Continental Aktiengesellschaft (CON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Continental AG Analyst and Investor Call Full Year Results 2022. At our customer's request, this conference will be recorded. [Operator Instructions] Let me now turn the floor over to Anna Fischer, who will lead you through this conference. Please go ahead, madam.

Thank you, Beatrice, and welcome, everyone, to our fiscal '22 results presentation. Today's call is hosted by our CEO, Niko Setzer; and by our CFO, Katja Durrfeld. Small reminder that both the press release and the 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 either of these groups, please kindly disconnect now. Let me walk you through today's agenda on Slide 2. Niko will start with our business highlights. Then Katja will review financial highlights for '22 and close with our expectations for '23. Following the presentation, we will conduct a question-and-answer session for sell-side analysts. [Operator Instructions] With that, let me now hand over to you, Niko.

Yes. Thank you, Anna. So welcome to everybody, and let's jump into the topic and let's begin on Slide 3. Most of the KPIs, you see will be already known as we have previously released on January 17. So I think it's not necessary to read through each number, however, the most important ones I like to discuss and describe. Overall, on group level, we came out at EUR 39.4 billion, and the adjusted EBIT margin was 5.0%. Special efforts of more than EUR 1 billion are predominantly noncash postings, mainly resulting from goodwill as well as property, plant and equipment impairments, consequence of interest rate hikes used in the valuation. We have also impaired all of the intangible as well as property, plant and equipment assets in Russia. These are all the burden to the net income, which ultimately amounts to EUR 67 million. Adjusted free cash flow is EUR 200 million, was significantly lower than our expectations. This is due to particularly delayed collection of account receivables as per the reporting date as well as high inventory levels still weighing heavily on working capital. So fiscal '22 was dominated by high inflation in all sectors, which led to price negotiations as well with all customers. Our main objective was to achieve sustainable and fair compensation for our products, services and solutions by reflecting this inflation in new prices agreed with our customers. And looking back, we can say that this process was concluded to our satisfaction in all sectors. The results of those negotiations are clearly reflected in the financial year's sales and earnings. So overall, we achieved a strong organic growth of 12.3%. FX impact on top line was 4.5%. In Automotive, we were able to outperform the market by around 10%. So 10%, we see this later on as well. Sales were weighted with our sales, and Katja will refer more to that. And this strong outperformance is also attributable to a significant improvement of our product mix, a higher content per vehicle, as well as a strong demand for our high-technology products. Another highlight in Automotive certainly was the strong order intake, EUR 23.4 billion, 26% higher than in 2021, which will secure profitable growth in the next years going forward. As one way of addressing portfolio measures, which we have always mentioned, we consider partnerships as enormously important, in particular, in our growth areas. So we are pleased to have entered the strategic partnership with Ambarella to jointly develop full stack software and hardware system solutions for both assisted as well as the higher levels, the automotive driving levels. As to our latest financing activities, it's worth mentioning that in November 22, we issued a new Eurobond on favorable terms. Continental is known for its strong balance sheet and solid financing structure, and this is yet another proof of it. Also, overall indebtedness increased at the end, reflection of higher working capital, as already mentioned, reliable long-term refinancing is not an issue and reflects high appetite as well as the trust of debt investors in Continental. Our gearing ratio at 32.8% is in line with our target ratio and increased even slightly from last year. Looking ahead, '23 will bring along some tailwinds. So Katja will talk about this later. We see the situation relaxing in some areas, at least certain raw material prices decreasing, for example. However, overall, we expect further inflationary headwinds in '23, impacting all 3 sectors, in particular, automotive again. Therefore, our focus on '23 is again on price negotiations with all our customers. For tires replacement business, we are absorbing the markets very carefully and will not hesitate to increase prices as well where necessary and possible. Essential pillars of our '23 program for success are the improvement of our operational performance, of our R&D efficiency in automotive and continuing the strict cost control in all areas, basically. The rigorous execution of our structural program is key as well. And of course, we will work on the further stabilization of our supply chains. Smart inventory management means aiming for minimum unit levels while still securing the supply of our critical components. Above all, we will continue to put our people first looking to retain the incredible team we have while attracting at the same time, new talents to support us to achieve our goals. So moving to Slide 4, looking for the tire highlights. And here, you see the progress we made in the last fiscal year as well as in the years before, starting with the chart on the left side. This shows our significant growth for our EV tire business, so we are now qualified to be fitted for more than 400 different homologations. About a year ago, we counted around 300. So we made significant progress, another 100, which we added, and we are proud of. From the 10 largest global EV manufacturers, and I guess they are well known, 9 of them rely on our high-quality products. On the broader stage, the vast majority of OEMs choose Continental tires for their EVs too. Given increasing requirements in this area, the growing homologation show the trust that these customer plays in our technologies, which we are consistently developing further. On the right-hand chart, you can see the 2 further drivers of our mix improvement. One is the ongoing expansion of ultra-high-performance tires in our percentage of tires mix, whose growing share of sales has well outpaced unit growth, demonstrating the overall proportional growth contribution from ultra-performance tires. This relates to all brands, for our Continental brand tires, the share developed even more significantly from 52% to 56% of PLT sales, so much higher than in the overall. Also contributing to mix cutting-edge technologies. You see them the free underneath, ContiSilent and ContiSeal, for example, as well as in the middle advanced compounds for increased mileage. Coming to the next point, dividends before we are turning to the financial performance, let me address our proposal here. In principle, we are committed to distributing a dividend commensurate to the development of our net income, our dividend policy is to pay out between 15% and 30% of net income attributable to the shareholders of the current. And this meant valid January, however, periods which are untypical, require different decisions, and we are not afraid to apply, when we see it fit, a more appropriate approach. As said before, fiscal '22 was burdened by high noncash effects in the net income in a simplified way, let me call them accounting effects driven by interest rate hikes as well as impairment losses on assets in Russia. Also considering a total shareholder return view with the share price under pressure, particularly last year, we proposed a dividend of EUR 1.50 for fiscal '22. This will be subject to approval by the Annual Shareholder Meeting end of April. With this, I would like to hand over to Katja for the financial review.

