Continental Aktiengesellschaft (CON) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Continental. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Bernard Wang, who will lead you through this conference. Please go ahead.

Thank you, operator. Welcome, everyone, to our 9-month 2020 results presentation. Today's call is hosted by our CFO, Wolfgang Schafer. 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 3 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 Schafer.

Thank you, Bernard. Let me begin today's presentation on Slide 3, 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 and North America production was able to slightly beat its prior year level. Europe remains the lagging region at minus 8% with our key German and French markets down by 16%, respectively, 23%. We attribute these weak production levels to conservative inventory management by our European customers [ pressed for ] 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 our businesses and regions. In parallel, we maintain strict management of our cost 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 impairment is attributable to acquisitions we made before 2008. Slide 4, 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. And on September 3, the 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 '23. Onetime 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 '21, while the amount in '22 should be somewhat lower. And 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 5. Many of you are already aware that our ICAS high-performance computer of the whole vehicle connectivity is at the heart of the new electronics architecture of the ID.3. It has [ what's ] called 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 brakes, components for thermal management of the battery as well as vehicle-specific summer, winter and all-season tires, featuring the Conti's [ serious ] technology. These products demonstrate the importance of our technologies in enabling key applications such as electrification, autonomous driving and networking. The next highlight to Slide 6 shows how Vitesco Technologies continues to strongly benefit from increasing demand for electrification. Two recent successes in this area shown here. First, we have been seeing very solid demand for our EMR3 E-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 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 7. Reported sales in the 9 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 totally -- totaled minus 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 minus EUR 1.168 billion as well as trailing ROCE, which was minus 4%. Free cash flow, excluding acquisitions and carve-out effects, came in at EUR 105 million, as the negative working capital effect 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 million at the end of September. Let me now move to the Q3 performance by group sector, starting on Slide 8. 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 the 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 14%. This was much better than the incremental 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 9. 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 North -- 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. Now 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 negative EUR 123 million from our Chinese HBS joint venture and FX effects. Organic growth was minus 5%. Weak sales in Europe, particularly in Germany, was the main reason for the decline by 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 evidenced 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 1-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, #11. Organic growth at VNI was at minus 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 fixed cost 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, restrained 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 only slight decrease in volumes of 1.8%, which was ahead of the more negative conditions in vehicle production in replacement tire markets I described earlier. But the bigger growth driver was we saw the 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 a 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 solution 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 Spring. 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 at 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, or 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 products as well as our high-voltage E-axle driver, is especially impressive. Moreover, the business units' electronic controls and sensing and actuation also outperformed light vehicle production. Adjusted EBITDA 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 strength 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 financing, cash flow, the outflow of EUR 1.6 billion reflect the payment of the EUR 600 million dividend this year in Q3, the redemption of the 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. And after the redemption in September, the next bond maturity of only EUR 200 million will be in 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. Though 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 re-initiation of social and movement restrictions in many of our key geographic, 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 impacts from the ongoing COVID pandemic on production, the 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 minus 4% and minus 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% to 14% globally. Meanwhile, truck replacement tire volumes in Europe and North America are expected to be only slightly below the previous year's level. And 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 3 automotive business areas, consisting of AMS, VNI and Powertrain, are expected to be around EUR 22 billion. The full year adjusted EBIT margin is expected to be around minus 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 to '29 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. So 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. Largely, while free cash flow before acquisitions and excluding carve-out effects is expected to be positive for fiscal 2020, the value is expected to be significantly lower than in the prior year. And with this, I would like to conclude today's presentation, and I open the line now for your questions. Thank you.

[Operator Instructions] Our first question is from Tom Narayan, RBC.

Tom Narayan, RBC. I have 3. The first one is on tires. It seems that you gained market share in replacement 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? And do you expect this to return in 2021? And then third, what was behind the decision not to do fuel cells? And 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?

Tom, the first question, tire 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 this in the last call, we have this situation that tire dealers narrow in their cash positions. They 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. And this makes us, and those which are producing within Europe, the more attractive partner for them, as we obviously can deliver those more a lot. There is some gain in the North American market, but main topic, yes, 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 if not, that we would get not those orders which are on the market. The customers are -- 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, it's just capacity, which they have available for it, as say, 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, to your last question. We have, by the way, fuel cells overall in a car. It would give many opportunities as well for ContiTech. As if you look at a fuel cell car, the whole lining and traction of the engine, including the fuel cell elements is, at least for those products, which ContiTech is delivering closer to the 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 past car vehicle side. And yes, we are working on that.

Our next question is from Gabriel Adler, Citigroup.

It's 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 lower R&D reimbursement, how much capitalization and how much were into provisioning? And then 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 expectation to the transition going forward when it will be complete and when the drag on growth from the changeover should begin to ease? And then my last question is on tire replacement outlook. And 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% to 6% given the margin was flat in Q3? The reasons there would be helpful.

To start with margin pressure on automotive, actually, you gave the right answers already. Specifically in Q4, we see 2 topics. One, this is more on the Powertrain Vitesco business, which is 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. And 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 reimbursement. They are, by the way, partly helping a little bit in Q3. So some of them were higher. And then we have -- we do see a bigger software project, which are there, which overall, put some pressure on R&D -- overall R&D jobs, which have to be done. So these 2 R&D on the one hand side and warranty on the other hand side together are those which are having 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 in, but it's somewhat 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 overcompensated by this reduction. The last question I have not fully understood. I just -- out here in the room, if they could just help me out.

