Continental Aktiengesellschaft (CON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Continental AG Analyst and Investor Call Half Year Results 2023. At our customers' 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, Ms. Fischer.

Thank you, operator, and welcome, everyone, to our Second Quarter 2023 Results presentation. Today's call is hosted by our CFO, Katja Durrfeld. A 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. [Operator Instructions] With this, let me now hand over to you, Katja.

Thank you, Anna, and a very warm welcome from my side also and great to have you all here with us today. Ongoing market challenges led to a pre-release mid-last month, so I'm confident you already know most of those relevant facts. Let's look first, however, to some details starting on Slide 3. Group level Q2 2023 sales came in at EUR 10.4 billion, 10.4% above last year's comparable quarter, which delivered an organic growth of 11.9% and an adjusted EBIT margin of 4.8%, 50 basis points higher than Q2 2022. Adjusted free cash flow came in at negative EUR 14 million. Although we expect it to be in slightly positive territory in the second quarter, this is rather a stabilization step towards improvement. With 6 months still ahead of us, further EBIT improvements are to come by continuing strict focus on working capital, we remain confident to achieve our guidance here. Looking at our sector highlights for Q2. Let's start with Automotive, but we see some progress in our sustainable pricing agreements. There are further contracts to be finalized in the second half of the year, some of which we've already signed between the second quarter due date and to date, so I can report continuous progress. As we already announced, the challenges arising out of currency translation, especially with the Mexican peso and Chinese RMB sequentially burdened Automotive heavily. Looking ahead, order intake for Automotive came again in strong at EUR 8.6 billion lifetime sales, reconfirming that our technology fits to our customers' needs. Moving to Tires. An adjusted EBIT margin of 13.7% continues the pace set in Q1 coming again above the guidance corridor with strong price/mix, overcompensating decreasing volumes and inflationary effects. We continue, however, to expect market dynamics to become more challenging in the second half of the year. Finally, for both Tires and ContiTech, we see some relief coming in inflationary headwinds. Let's now look on the second quarter performance by group sector on Slide 4. Looking at all sectors, you will see that each made a positive step forward. Starting with Automotive. Sales development continued strongly with a 20.1% organic growth year-on-year, while margin improved 190 basis points to negative 0.6%. Our margin improved year-over-year. And of course, we continue with our strict focus to achieve our guidance, and I will explain to you in a minute some of the details on that. For tires, we achieved an organic sales growth of 5.5%, while adjusted EBIT increased to EUR 474 million, both were supported by price mix compensating volume weaknesses. To ContiTech, the organic sales growth of 7.1% and adjusted EBIT of 6.4%, an increase of 150 basis points held well against weakening volumes in some industrial markets. Finally, to the slide, we continue our ramp down for contract manufacturing according to plan. Now let's look into our Automotive results in more depth on Slide 5, and let me share with you how we will meet our guidance for adjusted EBIT margin of 2% to 3% this year. Pricing with our customers will be the main driver of our sequential second half year improvements. With some major agreements to come in the second half, the pricing effect will contribute clearly more than half of the planned result. In addition, R&D reimbursements will be strong in the second half, particularly in the fourth quarter. Additional positive drivers will be lower premium freights as well as positive effects from our operational performance, mainly from improvements in the efficiency of new production lines and in the general labor situation. All in all, we are on the right path, and I'm pleased that our business is focused on key growth areas. Autonomous Mobility and Architecture & Networking delivered strong organic growth results this quarter as shown here. Now on Slide 6, we can see our performance segmented by region for the second quarter. Automotive worldwide organic growth again outperformed vehicle production by around 5 percentage points, with Europe being our strongest performer, underpinned by our increasing content per vehicle as well as pricing. North America for second quarter this year [indiscernible] below the market. This is attributable to higher call-offs of models with less of our content. We are also transitioning to some new solutions, which just begin to ramp up in volume. Looking into the second half, we will have a positive effect from new pricing agreements with retroactive effect as well as some improvements in the call-offs and respective mix. However, we expect the trend to at least partially revert in the second half of this year with positive signs of improvement already seen in July. In China, we grow with the market as it recovers. Being in line with the market is clearly a result of us engaging closely with our Chinese customer. Now looking to securing our future on Slide 7. We had another strong quarter of order intake in Automotive, achieving a total of EUR 8.6 billion lifetime sales. From the breakdown, we are pleased to show that our Autonomous Mobility team successfully booked EUR 5.2 billion, of which approximately EUR 4.8 billion was attributed to our new strategic partnership with Aurora. I have some more details on that in a moment. I also would like to highlight here the major contribution also coming from