Yes. Thank you, Niko, and also a warm welcome from my side. Let me now first move on to the Q4 performance by group sector on Slide 6. In Automotive, we see a strong increase of 17.9% in the year-on-year organic sales and margin improved by 570 basis points to 2.1%. Both effects, of course, were strongly supported by the price agreements concluded in 2022, and to a small extent from newly signed contracts, which we have a retroactive effect to January 1, 2022. In Tires, organic growth of 12.3% mainly reflects, again, the strong price/mix in the replacement sector. The adjusted EBIT margin decreased by 70 basis points to 10.3%. Positive effects on the top line were unfortunately countered by lower volumes and higher inflation effects in Q4. At ContiTech, the organic growth of 12.1% also reflects positive effects from price agreements, especially with automotive OEMs. Adjusted EBIT decreased by 340 basis points to 2.3%. Now continuing with the review Automotive Q4 sales and adjusted EBIT on Slide 7. Automotive sales totaled EUR 4.8 billion. The impact from FX was positive 3.5%. Key drivers for the strong organic growth as well as the adjusted EBIT margin of 2.1% were new price agreements in place, higher volume as well as higher content per vehicle. Inflation headwinds totaled more than EUR 100 million. For the fourth quarter stand-alone, Autonomous Mobility reported sales totaled to approximately EUR 0.5 billion, and showed an organic growth of 21.2%. This was mainly driven by stronger demand in long- and short-term range radars as well as front cameras. Safety and Motion reported sales totaled around EUR 1.8 billion and showed an organic growth of 15.2%. Strong demand in our new braking system generation and sensors business confirms we are on the right track. The new business areas, Architecture and Networking, Smart Mobility and User Experience reported sales totaled around EUR 2.5 billion and showed an organic growth of 19.4%. Sales were mainly supported by stronger volumes in the area of connectivity products as well as digital clusters and display solutions. On Slide 8, for a better understanding of current profitability within automotive, I will break down sales and adjusted EBIT for fiscal 2022 by different action fields. Let's start on the right side of the slide with the figures for fiscal 2022. For 2022, overall automotive sales sum up to EUR 18.3 billion with an organic growth of 13.9%. Adjusted EBIT margin is negative 0.2%. Our largest action field safety and motion with reported sales totaling to EUR 6.8 billion and an organic growth of 12.1% also makes largest positive contribution to adjusted EBIT at EUR 164 million. Adjusted EBIT margin is 2.4%. Smart Mobility is contributing with sales totaling EUR 2.4 billion, and organic growth of 4.3% and an adjusted EBIT margin of 3.6%. User Experience reported sales totaling EUR 3.7 billion and showed an organic growth of 12.5%. Adjusted EBIT margin is 0.4%. Architecture and Networking and Autonomous Mobility are operating in growth areas of future technology. Both showed strong organic growth of 23.4% and 19.3%, respectively, and we expect them to positively contribute to EBIT in future. Currently, the result is burdened by the DNA of this new and transformative business. In particular, the new technologies require quite high pre-investment while economies of scale are ramping up. Therefore, our absolute focus here is to significantly improve our R&D efficiency and secure the volumes for the future through further strong order intake. It is our belief that these growth businesses will be drivers for future outperformance. Let me now review organic sales performance for automotive versus regional vehicle production in Q4 on Slide 9. Segmented by region, automotive organic growth was able to outperform vehicle production again significantly in our European market as well as in China. Our organic growth in North America in Q4 was only slightly above local vehicle production, but is mainly due to the customer mix in this region. Overall in Q4, automotive outperformed its regionally weighted average by around 13 percentage points, which is a noticeable amount. The strong outperformance was again mainly driven by the significant effects from increased customer pricing. But other than in previous quarters, there were no significant retroactive effects in Q4. Furthermore, we were able to further increase the content per vehicle. And now turning to Slide 10. Let us have a look at our cumulative outperformance for entire fiscal 2022. European market shows a very strong outperformance and so does China. North America is outperforming too, but just slightly. Overall, Automotive outgrew its regionally weighted average by around 10 percentage points. On Slide 11, we see again a very pleasing total order intake of automotive of more than EUR 5 billion of lifetime sales. For Safety and Motion, we achieved an order intake of EUR 3.1 billion lifetime sales. We report here a major business wins for brake systems, MK C1 and MK C2. In addition, our business area Architecture Networking, Smart Mobility and User Experience continued the success story and showed also in the fourth quarter, a noticeable order intake of EUR 1.4 billion. The biggest wins were related to an order for L-shape display solution and orders for light control units. Autonomous Mobility achieved an order intake of EUR 0.9 billion in Q4, adding business in nearly all sensor categories and an additional system support, including a computing unit. Moving from automotive to tires on Slide 12. Despite the as expected difficult market environment, and a significant decline in volumes of negative 6.8%, Tires was able to increase sales by 15.7% to EUR 3.7 billion. Price/mix showed a very pleasing and an outstanding performance of 19.1%. This more than compensated for the inflation in Q4. Moving on to ContiTech on Slide 13. Despite a decrease in volumes in the industrial and aftermarket business, ContiTech showed a solid organic growth of 12.1%, mainly supported by price effects with industrial and aftermarket as well as automotive OEM customers. The profitability of the period was clearly under our ambition being highly impacted by higher production costs. While demand increased on the automotive side of the business, we