Continental Aktiengesellschaft (CON) Earnings Call Transcript & Summary

Welcome to Continental AG Results 9 Months 2022. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand over to Ms. Anna Fischer, who will lead you through this conference. Please go ahead.

Thank you, Lydia, and welcome, everyone, to our Q3 2022 results presentation. Today's call is hosted by our CFO, Katja Durrfeld. Small reminder, that both 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 kindly ask you to limit yourself to no more than 3 questions. This will help us conclude our call on time. With that, let me hand over to you, Katja.

Thank you, Anna. Let me begin today's presentation on Slide 3 with our most important KPIs and the group highlights for Q3. Reported sales came in at EUR 10.4 billion, 29.3% above last year's comparable period. Excluding supporting exchange rate effects of EUR 519.5 million and changes in the scope of consolidation, organic growth was 22.8%. Weighted by our regional mix, Automotive organic growth was able to significantly outperform vehicle production by 10%. Adjusted EBIT increased year-on-year by EUR 193 million. The adjusted EBIT margin was 5.8%. Price negotiations with our customers for Automotive, Tires, and ContiTech progressed further to our satisfaction. We reached agreements on retroactive price increases, which are clearly reflected in sales and in the quarter's earnings. For the fourth quarter, we expect further negotiation effects in Automotive. This shows clearly, we are progressing well and delivering our promises. Special effects totaled negative EUR 550 million, mainly due to higher interest rate and other valuation related effects, the value and use of one cash-generating unit within Automotive was lower than the carrying amount of this cash-generating unit. This resulted in a noncash impairment of goodwill amounting to negative EUR 498 million. Free cash flow, excluding acquisitions and divestitures, came in at negative EUR 496 million. Main contributors were again the high level of working capital as well as high capital expenditures on property, plant and equipment and software. Net income after tax decreased year-on-year by EUR 520 million to negative EUR 211 million. Trailing ROCE came in at 2.6%. Let me now move on to the performance by group sector, starting on Slide 5. In Automotive, we see a very strong increase of 34% in the year-on-year organic sales and margins improved by 500 basis points to 2.7%. Both, of course, were strongly supported by the price agreements concluded in Q3. These came in as a rollover from agreements concluded in the previous quarters, but also from newly signed contracts, which have as well a retroactive effect to January 1, 2022. Please note changed figures for organic growth at Tires and Contract Manufacturing. Sorry for the bug in the first version. In tires, organic growth of -- note the new value -- 15.7%, mainly reflected the strong price mix in the replacement sector. The adjusted EBIT margin decreased by 190 basis points to 11.8%. Positive effects on the top line were almost compensated by higher inflation effects in Q3. At ContiTech, the organic growth of 16.4% also reflects positive effect from price agreements, especially with Automotive OEMs. Adjusted EBIT increased by 30 basis points to 6.2%. Finally, Contract Manufacturing declined as expected year-on-year, in line with the gradual phaseout of its business with Vitesco. Now continuing with the review, Q3 sales and adjusted EBIT on Slide 6 (sic) [ Slide 5 ]. Automotive sales totaled EUR 4.9 billion. The impact from FX was a positive 7.2%. The organic growth of 34%, coupled with the 2.7% adjusted EBIT margin, Automotive have improved significantly compared to the previous year. Key drivers for both were, as already mentioned, the new price agreements in place as well as higher content per vehicle. Inflation headwinds were just below EUR 300 million. Autonomous Mobility reported sales total to approximately EUR 0.6 billion and showed an organic growth of 46.9%. This was mainly driven by stronger volumes from material shortage recovery in radar and camera business. Safety and Motion reported sales totaled around EUR 1.8 billion and showed an organic growth of 34.6%. It's encouraging to note that volumes for new brake system generations continue to rise. The new business unit areas, Architecture and Networking, Smart Mobility and User experience, reported sales totaled around EUR 2.6 billion and showed an organic growth of 30.4%. Sales were mainly supported by stronger volumes in the area of connectivity products and display solutions. Negative impacts from FX affected the bottom line. Let me now review organic sales performance for Automotive versus regional vehicle production in the fourth quarter on Slide 4 -- Slide 7 (sic) [ Slide 6, ] I'm sorry. Segmented by region, Automotive organic growth was able to again significantly outperform vehicle production in our important European market as well as in China. Our organic growth in North America in Q3 was slightly below local vehicle production, mainly because of customer mix in this region. In the full year view, our performance was absolutely in line and even slightly better than light vehicle production in North America. Overall, Automotive outperformed its regionally weighted average by around 10 percentage points. The strong outperformance was mainly driven by the significant effects from increased customer pricing, but also by high content per vehicle. We continue to expect overall uncertainties and volatility in the market to persist for the remainder of the year. Turning now to the order intake in Q3 2022 on Slide 9 (sic) [ Slide 7 ], we see a very pleasing total order intake at Automotive of more than EUR 6 billion lifetime sales. Let me today begin with our business area, Safety and Motion. Here, we achieved an order intake of EUR 2.3 billion lifetime sales. Our absolute highlight was winning the very first large strategic award valued at around EUR 1.5 billion lifetime sales within our value business with a very innovative product: a semi-dry brake system. With this, we reached a milestone in the