 700 million is expected in 2021, while the amount in 2022 should be somewhat lower. Actually, for 2020, we foresee around EUR 100 million. Let me now move on to some of our highlights from the period, starting with the Volkswagen ID.3 on slide five. Many of you are already aware that our ICAS high-performance computer for the whole vehicle connectivity is at the heart of the new electronics architecture of the ID.3. With headquarter server-based drive control unit controls in the vehicle's electric drive. In addition, we supply many key components into this and other Volkswagen, other vehicles on this MEB platform. This includes not only standard products such as safety and ADAS sensors, digital displays and control units, but as well innovative components tailored specifically for electric vehicles.
For example, the ID.3 features our newly developed drum brake, components for thermal management of the battery, as well as vehicle-specific summer, winter, and all-season tires, featuring the ContiSeal technology. These products demonstrate the importance of our technologies in enabling key applications such as electrification, autonomous driving, and networking. The next highlight, move to slide six, shows how Vitesco Technologies continues to strongly benefit from increasing demand for electrification. Two recent successes in this area are shown here. First, we have been seeing very solid demand for our EMR3 axle, our fully integrated system combining an E-motor inverter and reducer. By virtue of its high power density, compact size, and high integration, the EMR3 reduces engineering efforts for vehicle manufacturers. This is a key reason why we have been chosen to supply it to numerous OEMs and models such as PSA, Hyundai, and Dongfeng.
Second, we recently won a more than EUR 2 billion order from a major OEM for our new high voltage box product. This product integrates numerous high voltage functions to enable onboard charging and DC/DC conversion in a compact package. Winning this order will not only support future growth, it also underlines our ability to redeploy our competence in the field of electronics integration into new high voltage electrification applications. I move on to a review of our performance KPIs starting on slide seven. Reported sales in the nine months of the year came in at EUR 26.8 billion, down 19.7% versus the prior year period on a reported basis and down 18.1% on an organic basis. Exchange rate effects have gradually become more material due to the stronger euro, resulting in a headwind of EUR 578 million year to date.
The significant sales drop was the main cause of the substantial decline in adjusted EBIT to EUR 629 million and resulting margin to 2.4%. These numbers imply a year-on-year operating leverage of around 26%, which has been successively improving over each quarter during the year. Special effects totaled - EUR 1.563 billion due to restructuring costs, goodwill impairments, and carve-out effects. These items weighed on net income after taxes, which came in at - EUR 1.168 billion, as well as trailing ROSI, which was - 4%. Free cash flow, excluding acquisitions and carve-out effects, came in at EUR 105 million, as the negative working capital effects from the second quarter were neutralized by the improved business activities in the third quarter. I will address these topics on later slides. Gearing ratio and equity ratios reflect both the just mentioned business results as well as the dividend disbursement of EUR 600 million in July.
Net indebtedness stood at EUR 4.9 billion at the end of September. Let me now move to the Q3 performance by group sector starting on slide eight. Reported sales in the period declined by 7.3% year-on-year, mostly due to FX headwinds. Group organic sales were down only 2.7%. This decline was driven by lower sales in Automotive Technologies and Rubber Technologies, while Powertrain Technologies recorded positive organic growth in the period. Despite the organic sales decline, the adjusted EBIT margin in the quarter reached 8.1%. The continued implementation of cost measures initiated starting last year as well as in the second quarter and a positive tailwind from raw materials contributed to this result. Sequentially, comparing the third quarter against the second quarter, we achieved an incremental operating leverage of 40%. This was much better than the decremental operating leverage of 34% that was achieved between Q2 and Q1.
Let me now review organic sales performance for Automotive and Powertrain versus global vehicle production on slide nine. As mentioned earlier, the European market experienced the softest growth with light vehicle production in the region falling year-on-year by 8% and even weaker growth in our key markets, Germany and France. The disadvantageous mix was the main reason for the 14% organic decline in Automotive sales in Europe. In contrast, organic growth in Powertrain declined only 3%, bolstered by increased demand for electrification products. In contrast, Automotive was able to keep pace with growth in North American production while Powertrain underperformed slightly. Last but not least, both Automotive and Powertrain were able to outperform in the fast-growing Chinese market. Taken together, that on a global level, Automotive slightly underperformed its regionally weighted average due to our high European sales share, while Powertrain outperformed by 6 percentage points.