experienced decreasing volumes on the industry side. ContiTech's fragmented footprint offered few opportunities to immediately and locally substitute workforce, which was insufficient in the auto plants while having to deal with over capacities in the industry part. ContiTech also experienced increased sickness rates in general and particularly in locations under restructuring in high-cost countries. Corporate-related business restrictions in China and high energy costs in the quarter were an additional headwind. With a high labor content and a strong footprint in Germany, onetime payments negotiated with unions weighed over proportionately on the EBIT too. Let me now continue with the overview of free cash flow for full year 2022 on Slide 14. The main driver for the decrease of the operating cash flow from EUR 2.5 billion to EUR 2.3 billion with strong working capital headwinds from high accounts receivables as a result of delayed cash inflows from our customers at the end of this year. Inventories continue to stay at a high level as a combination of securing supply chain and higher prices per unit. The investing cash flow of negative EUR 2.2 billion was mainly influenced by high capital expenditure on property, plant and equipment and software in all sectors. For example, we increased investments in User Experience to expand capacities demanded by the high order intake. As announced, we continue to further increase capacity in the Tire segment, mainly in North America for truck tires and in China for PLT tires. Also, the enhancement of ultra-high-performance capacity in EMEA and for ultrahigh performance and light truck in North America remains a focused topic. On Slide 15, our expectations are based on currently foreseeable effects. Given this assumption, we are anticipating a year-on-year increase in light vehicle production of 2% to 4%. For passenger car replacement tires, we expect demand to be up from plus 1% to plus 3%. With the demand being flat in Europe without Russia and North America, but with a rebound in the Chinese market after the COVID-19 related disruptions in 2022. For the industrial production, we expect volumes to stay flat in the Eurozone, become slightly negative in USA and clearly positive in China. Let me turn now to our outlook on Slide 16. Here you see, as usual, our outlook KPIs for 2023. I'm sure that this is the main point of interest today. Sales increased to around EUR 42 billion to around EUR 45 billion are driven by higher volumes outperformance but also by inflationary headwinds which are expected to add up to around EUR 1.7 billion on group left. For 2023, main reasons are still material, particularly in electronic components, continue at lower levels than previous year in energy and logistics. A new element which needs to be mentioned, not just here but also in our negotiations with our customers, will be labor-driven inflation. On group level, we anticipate an adjusted EBIT of around 5.5% to 6.5%. Our prognosis for adjusted free cash flow is between EUR 800 million and EUR 1.2 billion. I'm now on Slide 17. We expect volume growth in all our underlying markets, and we will outperform the market in all group sectors. Driven by further sustainable price adjustments, the ramp-up of new product lines and the higher content per vehicle, we expect automotive sales to substantially outperform light vehicle production. We also expect Tires to record sizable outperformance predominantly from continued optimization of price and mix. Moving on to the EBIT bridge on Slide 18. Starting with Automotive. The increase in the global vehicle production, the ramp-up of new product lines with higher profitability, and the enhancement of our operational performance, for example, from R&D efficiencies and our structural program, will support a year-on-year improvement in EBIT. Inflation of around EUR 1 billion will be a headwind again. As in 2022, we have started negotiations with our customers with the aim to pass on as much of that inflation as possible. Altogether, we expect automotive margins to further significantly improve towards our midterm targets and at the end of the year amount to between 2% and 3%. In Tires, positive market developments as well as a solid price/mix will support the adjusted EBIT margin. Inflationary headwinds of around EUR 400 million are mainly driven by higher labor costs, a further increase in freight costs as well as some energy costs. So far, we don't predict an increase of cost for raw materials, but it's too early to say that there could be a tailwind. Based on these assumptions, we expect a year-on-year stable Tires margin between 12% and 13%. At ContiTech, the improvement in adjusted EBIT is also supported by market development out performance, focus on the industry business and now in focus operational performance improvements. Inflationary effects should add up to around EUR 300 million. Based on this, we are predicting ContiTech margins for 2022 to be between 6% and 7%. Continuing to our expectations of cash flow on Slide 19. There are many moving parts when we look at our operating cash flow. First, the year-on-year improvement in EBIT will be a positive. Furthermore, the optimization of our working capital supported by our smart inventory management and assumingly high timely cash inflows for receivables will support improvement of the operating cash flow. For our restructuring program, we expect a cash out of around EUR 200 million, which will be about EUR 100 million less than fiscal 2022. As for investing cash flow, we expect capital expenditures of around 6% of sales. As in 2022, Automotive investments are mainly driven by the high order intake as well as by new top technology products which require a higher production automation level. In Tires, we will invest to further extend our capacities, for example, in China and North America as well as tooling for further mix enhancements. And in ContiTech, we will focus on investments for the industrial and aftermarket businesses. In total, we expect group free cash flow before acquisitions and divestments to be between EUR 0.8 billion and EUR 1.2 billion. With this, I would like to end today's presentation. Niko and I will now be available for your questions. Operator, could you please open the line?