development of future brake systems. The start of production is planned for 2025. In addition, our business areas, Architecture and Networking, Smart Mobility and User Experience continued the success stories and showed again a noticeable order intake of 3.5 -- EUR 3.1 billion. The biggest wins related to two orders for our innovative pillar-to-pillar display solutions and OLED multi-displays within our UX action field and for other business wins for body control units. Autonomous Mobility achieved an order intake of EUR 0.8 billion in the third quarter. Besides the continuing solid order intake for radar sensors for European and Asian customers, we were able to win awards for camera business. I will now continue with Tires on Slide 10 (sic) [ Slide 8 ]. Reported sales increased by 21.8%. Organic growth was up 15.7%. The impact from FX was 6.1%. Overall, volumes decreased by 4.7%. This was mainly due to a decline in market volume, which was undoubtedly attributable to restrained stocking by dealers due to full warehouses as well as fears of a decline in consumer willingness to buy. Price mix was very strong at 20.4%, with around 2/3 attributable to price increases in the first half of the year. Adjusted EBIT increased by EUR 21 million equating to a margin of 11.8%. The positive margin effects from FX effects and the strong price mix in the top line were almost completely eroded by higher inflation, and wage and salary increases. The margin was again supported by a positive high double-digit amount from inventory valuation. For Q4 of this year, we expect a sequential decline in margin compared to Q3 due to further rising inflation, a further decline in volumes, a poorer mix and a significant reduction of inventory valuation effects. Moving on to ContiTech on Slide 11 (sic) [ Slide 9 ]. ContiTech showed a solid organic growth of 16.4%, mainly supported by price effects with Automotive OEMs, but also with industrial and aftermarket customers. Especially our business areas, Advanced Dynamics, Mobile Fluid Solutions and Surface Solutions showed pleasing development. Profitability was highly impacted by still increasing inflationary headwinds from raw materials, energy and logistics of around EUR 170 million. Positive contributions came from the pricing agreement. Since closing on July 1, the acquisition of WCCO Belting, LLC, USA, a manufacturer of belts for the agricultural and industrial business, has strengthened the customer and product portfolio of our agricultural business in the Conveying Solutions business area, and thus, the strategic growth area of highway. Let me now continue with the overview of free cash flow for Q3 2022 on Slide 12 (sic) [ Slide 10 ]. The main driver for the decrease of the operating cash flow from EUR 278 million to EUR 113 million, [ still ] were strong working capital headwinds from higher accounts receivables resulting from strong sales volume in September and pricing agreements, as well as the high inventory levels, although these headwinds were partly compensated by the noncash impairment of goodwill. The negative investing cash flow of negative EUR 702 million was mainly influenced by high capital expenditure on property, plant and equipment and software in all sectors, but also by acquisition of companies and business operations, like, for example, the acquisition of WCCO Belting, LLC, USA at ContiTech. Let me now move on to our market expectations for 2022 on Slide 13 (sic) [ Slide 11 ]. Our expectations are based on currently foreseeable effects. In the event the geopolitical situation, in particular in Eastern Europe, remains tense or worsens, it could result in further lasting consequences for production, supply chain and demand. In addition, further negative effects may result from the ongoing COVID-19 pandemic as well as possible disruption in the energy supply in Europe, particularly in Germany and the associated supply situation. We continue to anticipate year-on-year increase in light vehicle production by 4% to 6%. For commercial vehicles, we see a significant recovery in the market and now predict that production in 2022 will be between minus 2% to plus 2% in Europe and increase by 8% to 12% in North America. For passenger car replacement tires, we slightly decreased our expectations for our key markets and now expect the worldwide decrease in demand to be minus 3% to minus 1%. For truck tire replacement demand, our expectations remain unchanged in Europe and for North America. We lifted our expectations to 4% to 6%. For the industrial production, we slightly reduced our expectations for the Eurozone and lifted it for the U.S.A. Let me turn now to our outlook on Slide 14 (sic) [ Slide 12 ] and let me only point to the few adjustments we've made. We have decreased our expectation for the inflationary headwinds in Tires from around EUR 1.9 billion to around EUR 1.8 billion, resulting in a adjustment of cost inflation for the group from around EUR 3.5 billion to around EUR 3.4 billion. This decrease is exclusively due to lower volumes. As less is produced, less cost will incur for material and energy. Nevertheless, we expect higher sales and the adjusted EBIT margin to be at the upper end of guidance. With the first 9 months behind us, we can predict more precisely and have adjusted the guidance for the free cash flow. We have lowered the upper limit and narrowed the guidance from EUR 600 million to EUR 1 billion to EUR 600 million to EUR 800 million. Furthermore, we have adjusted our expectation for special effects from around EUR 650 million to around EUR 1.2 billion due to the extraordinary noncash impairments occurred in the third quarter. This does not affect the outlook for adjusted EBIT margin. The expected tax rate for 2022 was updated from 27% to 40%, taking into account nondeductible one time effects for this year. But now let me conclude the presentation with a message that we confirm our outlook for 2022 that we published on May 11, 2022, for sales and the adjusted EBIT margins as well on group as also on sector level. With this, I would like to end today's presentation. Operator, can you please now open the line for questions?