our Safety and Motion team where our latest one-box brake system and the stalwart of safety systems, our airbag control unit, contributed to the overall result of EUR 1.3 billion lifetime sales. Just a few months ago, we announced our exclusive partnership with Aurora to provide commercial scalable Level 4 trucking solutions. Now it's time for some quantification. We expect this business to deliver revenues amounting to EUR 4.8 billion. This reflects the current scope of the partnership and business plan till mid-2030 with targeted SOP in the United States from 2027. We are happy to collaborate with Aurora given their already strong positioning in the North American market. They are partnering and have a long-term successful cooperation with customers such as Volvo and [indiscernible]. Overall, an excellent step of our strategic approach into this new and exciting growth field. Now let's move on from Automotive to Tires on Slide 9. We've talked already this year about the challenging market environment. However, I'm pleased that our Tire colleagues were still able to achieve 5.5% organic growth year-on-year for the comparable quarter to bring home EUR 3.5 billion in sales with an adjusted EBIT margin of 13.7%. Considering the weakness in both the European and North American replacement markets, our price mix ensured our ability to perform and has placed us in good speed for the second half of the year. We do expect volumes to continue to decline across all regions except China, which will put pressure on our sales line throughout the rest of the year. I will touch on the impact of that again in my summary. On the EBIT side, as we anticipated in the first quarter, both cost inflation and impact from energy and logistics costs started to ease through the second quarter, and we expect it to further abate through the second half. And now let's dive into our final sector, ContiTech on Slide 10. As we saw with Tires, volume challenges remain, particularly in the construction and highway markets weighing on our Industrial business. Despite this, ContiTech achieved a solid organic growth of 7.1% and adjusted EBIT margin for the quarter of 6.4% led by favorable mix in selected industry fields. Like in Automotive, ContiTech continues to benefit from new price agreements, which have been successfully renegotiated and implemented. Our pricing strength, coupled with the easing inflationary effects, underpins our confidence that despite the challenging volume scenarios we see, we will meet our ContiTech guidance this year. Now let's move to Slide 11 and our report of adjusted free cash flow for the second quarter 2023. Here, we are progressing sequentially in the right direction with our Q2 result of negative EUR 14 million and on track to meet our guidance this year. The result was driven by overall profitability increases having a stronger impact on operating cash generation and supported by inventory levels beginning to reflect the more manageable supply chain situation. Looking to the investing cash flow, we had slightly increased capital expenditure to support our business growth needs. We continue to be on track to meet our adjusted free cash flow guidance for this year. Finally, I would like to review with you the update of some of our market expectations for 2023 on Slide 12. Based on the volume opportunities and challenges, which I've mentioned today, we are updating our guidance for both the weak vehicle production volumes and the replacement tire volumes. Starting with the vehicle production volumes for light passenger cars and light trucks, we have revised our worldwide view to the new guidance of plus 3% to plus 5% as we increase our expectations for both Europe and North America. We also upgrade our guidance for commercial vehicle volumes. Next, looking at the replacement tire passenger and light trucks volumes, now midway through the year, we are seeing a significant decrease in demand in both Europe and North America, leading to an overall worldwide adjustment to land within the negative 2% to 0%. Further, we see a drop in the volume outlook for commercial vehicle replacement tires in Europe and also North America. Finally, in Industrial production, we keep our overall guidance as it is, although we will continue to closely monitor our important submarkets, where we already see some weakening impacting us this quarter and beyond. So with that backdrop, let's review together our outlook on Slide 13. Let's first look to the tire slide. With the downgrading of the volume outlook in the replacement tire market, we're equally adjusting our tires sales guidance for 2023, reducing it by EUR 0.5 billion from the previous range of around EUR 14.5 billion to EUR 15.5 billion to the new range of EUR 14 billion to EUR 15 billion. While on the cost inflation side, we positively adjust our expected headwinds from negative EUR 400 million to negative EUR 200 million, reflecting the easing situation I mentioned earlier on energy and logistics costs. Next, please look at the line below, ContiTech. Here, we are also slightly improved our guidance on the cost inflation headwinds from previously negative EUR 300 million to now EUR 200 million. The result of the sales adjustments in tires can be seen directly reflected in the overall sales of the group. For the group as well as for each individual sector, we confirm the expected adjusted EBIT margins. Given the additional impairments resulting from the Russian business sale and announced restructuring measures in automotive, we increased the expected special effects to negative EUR 350 million. Finally, I would like to reiterate our guidance on the free cash flow. Now that concludes my key messages for today. And I would like to hand over now to you for your questions. Operator, could you please open the line for the Q&A?