Slide 10 shows the individual review of the business area starting with AMS. AMS sales totaled EUR 2 billion, 13% below the prior year level, excluding the deconsolidation effect of - EUR 123 million from our Chinese HBS joint venture and the fixed effects organic growth was -5%. Weak sales in Europe, particularly in Germany, was the main reason for the decline, while growth in both China and North America outpaced local vehicle production. Despite the sales decline, AMS profitability remained quite resilient, with adjusted EBIT coming in at EUR 125 million, equivalent to a margin of 6.3%. This result was thanks to the continuation of fixed cost saving measures initiated in Q2. This is evident by the sequential operating leverage of 43%. As for order intake, we continue to see delays in sourcing decisions by our customers, most notably for ADAS-related projects.
Despite this, AMS recorded an order intake of EUR 3.3 billion in Q3. The most significant order intake of around EUR 1.8 billion was recorded for our next Generation One box integrated brake system, MK C2. This innovative product will be numerous vehicles of a premium OEM starting in 2024. VNI, Vehicle Networking and Information, is covered on the next slide, number 11. Organic growth at VNI was at -7.9% in Q3, negatively impacted by weak European production and softer sales in North America, as well as continuing sales decline in our HMI business unit. In contrast, organic growth in China was double digit. In terms of adjusted EBIT, though the significant recovery in sales versus Q2 and continued strict fiscal management helped profitability in the quarter. This was counterbalanced by accruals for license fees and legal costs related to our networking business.
This impeded the development of the sequential operating leverage, which was only 30%. Just as in AMS, order intake in VNI was restrained by continued delays in customer sourcing decisions, most notably for HMI systems. Nevertheless, we were able to win further future business for body and telematic control units, helping us to achieve an order intake of EUR 1.2 billion for the period. Moving to slide 12, I will cover rubber technologies, starting with tires. FX headwinds, Restraint reported growth in tires to 3.4%, below the prior year level. Organic growth in the tire business area was positive at 0.5%. The positive figure was supported by an only slight decrease in volumes of 1.8%, which was ahead of the more negative conditions in vehicle production and replacement tire markets I described earlier.
The bigger growth driver was the solid price mix of 2.4%, supported by significantly positive mix and pricing attainment in replacement tires. The stable pricing environment in the European replacement tire markets also continued. These factors more than compensated for negative pricing in OE. The positive organic growth supported the positive development in adjusted EBIT to nearly EUR 500 million, equating to a margin of 17.1%. This was largely aided by significant reduction in fixed costs, which were down 8% year-on-year, and a strong tailwind from raw materials of about EUR 90 million. These effects positively expanded sequential operating leverage versus the second quarter to 47%. Please note that we do not expect these positive tailwinds to be sustainable, as many of our cost-saving measures are short-term in nature, and raw material prices have recently experienced considerable increases, for example, for natural rubber and butadiene.
ContiTech on slide 13, sales saw pronounced improvement versus the second quarter. They still remained organically 5% below the prior year level. On the OE side, the organic sales decline was 6.4% as Mobile Fluid and Surface Solutions experienced nice rebounds in volumes versus the historically weak Q2, but did not reach prior year level. Industrial and aftermarket developed comparatively better with an organic decline of 3.5%. This was supported by strong growth in air springs. In regional terms, both customer groups benefited from solid demand out of China, where our business grew organically at a double-digit rate. Thanks to the previously implemented performance enhancement measures and supported by short-term fixed cost savings, as well as the recovery in volumes, ContiTech achieved a strong sequential operating leverage of 38%. The adjusted EBIT margin achieved 10.6%.
Further restructuring measures are in place for implementation and proceeding according to plan to support future profitability. Last but not least, let me cover Powertrain technologies on slide 14. Sales of EUR 1.9 billion were organically up 2.4% versus last year's figure. This was impressively driven by the business unit electrification technology, which doubled its sales to EUR 130 million versus Q3 2019. Sales of power electronics product as well as our high voltage axle drive, especially brisk. Moreover, the business unit electronic controls and sensing and actuation also outperformed light vehicle production. Adjusted EBIT in the quarter reached EUR 111 million, equivalent to a margin of 5.8%. In addition to benefits from restructuring, short-term fixed cost savings measures were also important in achieving the sequential operating leverage of 38%.
Excluding electrification technology, the adjusted EBIT margin for Powertrain would have been nearly 10%, reflecting the underlying strengths of the electronic controls and sense and actuation businesses. Order intake in the period amounted to an impressive EUR 3.9 billion, which includes the previously mentioned above EUR 2 billion order for the high voltage box. Let me continue to the overview of the Q3 cash flow on slide 15. Free cash flow before acquisitions and carve-out effects for the group amounted to EUR 1.8 billion, well ahead of last year's comparable figure of EUR 348 million, and probably the best quarter ever in the last 150 years for Continental. As expected, the increase resulted from an improvement in business activities, which reversed the negative working capital, basically the same amount which we saw in the second quarter of fiscal year 2020.