[Operator Instructions] The first question comes from Tom Narayan from RBC Capital Markets.

It's Tom Narayan, RBC. I have 3. On Automotive first, your 2022 market guidance is below IHS across all the geographies. I know you're not going to give 2023 market outlook today. But I'm curious to -- as to what you are seeing so far and how your order books look into '23? We've heard some cautious commentary out of BMW and Stellantis last week. And then on Tires, I've got 2 questions. One, you again had some one-offs in the quarter that benefited the Tire EBIT. I think it was a high double-digit million level. Just curious if these are now complete? Or should we expect more one-off benefits in Q4 into 2023? And then finally, your 2022 replacement tire market guidance for Europe suggests a down shift, I think, in Q4. Just curious what's going on there. I know Michelin called out Asian tire imports and a mild winter impacting winter tire demand, but just love to hear some color on what you're seeing in the replacement tire market for the rest of the year?

Okay. Thank you very much for your questions, Tom. Let me see. First question was about order books, more or less how we see it. So in general, currently, we do see a strong order book for us in Continental. For the time being, you've also seen that we have been able to outperform the market during the course of the year so far quite well. So for now, we don't have anything -- any indication to believe that there will be any negative impact on us on short term. When you are talking about Tires, first question was about the valuation effects, and if we are done so to say with this. That's a question I can't answer you entirely at this point in time, it's still a little bit too early to talk about the Q4 figures. Yes, so that remains to be seen. And for the replacement tire demand, I think already in Q2 we indicated that we do see a weaker demand in the second half of this year due to some consumer confidence going down and full stock levels at the one or the other dealer or in between. So far -- because you especially addressed the winter tire business so far, we've been kind of satisfied with the winter tire business with the start of the winter tire business, but we definitely do also look for our [ less mild ] temperatures in Europe, for example.

Okay. And just a quick follow-up on the guidance for the replacement tire. I mean, are you seeing these imports of Asian tires coming in like Michelin was calling out? Is that something you've noticed too?

Well, the competition from Asia has always been there. They also have to cope with the high material costs and also with the logistics costs when entering the European market now. We do see this mainly not for our high-quality brands, Continental. But we see that more on the lower brand side. You know that especially for winter tires, for example, quality and technological competence make a strong difference for the buying decision. And therefore, yes, they are there. But especially for our strong premium brand business, we don't see that affecting us too much at the moment.

The next question comes from Giulio Pescatore from BNP Exane.