[Operator Instructions] And the first in the line is Jose Asumendi from JPMorgan.

It's Jose Asumendi from JPMorgan. I wanted to ask, please, and thank you for the incremental split we have now by division within the Automotive division. And you have a 2% to 3% margin guidance for 2023. So I would love to understand a bit better in this 5 subdivisions that we have, how do we project 2023 of which divisions do you think will be clearly in the positive? Which ones do you think will be more in the breakeven or maybe slightly loss-making? And what are the maybe the biggest highlights or the biggest drivers of the profitability across these subdivisions?

So let me take the question, Jose. So first of all, I would like to remind you that in general, we do only guide on Automotive -- we said that we give you profit indications from time to time to make sure that you're able to fill your models. But in general, we do only give guidance on the Automotive sector itself. When you look at the presentation that we have shared with you, you do see that we have 3 main drivers for the improvement of our operational performance in Automotive. The one driver is the pure volume driver, which comes from the market that we expect to be between 2% and 4%. The second pillar of our success in 2023 will be the outperformance we -- I think we indicated quite clearly how strong the outperformance in the Automotive sector was in 2022 beyond pure market growth or production volume growth. And the third pillar is, for sure, the operational improvements that we are expecting to achieve during the course of this year. There, we do see multiple contributors to it or different contributors to it. The one contributor is to show our R&D excellence program, of which we have started in 2022, which already had some minor effects in 2022, but will come to more effect in 2023. A second pillar is the contribution from our transformation program 2019-2029, where we also expect more positive contribution. And the third is the pure improvement of operational performance which consists of different pillars. So one topic is due to our higher working capital, we expect to smoothen and stabilize our supply chain, which will help us to reduce special impacts on our plant performance and also to reduce the necessity of special freights, for example, to either supply our plants or supply our customers. So all these 3 elements will play a role when we talk about the improvement of the Automotive business.