This effect is visible in the strong operating cash flow figure of nearly EUR 2.2 billion. Investing cash outflow was also lower due to the lower capital expenditures. As for our financing cash flow, the outflow of EUR 1.6 billion reflects the payment of the EUR 600 million dividend this year in Q3, the redemption of a EUR 750 million bond in September, as well as the purchase of the remaining shares of an already fully consolidated company for EUR 170 million in Korea. Slide 16 shows the liquidity bridge. Since free cash flow and financing cash flow were roughly on par with each other in the third quarter, our overall liquidity situation at the end of September was basically unchanged from that at the end of June.
After the redemption in September, the next bond maturity of only EUR 200 million will be next April, and all other redemptions to occur only in September 2023 or even later. Now let me continue with our market expectations for the fourth quarter and full year 2020 on slide 17. We would like to be cautiously optimistic that the progressively improving markets conditions we saw through the course of the third quarter will continue in the fourth quarter. With the reinitiation of social and movement restrictions in many of our key geographies, uncertainty is once again increasing and visibility is becoming more challenging. Therefore, the assumptions shown here are based on our current best assessment of the market situation for the remainder of the year. They do not include unexpected impact from the ongoing COVID pandemic on production or supply chain or demand, should they occur.
For light vehicle production in Q4, just as in Q3, we expect many of our OE customers to continue to cautiously manage their production activities to avoid overstocking in this environment. Thus, we anticipate that year-on-year production growth in Q4 will be between -4% and -6% on a worldwide basis, with all regions contributing to the decline. For passenger car replacement tire demand, we expect demand in Europe to remain soft, mainly due to the previously mentioned winter tire situation. We anticipate North America to be down in the same magnitude. In contrast, the growth trend in China is expected to continue in the fourth quarter. For commercial vehicles, we anticipate that production in Q4 will be down by 9%-14% globally. Meanwhile, truck replacement tire volumes in Europe and North America are expected to be only slightly below the previous year's level.
I conclude today's presentation with our updated outlook for 2020 on slide 18. It assumes stable exchange rates on September 30 level. It also assumes that there are no unexpected impacts from COVID-19, as already mentioned. Based on these assumptions, we expect consolidated sales to be around EUR 37.5 billion, and the adjusted EBIT margin is anticipated to be around 3%. Sales of the three automotive business areas consisting of AMS and VNI Powertrain are expected to be around EUR 22 billion. The full year adjusted EBIT margin is expected to be around -1.5%. This outlook includes, among other factors, expected provisions for warranty claims and higher than expected net research and development expenditures that will noticeably reduce adjusted EBIT in the fourth quarter. For Rubber, we expect sales to be around EUR 15.5 billion for the full year, and the adjusted EBIT margin to be around 10.5%.
This outlook includes an expected tailwind for raw materials in the fourth quarter of about EUR 70 million. Further expenses for restructuring and asset impairments related to the Transformation 2019-2029 program are expected to be recognized in the fourth quarter of 2020. Though the amounts are not clarified at this time, as they very much depend on the status of the negotiations with our partners at the locations and the unions at the year-end. Though these effects will not affect adjusted EBIT, they will materially impact reported EBIT and net income attributable to shareholders. CapEx, excluding financial investments for the year, is expected to be around 6.3% of sales. Lastly, while free cash flow before acquisitions and excluding carve-out effect is expected to be positive for fiscal 2020, the value is expected to be significantly lower than in the prior years.
With this, I would like to conclude today's presentation, and I open the line now for your questions. Thank you.
Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. Our first question is from Tom Narayan, RBC. Your line is now open.
Hi. Yes, Tom Narayan, RBC. Thanks for taking the questions. I have three. The first one is on tires. Wondering if you could comment on what's driving this, perhaps how imports coming into Europe from Asia may have declined. Second one, customer delays in ADAS. What is driving this specifically? Is it the OEMs prioritizing electrification budgets? Do you expect this to return in 2021? Third, what was behind the decision not to do fuel cells? I'm wondering if you could reverse this decision. It seems like a very compelling space, particularly as it relates to heavy-duty commercial trucks, or maybe you felt that the OEMs would do this in-house. Thank you.
Thank you, Tom. First question, tires gain market shares. Your assumption is the correct assumption. This is in Europe, where imports from the Asian markets are reduced. I think we mentioned it in the last call. We have the situation that tire dealers are narrow in their cash positions, don't feel in a position to buy bigger lots, which they have to do from imported tires. They prefer to get basically the tire delivered just in sequence when the customer wants it. This makes us and those which are producing within Europe, the more attractive partner for them, as we obviously can deliver those smaller lots. There is some gain in the North American market, but main topic is coming from Europe.