The first one on Automotive, first of all, well done on getting the margin back in the green. But I was wondering if you can help us quantify how much of today's margin is recurrent and how much is linked to the previous quarter? I appreciate that you've been unwilling to comment on compensation, but it is one pushback we're receiving a lot. So it would definitely help to know that the margin is moving in the right direction also on a sustainable basis. The second one on Tires, going back to the revaluation of inventories. Is it fair to say that mechanically, if next year, raw material prices would start to decline, then you would have a similar negative effect? And are you going to -- do you have any expectations in this regard based on today's spot prices? And then the last one on free cash flow. I mean inventories and receivables are at a record levels in Q3. I know that there is a seasonal element to your Q4 that should help you offset or reverse these trends. But can you help us bridge the various elements, because your guidance does demand for a large working capital inflow in Q4. And anything you can give us there would be much appreciated.

Okay. These were a lot of questions. I hope I got it all right. So we were asking about the positive development of the operational Automotive margin. And I think you tried to understand how much of the development is linked to which piece of the business, so to say. So in general, it is that this business is stronger in the third quarter due to multiple effects. A main effect are the price agreements that we've made, but we also benefited from higher volumes in the third quarter, and we also benefited from content per car. Yes, so also there, we did see some positive effects in the third quarter for Automotive. Then you asked about Tires, if I have any indication that for next year, the inventory valuations could become negative. Just looking at the normal way of how we do the valuation effect, for sure in case material prices would drop significantly, there would have to be something expected for next year. And the last question you had was about the free cash flow and with inventory and receivables being on record levels, that's true. And we've already initiated multiple measures, not only this month, but already before to make sure that we will be able to achieve what we have promised also on the free cash flow side. If you look what impacts us at the moment quite significantly are the price agreements that we have achieved in the third quarter of the year, which has not all come in as cash so far. But it also -- because we had a very strong September of the sales side, that also affected our receivables. On the inventory side, we are clearly differentiating between critical component inventories, which we want to build up and which we want to stay, because we try to stabilize, or we do stabilize our supply chain. And on the other hand, the noncritical components, where we have a strong plan on managing that.

Okay. Can I just follow up on the point you made on Automotive? So did you say that the majority of the improvement was linked to pricing. Is that correct? Sequentially...

That is correct. Yes. Yes.

Okay. And how much of that was recurring? And how much is linked to previous quarter's compensation? Can you give us an idea?

So if you would look at the -- if you do look at the year-to-date results, you see that Auto right now is at a negative 1% EBIT-adjusted margin, yes. This reflects the combined efforts of all the negotiations from the beginning of the year. If we look at the price increases and if we would eliminate the retroactive aspects that we booked now in Q3, you could see that way that Automotive is around breakeven in the third quarter. However, each quarter, as you know, has also a few other effects as I just mentioned them as well, so that the math isn't that easy, yes. We are still expecting effects from further negotiations, which are taking place in Q4 this year as well.

Okay. Very helpful. So breakeven in Q3 without the retroactive.

The next question comes from Horst Schneider from Bank of America.

Horst Schneider from Bank of America. Can you -- again, sorry, I need to come back to Automotive again. When I look at the full year guidance and deduct the first 3 months, then basically, I get a pretty wide range for the fourth quarter. So I think it is something like breakeven to plus 6%. And assuming now that Q4 should be sequentially stronger, so can you confirm that you expect Automotive sales range to be rather at the top end now? And with that also, it's certainly fair to assume that Q4 should be again stronger than Q3. So if you can give any indication if the pricing impact would be higher again in Q4 than Q3, that would be helpful. And again, coming back to cost headwind. I mean, we all know the guidance for the full year, can also back out what that means for Q4. But can you also confirm that then finally, at least material cost inflation should get off then after Q4? Because I think Q4 will still be a quarter basically where the year ago basis is much lower, but it should get better thereafter, if you agree to that. And then the last one is on general big picture and guidance. I mean you hosted the last CMD, that was end 2020. Since then, a lot has happened at Conti and in the world. So do you consider to host maybe a new event in 2023 where you update your whole framework?