I have one quick follow-up, please. Niko, can you comment a little bit around the business opportunity bringing in Ambarella as a partner into the business? Have you started to book orders on the back of this partnership?

Was there another question? Okay. All right. Good. The base of this question, I mean, look, we have a strong knowledge on the sensor suite. We have a strong knowledge since we get as well on integrating on automotive assisted driving, whereas Ambarella is very strong on the one side on the chip side, system on a chip, which we are already integrating our products, but at the same time, with their artificial intelligence and their environmental model, we are compiling a full stack approach. This full stack is as well open for the OEMs to add functionalities which are developed for them or others. So that is the target of our strategic partnership. It took already of speed. We are discussing now with several OEMs in which direction they want to go. And we will report once we are going further how successful we have been with those specific applications than for the OEMs as we speak. It's foreseen if it takes off then to have first applications in the market, 2026. That's the horizon, which you have to look at.

Next up is Josh [indiscernible] from Goldman Sachs.

The first question I had was just a clarification in terms of how much recoveries are assumed in the guidance for this year? And is your assumption around ability to cover inflationary costs confirmed already with your OEM partners? The second question I had was with regards to free cash flow. Obviously, you did mention high levels of inventory and receivables weighing on working capital and free cash flow at the end of 2022. What are you expecting in terms of the reversal of working capital in your free cash flow guidance for 2023?

Okay. Let me maybe talk about the recovery of the inflationary effects in 2022 first. So in 2022, we did not say anything about this specific recovery of the inflationary effect. We always said that we aim to recover as much as we were able to do. And from today's perspective, I would say that we are satisfied with the achievements that we have made in all our areas and in the sectors. When talking about the free cash flow expectations for 2023, we also said that we have taken conscious decisions to increase inventory levels, not only short term but also midterm to secure supply chains and make sure that we are able to deliver it to our customers what they expect us to provide. We have implemented a program last year, the smart inventory program and the end-to-end business process management to really make sure that we align demand from our customers with the delivery possibilities and potential on the supplier side early enough in the process. So in general, we do expect to keep higher inventory levels than what you have seen in the past in Continent Tire. There's a second effect in the cash flow, and this also comes from additional price effect. So the additional inflationary effects will also have an impact on the inventory levels. Last year, the effect on the inventory level composed of 3 different elements. That was, one, the pure increase in volume. The second was the pricing that was really significant. You all know what we guided for with regards to inflationary headwinds from material and the third one was FX. And we do expect to have additional inflation of around EUR 1 billion in automotive this year, and part of that is also attributed to especially electronic component prices.

Next up, this is Michael Chuck from Bank of America.

I have 2, both on costs. The first one, just in terms of the cost guide, could you perhaps provide a little bit more granularity on the building blocks for the EUR 1 billion cost inflation guide in the Automotive business. And as part of the cost guide, is it fair to assume then that you've not factored in any raw material tailwinds into this guide or the tire cost guide? And then my second question is just separately on logistics costs. Given the sharp decline in sea freight rates, and I would imagine a lower need for special freights, why would this line item not provide a tailwind at some point in '23?

Okay. So let me first talk about the building blocks for the cost inflation. We don't break it down in detail, but if you want to understand what is comprised in there. So in general, this again comprises headwinds from materials, especially from the electronic components. It also includes to certain extent higher energy and logistics costs, but it also, and this is what we mentioned specifically, includes higher costs for wages and salaries across the world. So that was your first question. I think the second question you had was why we have not included tailwinds into the Tires guidance or if we have included tailwinds into the Tires guidance. Is that correct?

Yes, just from logistics costs, mainly.

Yes, I would say that logistics costs have improved compared to the highest peak levels in last year, but they also did not start at the beginning of the year at the highest peak levels so far. And you do see a quite different distribution from region to region and also different developments there in the pricing, in general. Plus there is a drop in sea freight, which we do see in one of the other arena. But when you look at the land rate and transportation, then you don't see as much of a relief as you currently might anticipate.