[Operator Instructions] The first question comes from Bhagwani, Sanjay.

Sanjay Bhagwani from Citi. I have got three questions. Yes, but before that, congratulations on, again, a very strong order intake. And yes, my first question is on the auto tech. So when we think of the H2 outperformance, excluding the pricing, that is largely the volume and mix, should we expect this to accelerate versus H1, given that you had mentioned that there are some profitable ramp-ups in H2? That is my first question. And then I'll just follow up to the next one, if that is okay.

Okay, so I should answer that question first. We will have to see how the whole situation develops at the moment, especially with regards to the North American market, where we are seeing some ramp-ups, as I just confirmed. We are also quite satisfied with our current look on the Chinese market. So let's see in which direction that goes. I'm pretty confident that we will continue on the path that we've already shown in the first half of the year.

That's very helpful. And my second question is on -- I think on the second half margin improvement in auto tech. You already, I think, provided some really good detail that more than half of this comes from underpricing. If you could provide some more color on the remaining of the variables. I think you mentioned about R&D reimbursements. Then also you mentioned about some additional cost-cutting tailwinds. And I think you also -- on your full year guidance, you had mentioned that the ramp-up of new products with higher profitability. So could you maybe provide some more colors or details on how much of these other variables can contribute to this margin improvement?

Yes. So I think what you can see when you look at the development of the last years also is that our second half of the year, traditionally is quite strong with regards to the R&D reimbursements when we collect the money for the R&D that we are doing directly for our customers. This is a major driver always also in Q4 results. So this is what you can expect again this year to happen. When you look at our Q2 release, you also see that we had significant impact in the second quarter on our margin in Automotive coming from special freights. We still have -- we still face some issues in the North American supply chain, especially related to semiconductor shortages which we expect to further ease during the course of this year. And we also had some onetime effects from retroactive billing of special freights to us in the second quarter coming from the first quarter, respectively, from last year even. And this will also go away. We will have lower special freights in total compared to prior year special freight. So this will also support our development plus the volumes that we are talking about, where we have also adjusted our volume guidance for this year. This will also help to stabilize and improve our operational performance in our plants.

That is very, very helpful. And finally, just one last -- I think if I understood it correctly, the large reason for the revenue guidance adjustment is the volumes. And on the replacement tires, are you seeing any changes in the pricing expectations? And if, let's say, pricing expectations are not changing, then I mean, if volumes are -- let's say, if the sales is going down because of the volumes, if pricing is staying where it is and if the cost is going down, then is it fair to say that the margins could rather be at the upper end of the guidance range than towards the midpoint?

That's a good question, Sanjay, which I will answer by maybe, yes. So we said that we still faced some negative impacts in the first half of the year. So we will have to see how things will continue to develop overall. What we do see is still a very strong pricing in our premium brand segment. So this remains to be strong. So there's a lot of discipline still in the market with that regard. So we will see how the changes in material cost will finally materialize. Please keep in mind for the rest of the year that we also negotiated strongly with our OE customers last year for improved OE pricing also on the tire side, which include material index clauses, which will then also kick in, in the second half of this year.

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

It's Horst from Bank of America. I also got a few questions. I also want to ask them one by one. A follow-up to Sanjay's question, you answered it a little bit on tires. Same one for Automotive because you still guide for a range. The lower end of the range looks already ambitious but in theory, it's still possible even that you achieve mid of the range, end of the range? And what does it depend on? That's number one.