Okay. So let me see. First question was on the Automotive full year guidance, which we guided at minus 0.5% to 1%, yes. So that's what you can look at. If you look at the year-to-date figures after 9 months is that we do expect the fourth quarter to also be a strong quarter with continued improvement for the next year. So this will, as I just mentioned, come on the one hand with the sustainable price increases that we have already recorded, which will come into -- which will have their sustainable effect side, so to say, in the fourth quarter, plus it will also come from additional agreements that we're still concluding at the point in time plus sales effects, regional outperformance to continue. That was the first question. The second question was about, I think, material cost development, the cost inflation, if I see cost inflation coming down or coming to an end for this year. And now I need to give a nice answer, which means, it depends. It depends on which sector we are looking at. If you look at certain indices, for example, on rubber side, we do see an ease for example, for natural rubber, but also for selected other materials, so to say. These eases on price will not have an effect on us for this year anymore due to the long lead time, for example, for natural or synthetic rubber, but there will be some ease coming up. I can also not confirm that there will be no more price inflation -- I mean, cost inflation for next year. There are, again, some effect that might just -- looking at energy, looking at wages and salary topics, et cetera, et cetera. But I can confirm that we will address these additional headwinds to our customers, and we've already informed them that we will be talking about it. And I think the third question -- I'm sorry.

CMD?

We will inform you -- inform you in due time.

Okay. That sounds like a yes. But on Automotive revenues, you have not answered to that. So Q4 revenue is certainly going to be higher than Q3, right? The Automobile?

No, no, no, they will not be stronger in Q3. The revenues themselves, not.

Not stronger, so down. Okay. Okay. All right.

Your next question comes from Philipp Konig from Goldman Sachs.

Just I've got one follow-up on the Auto business to begin with. You mentioned the underlying margin running around breakeven. If we think about moving from that breakeven margin back towards the 6% to 8% eventually, I know you need -- clearly, volume is one big diver. But is price still another big factor that should get us really into the positive margins -- if we think about you mentioning incremental price negotiations into Q4, and then also into next year, if we think about some of the other inflationary items such as labor? And then the second question is on Tires. I know you already gave some details around you expecting the margin to come down in Q4. If we think about inflation beyond raw materials, I think, especially energy in the Tire business, is it fair to say that inflationary headwinds in the Tire business haven't really peaked out yet? And then my last question is something I think no one has mentioned is the order book, which actually looks quite encouraging to me. So maybe you can share a bit about what you're seeing on the order book side, what's been driving the strength? I think you just recorded a big win for your new brake system as well. Any more color there would also be very much appreciated.

Okay. That was [ a lot ]. So first question was about -- on midterm guidance of -- the 6% to 8% that we guided -- that we guide for Automotive, what does it take to get there? You more or less correctly summarized it. It will require volume. You know that we always linked it kind of to the volumes on the light vehicle production figures moving back into the 90 million arena. So that was one thing. Another thing that we -- that will definitely drive us getting there is the content by car development. So that's also an important factor with all the new technologies that we are now rolling into the car. We have a lot of ramp-ups now taking place in very relevant areas. Also, they will help us to drive the margin back to where it belongs. And the third point is, as I already said before, definitely, we will work on pricing in the future, and we will address inflationary headwinds to our customers. That's for sure also something that we definitely have in mind to look at. When we talk about inflation, and we've always said that in the second half of the year, Tire will have to face higher inflationary headwinds than in the first half of the year. That's the reason why we see a weakening of profitability for Tires for the second half. And that is still there. I just gave an indication that the -- one of the other raw material indexes is coming down at the moment, which will help us next year, so -- which will support us next year. But when you talk about energy cost, for example, or also wages and salaries, there are inflationary headwinds that we will see also affecting us in the second -- in the next year. So these are topics. And talking about the order book, I think the order book is something really great to talk about at the moment. We've just recorded order intake in total for this year of around EUR 18 billion, which is really strong, which is almost as much as we've recorded for the entire last year. So that's a very, very positive sign. Moving on,we've not only recorded that in one area, but we've also recorded that in multiple areas on the Automotive side and one thing I would really love to mention again is the Continental future brake system that we talked about, the EUR 1.5 billion lifetime sales, which operated more as the dry brake, so which means brake without the fluids, which ensures a greater sustainability as the brake fluid no longer needs to be changed and disposed, yes. But there are also some other advantages moving into the sustainability side. For example, there's systematic energy recuperation at the axle during each braking operation. So that is really a very strong sign that we've invested here and also in our brake system and to the right technologies of the future. And this is now also valued highly by our customers. But also the U.S. business, I spoke about. So we've shown a very, very strong order intake on the U.S. business, which we've turned from an analog business to a fully digital business. And now we have -- we're really benefiting from great order intake in that arena too. And also on the Architecture and Networking side, for example. So I'm very positive -- looking very positively into the future, Philipp, because I think we offer the right technologies to our customer of future mobility and that is what is appreciated by the customers at this point in time.