Understood. And then just to clarify on the raw material side, you're not factoring in any tailwinds into the guide for Tires this year?

Not significantly, no.

The next question is Thomas Besson from Kepler Cheuvreux.

I have 3 questions as well, please. I'd like to come back to Josh's question on the free cash flow. Is it fair to assume that either in '23 or in '24, you should be recovering a substantial amount of working capital because these inventories you've built for the short and midterm for your customers, you should be able to reduce over time as the supply of semiconductors becomes more normal and your customers' production normalize as well. That's the first question. The second question on Tires. Can you talk about your winter tire volumes in 2022? How they've changed versus '21? We've now had 5 consecutive soft winters in Europe. And there seems to be still inventories in the distribution channel. So we seem to be going into a sixth soft winter tire season. Can you talk about the evolution of winter tire contribution to Tires earnings and how much that accounted for the decline in profitability in the Tires business? And lastly, on the Automotive business, 2 of your businesses are effectively probably looking more at future products. And you've mentioned that they suffer from a high depreciation cost. And one of them, in particular, has seen substantial organic growth, but at the same time, more doubling of its losses. Can you just help us understanding whether this specific business will find kind of the floor in terms of profitability in also in Autonomous Mobility in '23 or whether we haven't seen the low point yet?

Okay. Let me see. Let me start with the free cash flow question first, Thomas. I think so in general, you are right, that's the inventory levels that we have seen for 2022 were significantly higher than we had done in the past. Nevertheless, I would like to mention that some of this level is especially requested and contracted from and with our customers. So there are special requests to hold more inventory on the midterm than what we had in the past. If you look at the past summers, you do see that Continent Tire probably has the lowest inventory levels and the highest churn rate and this is also why the semiconductor shortage in some areas hit us over-proportionally compared to maybe some of our competitors. So in general, there's a request from our customers to increase safety stocks in this business. Also, when you look at our expectations for the semiconductor supply situation, you do see that for 2023 and also for 2024, we still expect effects from shortages. We expect improvements overall during the course of this time, but we do not expect to come back to, let's say, totally normal levels before 2025, and this also is the reason why we will not return to working capital as we had it in the past. So that was the one question. The second question was about the winter tire...

Yes, maybe I add there, something. Yes, winter tire business was only decent in 2022. So it has shown as well a weaker market and a certain stock at the customers. However, we see as well a tendency, in particular, in those markets with not that strong winters that the old season area as well as our product is increasing. So we have a compensation to a certain extent from the winter tires to high performance or season tires where we are very well positioned, which means to the last latter part of your question, how much contribution has the winter tires to our portfolio? It's getting less and less, with our growth in all season. With the growth we have seen before as well in certain markets, such as the Americas and as well, Asia coming the portion of winter tires, and therefore, the dependence on the profit line is getting reduced. However, we watch, obviously, closely the markets and the stocks, but we are not concerned getting out of 2022 that we have here something like legacy, which we will see in 2023. To the last point, you asked in the portfolio, I guess, to the 2 growth yields within automotive, architecture, networking and autonomous mobility, which have been a negative territory as well '22. I mean on architecture network, you have seen this is the area which was harvested by the transformation software-defined vehicle and changes to centralized compute. We are further working there and have structured this area, combined all high-performance compute in this area, have it straightened out to product lines and performing here now with synergies. You've seen that we improved already our results there. We had a strong growth last year, 23% organic, that was even the strongest one, which we see here and via growth and all the factors, which Katja mentioned before, we are working further in order to improve our margin. On the Autonomous Mobility side, you see we basically deteriorated by EUR 100 million versus the year before, we have mentioned as well before going into the year that we invest hard in this area because I referred before to Ambarella, but you've seen as well some other order intake, which we took in last year and which we are still working on to go in the future. That's why we are investing in total, we had a special budget of EUR 200 million. This was EUR 100 million more last year than the year before, which we are spending in partnerships, which we are spending on the R&D side becoming full stack and full system provider. You see that this delta is exactly the profitability, which were reduced from '21 to '22. The rest was stable on the go with relatively second largest growth, which we have in this area, 19%. Still here the focus is on executing the growth opportunities which while over time, improving as well the profitability level more on the longer term than in the value segments, such as our safety business or on the UX side.

The next question comes from Tim Rokossa from Deutsche Bank.