So in general, Horst, we're guiding a range of the 2% to 3%. And these, we reconfirmed again. What does it take to get there is -- are the price negotiations with the customers, which we still continue to have, where we have done more contracts finally negotiated already in July. So I think this is moving into the right direction. This also gives me confidence that we will be in the range of our guidance where exactly we will see because you also know that we spoke about FX developments, we will also have to see how the FX effects will develop.

That takes me also then already to the next question because, of course, we see that the Automotive adjusted EBIT margin has declined Q2 versus Q1. We understand the driver for H1, maybe also in year-on-year comparison, you provide some numbers. But what has triggered in the end the sequential decline? What has deteriorated in Q2 versus Q1? And what will change again? It's clear one of the impacts should have been FX. So therefore, of course, one of the questions is what was the FX drop-through on earnings in automotive in Q2?

Sorry. I cannot quantify the effect per currency loss. The major drivers for the decline was the Chinese renminbi and the Mexican peso. For the Chinese renminbi, we had high payables in euro in China, which then weighed on our results and the Mexican peso has developed strongly compared to last year. And we will have to see -- we are currently deeply analyzing and trying to see what we do to minimize or to fight back those effects on our margins. But again, a driver is also that we had the full cost effect in the second half from the inflationary headwinds, but we have not finally concluded the negotiations with all of our customers. So that has also led to the drop.

And you say you had an impact on revenues from FX of minus 1.1%. Can you quantify then a drop-through to earnings of this minus 1.1%?

I think it's a double digit compared to Q1, but I don't have the full -- the exact amount on hand right now. Yes.

Yes. No problem. Then the last question that I have is on raw materials. Since I think you do not provide a specific guidance on raw materials -- you say it was flat in H1, but I think you exclude raw materials from your guidance. So therefore, my question would be what cadence can we expect from raw materials basically in ContiTech and also in tires in H2?

So the point on that, what I said it was flat for tires. That's an important statement. It was definitely not flat on Automotive because in Automotive, we do guide in the EUR 1 billion that we have, yes. We say that the majority of it comes with material on Automotive, just to make that clear. And we've already seen an easing in raw material prices in the second quarter. Even if we are still negative in the first half, we expect further significant recoveries for the full year, but it's too early to really quantify the effect on our P&L at the moment. We will keep you updated. That was for tires.

Okay. And that's also not considered in your guidance yet at all?

It is. No, no. It is fully considered in our cost inflationary headwinds of EUR 1.4 billion. The tires guidance, the EUR 200 million does not include any negative headwinds anymore, yes, the updated guidance.

But also not a positive tailwind?

Not. No. This is what we're looking at now.

The next question is from Pescatore, Giulio from BNP Paribas Exane.

The first one, going back to the EBIT bridge for Automotive. I was surprised that you didn't mention the cost restructuring efforts in the way to get to the higher margin in the second half, it does not going to be a contributor to the margin improvement? Can you maybe update us on how much of the EUR 1 billion you think you can achieve this year? And how much will then shift into next year? That's the first question.

You've caught me a little off guard, Giulio. When you're talking about our transformation program 2019, 2029, this program ramps as normal as expected, I would say. And we expect to achieve EUR 850 million in gross savings by 2024. We already do have some effects in our current results, but it's an ongoing program. And we've always guided for gross savings here.

Okay. So pretty much half maybe this year and then the remainder next year of the EUR 850 million?

No. We've already -- we are already on a very good way with the program in general, and we are also -- but we never broke it down on a yearly basis in detail, Giulio, but we've already achieved a significant number already this year.

Okay. And then the second one, I mean, we talked about the CMD before potentially in Q4. Can you maybe confirm if that's still your intention? And we talked a lot about portfolio restructuring. Is there anything you can say in terms of your willingness to look more actively in the short term to any potential divestment or spinoffs.

So I think Niko announced it at the tech day to be in the winter season as a formal tire guy, he meant that to be between October and Eastern. So we'll keep you posted with the date. And as we've always confirmed, we are doing reviews on our portfolio on a consistent and consequent basis. And in case we have news to share, we will do that in due course.

The next question is from Thomas Besson from Kepler Cheuvreux.