The next question comes from Thomas Besson from Kepler Cheuvreux.

It's Thomas Besson, Kepler Cheuvreux. I'll start with a candid question. Can you just give us the exact and detailed methodology you use for your quarterly inventory valuation for cars and also explain the methodology that is used for eventually writing off some of the assets in the components business? I've noticed this is happening more for German companies than, for instance, for French or Spanish or Italian companies. So that's the first question. The second, could you remind us how much of your European passengers car business is effectively in Tier 2, Tier 3 basically not with the Conti brand, but with your other Eastern European brand and someone that we are less familiar with than Continental? And thirdly, if I assume that things eventually normalize 1 day, maybe in 2024, let's hope so. What should we assume as a normal operating leverage for your Automotive business? If your revenues go up 10%, how much is your operating profit going to move up? So that we can try to understand more mechanically how we could get back towards the 6% to 8%.

Okay. Yes. So thank you, Thomas. Let me say one thing. For a really detailed breakdown on the quarterly inventory valuation effects, I would rather recommend that we bring something in detail prepared for the next quarter and we will incorporate that into our presentation so to look at it really in detail. With regards to our brands, so to say, so let me say that around 70% of our sales are related to our premium brands, Continental. We have another 7% of our sales, which are in Tires, which are related to our high-quality brands, yes. And so the rest of the budget brands, so to say, or the not that highly valued brand. So -- and I think I kind of missed the third -- the third question you had. Let me just clear it up. Oh, that was on the to be expected leverage of Automotive in 2024. Sorry, we have not shared this kind of information so far, Thomas. And for 2024, I would rather not like to bring that out for the time being.

The next question comes from Tim Rokossa from Deutsche Bank.

I have 3 questions, please. And first of all, it's good to see that, again, another quarter, it feels much more stable and that you have things much more under control. All the more important it is for us to understand how sustainable this being back in charge actually is. Therefore, all these questions on the underlying breakeven point and everything, Katja. And I'm afraid, I have to get back to this as well. With your current view on the world, is the breakeven level that we've now seen in Q3 a stepping stone and an upward trajectory for me to really improve things progressively? Or do you think there will be further setbacks when we think about the costs next year? Which brings me to my second question, you don't want to guide to next year, but obviously, when we think about the number of headwinds, labor, energy, especially, there's quite a bit that you will need to show the next year as well. At the same time, ship costs come down, logistics costs come down. Is all of that in total enough for you to stomach the additional input price inflation? Or do you need further help from the OEMs, again, for example, via waiving the usual announced net price downs and stuff like this or even further price hikes again? And then just as a third question, one that we spoke about a couple of times already. You obviously started your restructuring program during a very difficult time the world was in. Do you really not feel that you need to start revisiting this, given that your footprint is still very large compared to the revenue numbers that we see right now and probably are going to see for the time being?

Okay. So these are a lot of questions, but thank you, Tim. So the around breakeven figure for Q3, you are right. When we look ahead into the future, there will be further cost inflationary headwinds that we will have to face also in Automotive. We've named a few of them like the wage and salary increase topics that we have worldwide [ on a basis, ] but also some other things like energy, for example. And as I already said before, we have already informed our customers that further inflationary effects of 2023 will lead to a next round of negotiations. So they are aware that -- and we will be referring to addressing material, energy, freight, but also labor cost this time. So with our customers, some of them we've already started the discussion. So that is something that we are again looking for. But I really think you should take the results that we have now shown in Q3 and the third improvement in a row to really believe that we are working hard on improving our operational performance each and every day on the Automotive side. And that we will continue to do so with full speed, yes, internally and externally. Looking at our restructure program 2019, 2029. I think that program is running, as you know, Tim. So we are following up on it. We are looking at the effects and making sure that the effects are coming into play. There are some things that might have had an impact on some of the effects we recorded, because, as you know, we, for example, had to postpone the closure of Aachen, for example, so that will have an impact on when the savings will come in. But nevertheless, the savings will all come in. And we will not extend or expand that program by itself, Tim. But nevertheless, that does not prevent us from looking at all the effects that we are currently facing and evaluating if there are additional measures to be taken just as we have done for ContiTech this year. So we already announced this year for ContiTech that we will adjust the European footprint on hose production, for example. Because we do see a strong shift from rubber hose, for example, to plastics, which will also have an impact. So we are working on it, and we are on top of it. We're trying to make sure that we adapt according to need.