Katja, you rightly predicted the guidance is indeed the main point of interest to most people today, I think. When we think about, in particular, how important volume is versus your own execution, I have 2 questions on that. The first one would be, you've been quite optimistic on your cost initiatives over the past years already without us really seeing a potential, a real positive net effect from them. Why are you so confident that we're going to see that in the EBIT bridge this year? Is it simply because more time has passed now and you're further along in all of these projects? Or have you really started new ones become more aggressive on certain assumptions? Secondly, A big impact in the past was also that you had very negative contracts in there. And to one of the earlier questions as a follow-up to that, I think Jose wanted to know that basically, have you managed to price out some of these very negative contracts that really reprice them with your customers? Does that reflect quite a bit of the improved earnings potential that you see there? And then finally, Niko, I'm sure you were up in Volkswagen discussing with VW on their relatively positive unit sales growth expectations for this year. Now VW, we all know have been in the past, very often way too optimistic on that assumption. But obviously, they need your backing as one of their key suppliers globally. Would you be prepared? Or are you even expecting that some of your major customers can grow well into the double digits this year? And does that reflect the outperformance that you're seeing from a market positioning as well? And as a follow-up to that, when you have these discussions, I spent quite a bit of time with the CFOs of your key customers lately, they are not very confident that you will be able to get any of the labor cost inflation back from them because they say those are management decisions. You can just move to best cost countries. What makes you so optimistic that on that side, you will be successful as well?

Well, Tim, that was a long question. At least quite a more well, very comprehensive one. So let me start maybe with the first question about why am I positive that we will be able to improve on our operational excellence and our operational performance. I think when we look at this year, Tim, we already made some achievements in that direction. This is also the reason why despite all the challenges and all the problems we had, we were able in Automotive to improve our EBIT margin compared to prior year by 1.2 percentage points. I think that is a strong sign that we've understood how to do it and how to drive the improvements, which were not only coming from volume. I think that's clear. So when you look further, there are multiple things that are now falling into place, which we have initiated also during the course of the last year. The R&D efficiency program is definitely one of the programs where we have a high focus on where we look really carefully to improve efficiency and effectiveness of our R&D globally in automotive, where we've seen some impact already in 2022 and where we know that we will see more impact in 2023. I think the second big point is the reduction in manufacturing cost variations that we had to face during the course of the year, mainly really caused by the instable supply chains that we have to face. So by adding the safety stocks that we've just spoken about and flattening or smoothing our supply chain, that is something that we definitely will see to pay a, on the manufacturing cost variation, but also on the premium freight side, which has been a hit for us. And last but not least, I think what is also important to mention is that we will see additional positive impacts from our transformation program 2019-2029 in 2023 above what we have experienced in 2022. So I think this is the question why I'm so confident that we will be able to drive the operational performance improvements in automotive. And the second point you've mentioned was that we had negatively priced contracts with some of our OE customers. And let me assure you that we have been in very, very intense negotiations with our customers during the course of this year to negotiate pricing and compensation for the inflationary headwinds. And as you can also see in the margin of Automotive, we've been quite successful in doing so.

Yes. Coming to the outperformance or you mentioned the one or the other customer, which has published growth rates in 2023, which might be higher than the average what we are guiding or what the marketing intelligence is seeing. I mean, our guidance is based, obviously, on the market, as you've seen before and as well on the order book, which we have from OEMs. This is highly dependent as well on new launches which we have, new products which we are bringing higher value per car. You have seen as well in the past, and we referred already that we have a higher net outperformance in 2022. But if you look a little bit longer, we had a portfolio which was strongly changing as well due to the market, analog to digital, looking for the UX side, for instance. This has now phased out, and we have now the new products coming in, which supports then our net outperformance on the Automotive side, and that's the main reason why it's that large. If our larger customers are producing more cars and are successful in selling them, that helps us, obviously. However, our guidance so far is based on what we see in the market as well as on our order book. Once it comes to labor cost compensation or overall compensation, we are showing transparently to our customers how our costs have developed from '21 to '23. So what we have seen last year and as well what we see this year, how successful we will be with the certain components we will see, as Katja referred, we are working in order to get as much compensation as we can. We have been relatively successful last year to get a majority -- vast majority of our cost increases compensated. And we will do the same for 2023.

I struggle on the inflation labor cost side, but it's great to see that you are back on a much more stable path again after some very rough years. So well done.

And the next question comes from Himanshu Agarwal from Jefferies.