It's Bernard here. So your question is about tires in North America, right?

Yes, exactly, the slowdown in Q4 of volumes.

Yes, this is just based on our own channel checks in our field for how the demand has been developing. We don't see the growth yet in Q4 the same way we saw it in Q3. I mean we can maybe take a shot at different hypotheses, right? 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 the Q3. Thus, leaving a little bit less for Q4 there. But I mean, so far, it's -- the indication from October is that it's a little bit slower than it was exiting Q3.

Our next question is from Victoria Greer, Morgan Stanley.

Yes, just on the tires, first of all, quite strong mix quite -- strong price/mix in Q3. Could you talk about the drivers for that, please? And then 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? And if you could comment also on tires' raw materials for Q4, that will be helpful. And then 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? And then 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 under 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?

Thank you, Victoria. These were more than 3 questions with on the questions with under-questions on the 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. And this is always a comparison to prior year, this price/mix. And in prior year, you might remember, we saw quite some price pressure in Europe, specifically in replacement tire markets. And for the price/mix, it's 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. And this is one reason as well your next question for Q4, winter tires is part of it. And obviously, what we discussed about the U.S. before. Raw materials, we see a tailwind of EUR 90 million in Q3. It's up then, the total year to EUR 130 million tailwind. And then there is left to the EUR 200 million guidance, another EUR 70 million for Q4. And the content per car for the ID.3, I'll ask Bernard.

Yes, 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, 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 replaced. It's just the conventional part that we would sell in there, but also other things that are in there. So there's a lot more value, including software that's put in there, plus the integration work that we put in on that product. You asked about the next one, so the next, next year that -- I mean, don't just look at the ID.3, right? We -- a lot of these products will make their way throughout the entire MEB platform. So you can scale that along the platform expectations as well.

And to 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.

Our next question is from Henning Cosman, HSBC.

Henning from HSBC. First of all, thanks for clarifying the EUR 200 million impact implied in the fourth quarter guidance. That's super useful to understand. And maybe just to clarify in terms of how that continues on into 2021 or 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. And secondly, maybe still on the guidance, the free cash flow guidance is, of course, a little bit vague. But 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, and that also includes some of the collection of receivables and the tires, or why you may only see relatively small inflow in Q4? And the fourth question, if you allow me, around the Capital Market Day and the potential succession of Dr. Degenhart, if at all, you can say anything about the press rumors around the 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? And 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? And any color around this would be super appreciated. And obviously, in that context, we wish Dr. Degenhart very well as well.

Thank you, Henning, for the wishes. So Elmar Degenhart, I will give this to him. And 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. This 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 0, this is a big range, which is slightly included in this number. We are, in so far, cautious that we have not a very good feeling about what happens at the year-end with payments coming from our customers, the OEs. 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 and, in the end, should be over 30 to 40 days on average payment terms with our OE business. Basically 2 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 in that, and there is no principal change that Q4, for Conti in the midterms, will stay, and already next year, again, will stay a strong cash-generating quarter. And 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. Careful, [ as you saw ] and all this is a little bit vaguer answer, but I hope 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 the 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 days -- in these difficult days without any top management. And so there will be, hopefully, a decision in a decent time. And we assume that the Capital Markets Day will take place here in [ our room ]. There's no information from Conti's 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 the new CEO then, and that is not a strategy which would not, as well, provide midterm targets.

Our next question is from José Asumendi, JPM.

José, JPMorgan. Three questions, please. The first one on Powertrain. And 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 the electrification side is waiting there. So how do you expect that? And then 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 1. Question 2, simple one, restructuring cash outflows, please, for 2020 and 2021. You mentioned them before, I was not able to catch them, the restructuring cash outflow. And then question 3, on VNI, the book-to-bill ratio looks challenged on the quarter, past 2 quarters. Can you maybe explain in your own words, like what is happening, going on, on the quotes on as you're pitching the products to the OEMs, what is changing within Continental to get that order book rising in the coming 6, 9 months and gain again that growth back in this division, which will allow us to re-rate margins?

Powertrain electrification, José, 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 would be in January, I think.

No. In advance of the spin-off.

In advance of the spin-off. So it's probably somewhere later, but this will give more details on that, but it will stay negative, but it will be less negative than it has been before. So 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 a high-cost financing and volatile, capital markets, we do see this disappearing in 2021. This is our firm belief. And therefore, this delay, which we have, yes, it's there. But we are fully working on a spin-off and respectively, IPO for the business in 2021. And I think while you have an opinion on the markets, but I think we would all agree that the market should be in a position and not be hindering to do that. The BMI business, book-to-bill ratio. Again, a similar answer to advanced driver system. We are getting those orders which we wanted to get. Those orders, which we did not book are those orders which the OE did not find any 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. And 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, replacement of these orders to the market. So expected that our lead time is somewhat shortened. And therefore, should not be worrying at 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. So we do expect a stronger order intake there.