Great, thank you. And thank you, by the way, for doing the intro shorter before the Q&A, that leaves a lot more time for us.

The next question comes from Sanjay Bhagwani from Citi.

I have got 3 questions. My first one is on the financing. So roughly half of the gross debt seems to be the short-term investment, basically maybe due to finance...

Sanjay, this is Anna. I'm sorry. Can you speak up a little bit? We can hardly hear you.

Sorry for that. Can you hear me now?

It's better, yes.

Sorry. So my first question is on financing. I see that roughly half of the gross debt is due to be financed in the next 12 months or something, [ given ] it's a short term in the balance sheet. So can you please talk about how the refinancing you are like -- what kind of like financing costs you are expecting for these? And any more color on that? Are you considering sustainability-linked bonds, which you -- some of your peers have benefited from? So that is my first question, basically how -- and how do you -- how are you planning to refinance the half of your gross debt, which is due in the near term? And maybe I'll follow up with the next one after this one.

Okay. So I'm not 100% sure if you spoke about financing. So the refinancing of the bonds that have a maturity for next year. If that is the question, we're current...

Yes.

Okay, then I got it right. So that's the question. We're looking at it. So we have 2 bonds that will mature next year, second half of the year. We are currently evaluating different options for refinancing. So that's an ongoing task. We might -- we are looking at it, but we feel quite comfortable. So we have quite positive signs from our banks to say that this will be a thing to be done quite shortly, yes. So we are looking at it.

The next question comes from Edoardo Spina from HSBC.

I have 3 quick questions. The first is on accounting on the D&A. We expect the sales growth to continue. So will D&A grow almost in line with sales in the next couple of years? Or can we expect a much lower growth for D&A due to the low CapEx recently? And also, will any of the impairment that you have taken this year translate into lower D&A in the future? The second question is about net pricing for the group. I mean there are many moving parts, raw materials, energy, shipping and labor. Do you expect to recover higher percentage of this cost in Automotive division or in the Tire division? For 2022, I assume higher recovery rate for Tires. Can you confirm that? And especially comment on the direction for 2023. And the final question is on semiconductor. Based on the fact book data from last year, we calculate the cost of electronics about 25% of Automotive sales. So is it correct to assume this cost for semiconductors, about 25% of Automotive sales? Or should we adjust for other factors?

Okay. First question was around depreciation and amortization in the years to come. So you have seen that we have -- that we continue to invest into the expansion of our technologies in Automotive. So that is what will then also come with depreciation. The goodwill impairment does not have any effect on our depreciation. Nevertheless, if you look at the Q2, we had an asset impairment there, and this will have a positive effect on the depreciation for the years to come. So then you asked me about the recovery rate of inflationary headwinds. If I can give you an indication of -- if that's better in Tires than it is in Automotive, et cetera. So that is what I can't give you in detail, because that's really a case-by-case evaluation. What I can say, for example, that is, I call it easier or that it was faster to increase prices in the industrial business than it was on the Automotive business. You know that, that was a total change of doing business, yes, way of doing business with the OE customers. So it took us longer to conclude the negotiations. Nevertheless, we were able to conclude all those retroactively, which then also has given us a good recovery rate, so to say, which we never said how much it would be, by the way, yes? And then there was a third question, I think, about how -- the sales, how much semiconductor cost are in percent of sales. I've never calculated that figure, I have to admit, because also there, we don't have a one size fits all answer. It's really different from product group to product group that we have. So I'm sorry, I can't give you an indication of the 25% are correct or not.

We have another question from Sanjay Bhagwani from Citi.

And I'm sorry for the line issue. My first question was on financing costs. I see that roughly half of your gross debt is due to be financed in the next year or so. So could you please maybe provide some color on how are you expecting the cost of funding on these and what mode of financing you are considering? That is my first question.