In ADAS, actually, we don't see any order which we wanted to get, which we did not get, meaning that it is indeed, as you were assuming, it is a topic of customers not putting these orders on the market versus which would be bad news, but is not that we would get not those orders which are on the market. The customers, none of them is canceling projects to our knowledge now. For most of the projects, it is a delay, and the reason the OEs are giving with these delays is just capacity which they have available for it as they, in the last very volatile quarters, had to concentrate on other topics. We expect them to be in the market latest in the first half of 2021. At least this is what we hear from our customers regarding specifically these ADAS orders.
We do work on fuel cells, your last question. We have, by the way, fuel cells overall in a car would give many opportunities as well for ContiTech, as if you look at a fuel cell car, the whole lining and the structure of the engine, including the fuel cell elements, is at least for those products which ContiTech is delivering closer to today's combustion engine than a pure electric vehicle is. We are very closely following this, and I think we do agree that there might be an entry for the fuel cell business more on the truck side than it is on the pass car vehicle side. Yes, we are working on that.
Okay, thank you.
Our next question is from Gabriel Adler, Citigroup. Your line is now open.
Hi. Yes, Gabriel from Citigroup. Three questions, please. My first is on the guidance. Can you just elaborate on the reasons for the margin pressure on the automotive side in Q4 that's implied by your guidance? How much of this relates to low R&D reimbursement? How much to capitalization, and how much to warranty provisioning? How should we think about these impacts going forward into 2021, if at all? My second question is on the VNI outperformance. The slowdown in organic growth was attributed in your presentation there to technology transition. Can you comment on your expectations for the transition going forward, when it will be complete, and when the drag on growth from the changeover should begin to ease? My last question is on tire replacement outlook. I understand the caution on Europe and your comments on the winter season were useful.
Could you also clarify why North America specifically is expected to be down 4%-6%, given the market was flat in Q3, the reasons there would be helpful. Thank you.
To start with margin pressure on automotive, actually, you gave the right answers already. Specifically in Q4, we see two topics. One, which is more on the Powertrain, the Vitesco business, which is a warranty topic. There is not the one big claim, but there are some which we are basically clearing up for the year-end and for the fourth quarter. Then we have, and this is what you were referring to, in the R&D area, we have altogether, we have lower capitalization in R&D foreseen for the fourth quarter, which we already tried to install and tried to stick to in the beginning of the year. You might have noticed we have lower R&D reimbursements. They are, by the way, partly helping a little bit in Q3. Some of them were higher.
We do see a bigger software project which are there, which overall puts some pressure on R&D, overall R&D jobs, which have to be done. These two, R&D on the one hand side and warranty on the other hand side together, are those which have an effect on Q4. The majority of them should not continue in Q1. Total amount is a very rough number, very round number. I think I would not give this number on the phone when you call them, but it's somewhere around EUR 200 million, I think, which we have as a burden there. VNI, as well, right interpretation, the low outperformance is the technology transition.
It is, unfortunately, already mentioned for a while, the HMI topic towards digital displays will last during 2023, and hopefully then we are at a level which allows to see the growth of other attractive products kicking in, not overcompensating by these reductions. The last question, I have not fully understood.
Hi, it's Bernard here. Your question is about tires in North America, right?
Yeah, exactly.
Yes
Q4 volumes.
Yeah. This is just based on our own channel checks and our feel for how the demand has been developing. We don't see the growth yet in Q4, the same way we saw it in Q3. We can maybe take a shot at different hypotheses, but I think to a degree, North America lockdown did last longer, hence the pent-up demand came later. A lot of that was potentially fulfilled in Q3, thus leaving a little bit less for Q4 there. So far, the indication from October is that it's a little bit slower than it was exiting Q3.
Okay. Thank you both. Really helpful.
Our next question is from Victoria Greer, Morgan Stanley. Your line is now open.
Hi there. Yes, just on the tires, first of all, quite strong price mix in Q3. Could you talk about the drivers for that, please? On your Q4 outlook, it seems like your guidance is for a little bit of a larger decline in terms of revenues in Q3. Is that volumes? We touched on the North America weakness potentially on volumes already, or is it a bit weaker price mix in Q4, or is it both? If you could comment also on tires raw materials for Q4, that would be helpful. Second question on the ID.3, could you talk about what's your content per car there, particularly for ICAS, and what can we expect there for 2021 as the ID.3 volumes ramp up?