I hope you can hear me. I have three questions as well, please. Firstly, on Automotive, can you tell us, at the end of June, what proportion of your Automotive revenues have already been negotiated with your customers in terms of inflation knowing that a lot of automakers have told us that they -- in their mind, most of the negotiations were already over by the end of June. And can you comment on that relative comment? Second question, more long-term question. Both your Automotive and Rubber businesses have seen some clear deflation in terms of working capital. How long do you think it's going to take before we see some real improvement on that front? And do you think we're ever going to get back to the pre-COVID situation in terms of working cap? And how long do you think it could take to get there? Last question. I'm a bit puzzled by your earnings seasonality, notably in Automotive over the last couple of years. Normally, the 2 strongest quarters in this business are Q2 and Q4 because of volumes and R&D reimbursements. In this year, like last year, your second quarter is terrible despite strong revenues. Can you explain that? And can you tell us whether you think that once we are out of this high inflation phase, we're going to get back to such seasonality where Q2 and Q4 are the best quarters or whether it's something new in your business, which means that the first half is weaker and the second half is stronger?

Okay. Let me first start with the amount of negotiations we've already concluded. As you know, Thomas, we don't quantify how much we have already achieved, that we are working heavily on the -- to recover as much of the cost inflationary headwinds that we are facing in Auto, that would mean the EUR 1 billion. As you know, we've also communicated that we are -- that the concentration is very kind of stable between the different quarters, as we've fallen short, so to say, on our expectations, you see that there is still something to come for the last half of the year -- for the second half of the year. And that is under negotiation still ongoing. So there are still some contracts that we do have to negotiate with retroactive effects to catch up. The second question was about the working capital topic. I think we've clearly said that comparing the current situation in the supply chain overall worldwide that an increase in working capital is something that we will continue to see and that we do not expect ourselves to get back to pre-COVID levels, especially on the Automotive side. The reason for that is that we had to build up stocks also upon customer request to limit potential effect of shortages in the supply chain overall. What we're doing right now is we are working heavily to determine the right level of inventory for the different parts and components that we have out there, where you see that we have reduced our inventory levels for probably the first time really for a couple of quarters, so that our measures that we have decided on and that we have taken are now really getting -- paying into effect. Plus what you also need to keep in mind, and this is what I've also said, especially looking at the year-end figures last year is that our customers have also changed their payment behavior quite heavily, and this is also something that we have to work against. Then looking at the Q2 results this year and also when you talk about last year, what I just mentioned is that we do see the full inflationary effects being in place in the second quarter of this year. And we have not yet finally concluded the negotiations with our customers. This is the reason why the second quarter was still weaker plus the one-term effect plus the FX topic that we spoke about. Will we get back to more normal levels if we -- if the inflationary headwinds will become normal again, call it like this, yes, that is definitely our expectation. Our tires for the second quarter did not look that bad.

The next question is from Jose Asumendi from JPMorgan.

So a few questions, please. On tires, I was wondering if you could please just describe a little bit why -- what's going on in the industry on your -- the reasons to downgrade the guidance on replacement tires across passenger car and truck. And if you could maybe elaborate a little bit how far -- how many quarters do you think it's going to take to see the destocking done the truck tire side? Also, specifically on the bridge, if possible, do you think volumes can turn positive in Q3? And from your experience with pricing in a deflationary environment, how does pricing evolve naturally for the business? That will be the first bucket. And second bucket, very simple UAW negotiations kicking off in Q3. From your experience the past years, are you expecting some production disruption in September, October? Have you maybe overproduced in the first half and this might not have a major impact in the second half? Is this part of your guidance overall?

Okay. So I'll just start with the market question on tires. So we've reduced our sales outlook because we do see a continuous weakness on the European and North American market on the replacement tire side. Why is that? Part of that is, as you already said, still having higher inventory levels than in the past with our dealers, which means that the stocking takes place later in the year in some areas. We saw that with the summer tire stocking also, and we will have to see how the winter tire business stocking will really take place. So that is, in general, a weakness in the market at the moment. What we also do see is that some of our dealers are still hoping for price reductions and that this also delays the stocking period a little bit. I think that is something that we definitely do see, and this is the same for the passenger car -- passenger lighter tires and also for the truck tires. How long it will take to normalize? We will have to see. There is currently no real projection possible. For us, that is the reason why we've adjusted our market outlook and we've also reflected that in our sales expectations for this year. On the UAW side, I've seen the requests that were put out there, and those are strong requests and heavy requests. This is what you were seeing. We are already used to high cost inflationary impacts, but the request of the UAW currently is a new category, I would call it, with regards to the expectations. If that will lead to production interruptions during the course of the year, I cannot say for now, if such a potential disruption part of our guidance, I clearly need to say no.