So let me first say that for this year, we don't expect a major impact on our financing costs from the increase in interest rates. But when we look at the refinancing for the two maturing bonds, we do expect an increase in pricing compared to what we have right now.

That is very helpful. And yes, my second question is coming back on the order intake, a follow up to Philipp's question. The order intake indeed looks quite encouraging. My question is back in your CMD, you had mentioned order intake of somewhere around more than EUR 4 billion from the high-performance computers and the controllers. So just wanted to know how have you seen the trend now? Is it accelerating in the last 2 years? So any bigger picture message would be helpful on this. And are there specific regions that you are seeing more acceptance from the customers on these new technologies?

So I think if I got it right, it was about the HPC order intake that we are having at the moment. So we do record HPC order intakes, and we've also communicated about them. I'm not aware that we had a specific order intake in the third quarter. We are on the way, so to say. The technology is also developing, there were some delays with the changeovers, but we are in constant negotiations with all the relevant players, and we were able to get a significant order intake also in that arena. A total number I don't have for you right now, but I'll take that up for the next quarter call for Q4 call or you can follow up with Anna in detail on it.

The next question comes from Himanshu Agarwal from Jefferies.

Himanshu from Jefferies .I just have 2. One is a clarification -- on this price compensation that you're getting from OEMs, can you just talk about the mechanism? Is it a surcharge that you're receiving on raw mats? Or is it -- or do you have indexation clauses? And if raw mats go down, then these prices, how are these going to reverse? Are they going to reverse with a lag or the mechanism around that? And secondly, on the price -- on the cash flow impact of this price compensation, you mentioned that not all of this price realization has flown through in cash -- cash flow at the moment. So can you just quantify, I know you will not give us a number, but in terms of percentage, how much of the compensation you have already received in cash? And what percentage share you expect to receive in Q4?

Okay. So first about the price mechanisms that we have. So and again, here, I can just say it depends, yes. So we do have in selected areas price agreements or contracts that include material indexations, for example, on the HBS side, so the hydraulic brake system. There, the clauses do include or there the contracts do include some indexations. Also on the Tire side, there we also do have some indexes included into our contracts that help to flow with a little time delay up and down with the indexes. The price negotiations that we had for the other materials, I would say, or for the other components, they are not linked to indexes, because, for example, for semiconductors, you don't have a publicly traded index. So that's why those are not linked to any indexes. What we've done during the course of this year, we have created some transparency on the inflationary effects that we had in Continental and discussed them with our customers and therefore we have received price increases. Some were like price adders but not linked to a specific material. For some areas, we completely changed the price line. What was important for us is that those price increases are -- were, on the one hand, applied retroactively, but on the other hand, also sustainable. And so those were the most important drivers for us with regards to the pricing negotiation. And if you would talk about the free cash flow. So most of the agreements that we have concluded late in Q3 have not materialized in cash inflows so far.

Okay. Is it possible for you to give us a number like is it 80-20, like 20% of all the price impact you realized in cash so far and 80% will come in Q4? Is that a fair number?

I don't think so, I have to admit. I was specifically speaking about those that we have concluded in the third quarter. So I was not talking about those that we have concluded in the quarters before.

The next question comes from Frank Biller from LBBW.

Frank Biller, LBBW. It's a quick one on the cyber which was given in the press release. There's a lot of speculation here, what's going to happen...

I'm sorry, Frank, I cannot understand you. There is [ commotion ].

Yes, the line is very bad. Sorry about that. So talking about the cyber attack, any effects expected here in your figures? Or is it just a minor thing here to expect in the figures?

So please allow me to say that this is currently an ongoing investigation that we are conducting internally. So -- but what I can say is that we have not had any impact on our production or sales or anything during the course of the attack. So therefore, our current figures don't include any effects from the cyber attack.

Okay. So -- and all this is running pretty well right now, yes?

We are fully in charge of our systems. Our systems are safeguarded, so there are no effects.

Ladies and gentlemen, there are no further questions. Dear speakers, back to you.

Thank you, Lydia, and thank you, everyone, for participating in today's call. As always, the Continental Investor Relations team is available if you have any remaining questions. With that, we would like to conclude today's call. Stay safe and healthy. Thank you, and goodbye.