The last question, we've seen quite a lot of OEMs announcing discontinuing model lines or Powertrain variants like PSA, for example, coming out of the mini category, Honda discontinuing diesel in Europe from next year. Are you seeing any changes there on start of production or in existing contracts that we should think about? Thanks.
Thank you, Victoria. These were more than three questions with other questions for that side. Price mix in Q3 is very much the nice pricing which we see in Europe. We saw replacement tire markets in Europe stable in prices, this is always a comparison to prior year, this price mix. In prior year, you might remember, we saw quite some price pressure in Europe, specifically replacement tire markets. For the rest, mix is good. We are further moving to the high-performance tires up, though winter tires are weaker, significantly weaker than they have been in the prior year. This is one reason as well, your next question for Q4. Winter tires is part of it, obviously what we discussed about the U.S. before. Raw materials, we see a tailwind of EUR 90 million in Q3.
Adds up the total year to EUR 130 million tailwind. There is left to the EUR 200 million guides, another EUR 70 million for Q4. The content per car for the ID.3, I ask Bernard.
Yeah, we have not given a number on it, but I think if you just look at the content that's there and make your own guesstimates, Victoria, you could probably come to a pretty decent number. More important than just the number is probably the quality of the content we have there. You pointed out ICAS. Again, not in a position to give a specific number there, but it's a good chunk of content in there because the ICAS is not replacing just the conventional part that we would sell in there, but also other things that are in there. There's a lot more value, including software that's put in there, plus the integration work that we put in on that product.
Next one. Yep
Right. Next year, don't just look at the ID.3. A lot of these products will make their way throughout the entire MEB platform. You can scale that along the platform expectations as well.
Your question regarding discontinuing model lines, actually, we are not worried about that and don't see bigger impacts on our business for next year.
Great. Thank you.
Thank you.
Our next question is from Henning Cosman, HSBC. Your line is now open.
Good afternoon, Mr. Schäfer. Henning from HSBC. Thanks for taking the question. First of all, thanks for clarifying the EUR 200 million impact implied in the fourth quarter guidance. That's super useful to understand. Maybe just to clarify, in terms of how that continues on into 2021, or indeed it doesn't continue on. Would you just be able to confirm that therefore a number more similar to the Q3 margin or indeed the implied Q4, excluding that EUR 200 million impact, such a run rate is a more sensible assumption for the first half of 2021 as well. That's the first question.
Secondly, maybe still on the guidance, the free cash flow guidance is, of course, a little bit vague. When I assume that implies maybe a small inflow for the fourth quarter, that's still relatively uncharacteristic for you because you normally have quite a large inflow in the fourth quarter. Could you just talk about that, if that's just because you had effectively a pull forward of the working capital inflow into Q3 already, so naturally that won't repeat. That also includes some of the collection of receivables and the tires, or why you may only see a relatively small inflow in Q4.
The fourth question, if you allow me, around the Capital Market Day and the potential succession of Dr. Degenhart, is that all you can say anything about the press rumors around a potential supervisory board meeting in the middle of November, so potentially next week, to decide about a potential successor and the implications that may have on your Capital Market Day. If it does or doesn't happen, what that means for your midterm targets, which I suppose you were going to announce at that Capital Market Day. Any color around this would be super appreciated. Obviously in that context, we wish Dr. Degenhart very well as well. Thank you.
Thank you, Henning, for the wishes to Elmar Degenhart. I will give this to him. To your questions, the auto margin excluding the EUR 200 million, well, you can make your calculations how much the margin would have been there. I talked about some increase for new project software related. These R&D increases will stay. They will be there as well in Q1, but a bigger chunk of the rest should be clearing up in Q4 and then allow us for a cleaner start in 2021. The free cash flow guidance, again, I fully accept if we say more than zero, this is a big range, which is finally included in this number. We are in so far cautious as we have not a very good feeling about what happens at the year-end with payments coming from our customers, OEMs.
Actually, as this is an unusual situation, we saw quite different behavior in end of Q2 and end of Q3, and therefore, we would like to leave this open. In the end, with 30-40 days on average payment terms with our OE business, basically two months from OE business overall of whatever more, if you take all OE business in ContiTech and tires included, more than EUR 25 billion. This is a significant amount which might change the number, and this is why we are somewhat more careful on that. There is no principle change that Q4 for Conti in the midterms will stay, and already next year again will stay a strong cash-generating quarter. I think with the performance we see coming back as well in tires, Continental will be a company to generate nice cash flow starting next year again.