The first one is on the autos. I see you're talking about the operational improvement. Is it possible for you to quantify the benefit that you're expecting from the transformation program on the bridge. So that's the first one. And just to clarify on the auto side, have you received all of your retrospective pricing related to '22? Or are you expecting some benefit to come in the '23 as well. And on the Tires, 2 questions. One is on the inventory revaluation effect. So last year, you had around, if I remember right, EUR 350 million to EUR 400 million of positive impact, and sales raw mats are coming down, is it going to weigh on the bridge for this year? And lastly, on the Tires, I think in the bridge for '23 guidance, you're talking about some outperformance relative to the market. And I think we were seeing some downgrading in Tires. So what gives you confidence that you will be able to outperform the market in '23?

Maybe I can start with the second question, sustainable pricing. So you referred to pricing 2022, onetime or not. I mean we assume, and I mentioned this as well at the beginning one commenting the slide that a big portion of that is sustainable. We have achieved to get sustainable price increases with our customers means their role as well over then in 2023, where we have to address as well the 2023 components. What makes us confident to outperform the markets on the tire side? On the regional side, looking with our setup in particular on the premium side, I referred before as well to a growing part of season in Europe, where we finally with our product could succeed, we still see relatively strong and solid demand for the premium area. And we have as well a strong portfolio, profiting from trends in quality and in budget. We have shown as well before that we've been capable to outperform the market on the Asia side and on the North American side. Fair enough, looking on our market shares, which we have, those are still underdeveloped. We have a very solid product, we have very solid technologies. We have a strong footprint. There are lots of reasons with our customers over there to grow and get as well our fair market share, so to say, in those regions.

And maybe just coming back to your first question with regards to our transformation program 2019-2029. I need to tell you that we have not broken down the individual gross effects per year so far. So all that I can tell you is that we do expect additional positive effects in 2023 from our program.

Just on the inventory revaluation, if you could talk about that?

Inventory valuation. And what was the question on inventory valuation? We missed that, sorry.

On the Tires EBIT bridge last year, there was around EUR 350 million to EUR 400 million positive impact from the inventory revaluation. So -- and then now given raw mats are coming down. Is it going to reverse this year?

I would say, to reverse is probably not the right way to frame it. And as we don't know the overall development of the raw material prices during the course of the year, it's pretty hard to predict how this will develop quarter-by-quarter. But I would not consider that to be a reevaluation effect in the same amount.

And you have to consider as well that raw material pricing or costs were increasing during the course of last year. And average values year-end has as well an influence on the inventories then going into 2023. But as Katja said, very dynamic area. Let's see where this works out, but there is a certain effect out of the evolution of the raw materials, obviously, from last year, if you will. Trailing raw materials going down. And the end is below the average, then obviously, you have more of the headwind it's got to reevaluation than having a more solid pass-through or even a [indiscernible] , but how that ends up remains to be seen.

And the next question comes from Philipp Koenig from Goldman Sachs.

I've just got 2 left. First is on ContiTech. Maybe can you just elaborate sort of what were the main drivers that weighed on the margin. You're mentioning negative price mix. Have you taken some action on raising the prices, both in the auto and on the industrial side of the business? And sort of what makes you confident to get back into the 6% to 7% margin corridor and eventually to the midterm curve that you're aiming for? And then my second question is just on the R&D again, sort of structurally, obviously, you have a very healthy and very strong order book after last year. Can we sort of expect in absolute terms, R&D to continue to step up over the next 1 to 2 to 3 years? Also, do you expect the stabilization at some point when you've made the majority of investments in some of the secular trends of the industry?

Okay. So let me first talk about ContiTech and about what we've done on the pricing side. So let me confirm to you, Philipp, that we have increased prices on the industry and aftermarket business in ContiTech as well as on the Automotive business during the course of the year. You know that we had guided for approximately EUR 600 million cost inflationary effects in 2022 for ContiTech. And you also saw that we have also guided for additional inflationary effects for 2023 to come, which we will, for sure, again, address during the negotiations with our customers in all relevant business segments. I think that's the first one. On the R&D side, I think we have already pointed out that we intend to invest and continue to invest into our future businesses and business models. You've seen the very strong order intake that we had doing the course of last year with being about 26% above the 2021 levels. These new orders also require investments into R&D. But what we do definitely intend to achieve is a better ratio in percent of sales.

There are no further questions.

Thank you so much, Beatrice, and thank you, everyone, for participating in today's call. As always, Continental's Investor Relations team is available for you for any remaining questions. With that, we would like to conclude today's call. Thank you, and goodbye.