I know this is a little bit vaguer answer, but I hope that you understand at least why we are a little bit vaguer than we have been in the past for this. Capital Markets Day, you might understand I cannot give any insights on the decision about a successor for Elmar Degenhart. There will be a supervisory board meeting, by the way, tomorrow, and I think our supervisory board will do its job as they have to do to make sure that Conti is not running in these difficult days without any top management. There will be, hopefully, a decision in decent time. We assume that the Capital Markets Day will take place.
There are no rumors, no information from Conti side that this should not take place, that it should not include our strategy, that this should not include a strategy which is fully backed by a new CEO then, and that is not a strategy which would not as well provide midterm targets.
Thank you very much. I appreciate it.
Our next question is from José Asumendi, JPM. Your line is now open.
Thank you. Thanks, Wolfgang, and hi, Bernard. José, JPMorgan. Three questions, please. The first one on Powertrain. As we think about the dilution you have in margins due to electrification, how do you expect this margin dilution to progress in the coming sort of 12 months? Obviously, very, very strong margins on Powertrain, but that electrification side is waiting there. How do you expect that? Also, in the light of the very strong Powertrain margins, can you remind us of the logic of the Vitesco spin-off? That would be question one. Question two, a simple one, restructuring cash outflows, please, for 2020 and 2021. You mentioned them before. I wasn't able to catch them, the restructuring cash outflow. Question three, on VNI, the book-to-bill ratio looks challenged on the quarter, past two quarters.
Can you maybe explain in your own words, like what is happening, going on the quotes as you're pitching the products to the OEMs? What is changing within Continental to get that order book rising in the coming six, nine months and gain again that growth back in this division, which will allow it to rerate margins? Thank you.
The Powertrain electrification for sale is still not at breakeven. I think this cannot be the expectation, though we see this nice sales increase, and it will not be a breakeven in 2021. There will be a capital markets day of Vitesco as well, soon. This will be in January, I think. No, later.
In advance of the spin-off.
In advance of the spin-off. It's probably somewhat later, but this will give more details on that. It will stay negative, but it will be less negative than it has been before. We see an improvement in this negative margin, and this is helping the Powertrain margin to come back to the level which we have seen now. Already mentioned spin-off. We have explained when we delayed it, that this delay was only due to high-cost financing and volatile markets, capital markets. We do see this disappearing in 2021. This is our firm belief. Therefore, this delay, which we have, yes, is there, but we are fully working on a spin-off and respectively IPO for the business in 2021.
I think while you have an opinion on the markets, what I think we would all agree that the markets should be in a position and not be hindering to that. The VNI business book-to-bill ratio. Again, a similar answer to Advanced Driver-Assistance Systems. We are getting those orders which we wanted to get. Those orders which we did not book are those orders which we did not find a place on the market. We see this in a wide range of orders, that there was a delay in the last half year, a significant delay in orders, but again, no message from OEs. We are canceling a model which we expected to do. They are just delaying.
Some of the delays are still argued with words like, "We won't delay the start of production, we only delay the start of development," or in the end the placement of these orders to the market, so expected that R&D time is somewhat shortened, and therefore, should not be worrying. This book-to-bill ratio, therefore, in this year probably does not really make sense. Yes, expectation is to pick that up finally in next year, and I think lots of it in the first half already of next year. We do expect a stronger order intake there.
Cash outflow restructuring, please.
Restructuring, yeah, cash outflow.
Cash outflow. Yep.
Mentioned 2020, about EUR 100 million. We see for next year it's about EUR 700 million. It will be about, now this is quite an early number. We did not do the negotiations, but a number which is lower than that, but still significant in 2022.
Thank you very much. That helpful to keep.
Overall, Sorry?
Very helpful. Sorry, apologies. I cut you off there. Sorry. Please continue. Overall-
The overall cost will see the EUR 1.8 billion, which we have announced for the whole program are there, and you can probably expect something like 3/4 of that finally to be cash relevant.
Great.
The rest is impairments on assets which are no longer used in locations which are closed down.
Thanks. Thank you. Thank you very much.
Our next question is from Thomas Besson, Kepler Cheuvreux.
Thank you very much. It's Thomas Besson. I have three questions as well, please. The first one is coming back to the content you get on battery electric vehicles versus ICE. I understand you don't want to give it specifically for the ID.3, when you look at your overall contracts, can you comment on the difference between your BEV content and your ICE content, and split that between the core Conti and Vitesco, please? Tell us whether you believe that OEMs are in a trend of reinsourcing these products or not. That the first question. The second, you've mentioned the possibility of additional one-offs in Q4. You're already, if I look at 2019 and 2020 year to date, at EUR 4.5 billion. Can you give us an idea of the magnitude of the one-off we could see still in Q4?
Is it going to be a small quarter, or could it be meaningful again? What of these one-offs do we get structural benefits for Conti already, please? Last question, probably a bit more difficult. You say we are in an extremely volatile environment. I fully agree. Can you share with us your thoughts about Q4 development? Do you believe you have a strong grip on where the quarter is going to end, we are already in November, or it's not clear? On 2021, how do you do your planning assessments? It looks like Q1 could be soft, but at least financial markets are hoping for a much clearer second part of the year. Is that your feeling as well? Do you still believe we can count on a strong double-digit global demand recovery in 2021, or is it too early to tell? Thank you.
Well, the share of battery electric vehicles where Conti is part of, I could not give you this number now, but in principle, many of the products we are delivering from AMS and VNI are not limited to only combustion engine or only electric vehicles. They can end up in both. I see no bias from us towards the one or other. We are very successful, as you saw on the example of the ID.3, to come into plug-in hybrids as we are into pure electric vehicles. Obviously, this is for Powertrain, it's a different story as they concentrate on the electrification in their strategy. Therefore for them, the order intake is very much driven. I mentioned this one big order for these box, high voltage box, which they do, where you see that these are big orders which come in finally ending up in electric vehicles.
For them, obviously, it's a completely different story. Yes, they have in their order intake a much higher share than the market is for the electric vehicles than they do have for the combustion engine. This has to be to support their electrification strategy. Yes, it is supported with their order intake. The one-offs, if I understood this correctly, for restructuring in Q4, if you do the math, it is roughly EUR 400 million or so missing still in Q4 to get to the EUR 1.2 billion, which are missing to get to the EUR 1.8 billion in the end. We just don't quantify the number. This is, in the end, IFRS-driven. We need a certain stage of negotiations with our counterparts in the unions or in the local representative of the employees.
It might be that the negotiation is only at the 5th of January, and so in a state that we could book it or it might be already at the 20th of December. Therefore, we leave it up. The overall number is confirmed. It is this EUR 1.8 billion. You know the numbers, I mentioned them, which were booked already. There is a leftover, and this either all ends up in Q4, this is what we would like most, or part of it still might be in Q1 or Q2. The volatile environment. Not sure I completely understood the question, Thomas, correctly. Yes, we would agree on your assumption that probably the first half of next year is the one which still might be more volatile as lockdowns and impacts from the epidemic, COVID, might be there.
My personal expectation is as well that in the second half of next year, we probably with vaccination or other remedies, the legislation and states can be more eased on any restriction, and then we should come back to a type of normal life, and then the people might and should come back to a more normal consumption, probably with some pent-up demand. Yes, it could be a strong 2021. Not giving a guidance now for 2021. It is still volatile as you rightly described it.
Thank you very much.
Our next question is from Horst Schneider, Bank of America. Please go ahead. Your line is now open.
Good afternoon, thanks for taking my question. Hello, Schäfer. I have got just a few left. The first one is regarding the sequential operating leverage that you also highlight on one of your slides. Can you maybe give us more thoughts how we should think about this operating leverage basically for the future? I know in Q4 you have got this R&D issue and probably also you have got some reversal of SG&A at some point of time. On the other hand, you are cutting some stuff and the general level of cost should decline. Basically, some guidance, how we should think about this operating leverage going forward, that would be helpful if maybe the Q3 factors are even representative here for the next few quarters. On Powertrain, impressing outperformance 6% in Q3.
I think large part of that is due to that electrified content that you supply. Can you maybe separate this outperformance between ICE and EV content? I want to get the feeling to which extent you are still outperforming due to the ICE business. The last question that I have relates again to production outlook, because it strikes me you are something like 1%-2% below the current IHS forecast. You see already that some car makers are leaving earlier for plant holidays just because some regions are again affected by lockdowns. Thank you.
Thank you. Operating leverage. Schneider, I accept fully the question obviously to make your own range guidance for 2021, but please wait until we do the guidance for 2021 before we do some calculation. Obviously, this leverage from Q2 to Q3 cannot be the leverage which we can expect for the rest next quarters, because there we had this great effect of completely unutilized sitting there, production sites, filling them up again, always a high leverage. You are already on a much closer to 100% level and then moving up. The ICE outperformance, I think, was slightly positive in Powertrain. I think it was around 1%, while the electric outperformance was very significant. Therefore, good news regarding their strategy. Finally, the last question was on the Sorry.
Production.
It was on production out of Q4 versus IHS.
Yeah, production out for Q4. It is somewhat for us still, I would answer twofold. One thing a little bit from more operational. Actually, when we said the -4% to -6%, the sales which we saw for our automotive division were slightly lower than what we have now in our guidance. Actually, with what we show as sales in automotive for Q4, we are more at the better end of our guidance than on the worse. This gives an indication that in the last days, we are seeing less of these factors which lead to the -4% to -6%. We are seeing less of them. Nevertheless, we still have the one or other indication from OE locations that there might be earlier or longer vacation breaks around Christmas time.
This is, I think, a little bit the background of our guidance still shows here that there is, for us as well, some uncertainty in what is going on even in the next four weeks.
Mm-hmm. Regarding this operating leverage again, can you at least maybe quantify the one-off costs which will not repeat again in the next few quarters? Again, regarding Q3.
Well, we talked about the Q4 guidance, and I mentioned these EUR 200 million.
No, not one-off cost. I mean more one-off benefit. Sorry, I was not clear.
You talk about things like cost optimize.
Yeah, correct.
effects.
Yeah.
I think one way to look at it is, we've guided to you what we have in terms of fixed costs, savings targets for the full year. You see the development it's been for the nine months, right? Obviously, the fourth quarter with pretty normally or, in these times, quite normal production levels, that those effects are starting to fade. That is, I think, the first indication for you what is short-term in nature. Plus, of course, things like raw materials would not be sustainable.
Okay. Thanks very much.
Our last question is from Tim Rokossa, Deutsche Bank. Please go ahead.
Thank you very much. Good afternoon, Mr. Schäfer. Good afternoon, Bernard. I'd like to come back to a couple of questions that were already raised by the previous speakers. That is firstly on the production outlook that you've given for Q4. We had the same discussion with your Q3 production outlook, Mr. Schäfer, on your Q2 call. Also back then when you projected -10% to -20%, you actually said that it rather looks a bit more dull and the last couple of days, maybe a little bit better, but the run rate was rather -20% than -10%. That was middle of August, and it ended up being more like -7% or -8%. Why do you think the reality that we see now for a couple of quarters versus their previous expectation is so different?
Is it just that you approach this very conservative? Is it because the customers of yours leave you very much in the dark about call-offs and much more than they used to be? Or is it really just that internally you plan for very different numbers, than you put on these slides? Secondly, when you think about R&D costs, now you spoke about a bit of an escalation for interesting opportunities on the software side in Q4. I think obviously everyone would want you to go for any interesting opportunity that's out there. You already spent quite a bit of money on R&D now, and that number does nothing but going up for a number of years now. I assume there will be many more interesting software opportunities down the road for you over the next couple of years.
Can we expect to see R&D as percentage of sales even increasing? Would that be one of the responses also from the midterm targets that you tell us about at the Capital Markets Day? As a final question, a little bit into Gabriel's and José's question as well, I think that the case for Vitesco now gets increasingly clear after this was so disappointing for many years, and there's certainly a lot of guys that want exposure to that asset. The rest of auto is increasingly looking a bit difficult, and when I now hear that the HMI issues are lasting into 2023, I think a lot of people will ask themselves how you can fix other auto or rest of auto ex Powertrain. Do you have any thoughts on that already? Thank you.
Well, production outlook, Rokossa, yes, probably it is too careful. This is what I wanted to say, that we have increased our sales expectation for this quarter in the last days. This is included in the guidance. We are probably more at the upper end of the -4% to -6%. To my knowledge, we are not so different with this from expectations of other automotive suppliers. Your question basically, are we constantly wrong with our estimations? I don't think so. We might have been more on the careful side in the last quarters, which actually in such situation as a company, I think you should be to be prepared for the worst, as this is the scenario which is then the more challenging as if it comes the other way around.
R&D in percentage of sales, well, obviously next year we expect the R&D quota to go down. This is clearly linked to increasing sales expectation versus 2020, where R&D will definitely not increase in the same amount. R&D overall still will increase as the products are more R&D intense and more software including. The actual quota R&D to sales should stay for automotive overall, should stay on the level which we are seeing at the moment. In a normalized year, not in a 2020 year. Well, the answer to VNI, this is twofold. One question is: When is the restructuring of the Babenhausen plant and with this, the whole HMI topic resolved? This moves until 2023. Now, this was the answer I wanted to give before.
When do we get out of this negative impact on the outperformance from this part on the company, or at least on the VNI business overall? This I think should be in 2021 finalizing and then already starting 2022. In 2022, we should finally see the positive impact of new orders can be seen out of the top-line development versus what we see at the moment.
That's very clear. Thank you.
Our question and answer session has been concluded. I will hand back to the speakers.
Thank you, operator. Thank you everyone for participating in today's call and cooperating on timing. As always, the IR team is here available for any further questions you may have. Thanks again, most importantly, please stay safe and healthy. Bye-bye.