Got it. And on the revenue tire bridge, do you think volumes can turn positive in Q3? Or should we still pencil in some softness there, some negative number?

On the automotive?

On the tire revenue bridge. Do you think we should still expect some negative volume there? Or do you think there's a chance for the business to turn positive on volume?

I think we've just adjusted the guidance. So our expectation is not a further weakening beyond our current sales protection.

[Operator Instructions] The next question comes from Tim Rokossa from Deutsche Bank.

Tim from Deutsche Bank. I have two questions, please. The first one is heading a bit in the direction that Thomas also came from, I think. I mean, FX is one of the explanations, but you are one of the three largest suppliers globally. You are a key partner to all of your OEM customers. And the fact is you make 0 profit on EUR 5 billion revenues and 20% growth. Why do you think you are in this situation? I mean we can debate about all sorts of nitty-gritty points like FX, which has a meaningful impact in a given quarter. But if you start at 6% to 8% margin, that wouldn't even be worthwhile discussing really. So what's the fundamental problem that you have in Automotive? And what's the pivotal moment that brings you back into being a normal supplier that generates returns that are adequate to your size? Is it the renegotiations? Is it EUR 6 billion revenue run rate? Is it new contracts materializing? All these sort of questions. And secondly, when we think about your customers on the OEM side in Automotive, they have pretty long order backlog. Obviously, they worked this through. Now the fear is that a lot of investors have that post that order backlog, there isn't much coming, and we would see a bit of a downfall. We get very conflicting messages on that from the different OEMs. What do you currently plan for? And what do you see in your call-offs? Do you believe that we will see a dip post the order backlog having been worked through? Do you notice that there's a certain improvement, in particular in Europe like we have heard it from some of your customers over the last few weeks and months?

That's a broad question, Tim. So in general, with regards to our insufficient performance on Automotive in general, this is how I would call it. I fully I understand your point. And the only thing that I can really point out is that we've been probably hit due to our portfolio, mostly from the transformation of the industry, which requires us on the supplier side to heavily invest into the new technologies upfront. What you do see is that with the order intake that we are having now, we have definitely taken the right decisions on the investments that we have made, but those investments still do and have weighted heavily on our margin performance in Automotive. We are in negotiations with our customers. And as you said, we do have a very broad customer base and are a very relevant supplier to our customers. This is also why we are fighting for our new price negotiations. And while we are also following a quality over speed approach maybe compared to some of the others to really make sure that we get what we deserve for the products and the services that we do provide to the industry. On the automotive orders or on the backlog that our customers are talking about a lot, we do see a quite good situation in the market. This is why we've raised the expectations on the market outlook from 2% to 4% to 3% to 5% for this year, Tim. And we also don't see any signs of weakening order intakes at the moment from our side. And when you look at the mid- to long-term perspective, we've been reporting record order intakes for quite some time, quarter over quarter over quarter, which means that we are supplying the right parts to participate in the growth and also in the -- in some areas, maybe also adapted strategy of our customers.

And when you think about the negotiations and you want quality over speed, I think that's much appreciated. But ultimately, you have to conclude these negotiations because they consume quite a bit of management power, I assume. Will this definitely be sometime in Q3 or at least H2? Or do you believe you may want to drag this on if no OEM wants to agree on the quality, but rather wants to settle on quantity?

Well, as I've already pointed out that the expected price negotiations do play a major role in achieving our 2% to 3% guidance for this year for Automotive. You can be sure that we will work very hard on concluding everything as soon as possible and also during the course of this year as we were able to do also last year.

Next question is from Himanshu Agarwal from Jefferies.

Himanshu from Jefferies. Just wanted to come back on to the order intake. The EUR 8.6 billion orders includes around EUR 4.8 billion from the Aurora partnership, which is on the commercial vehicle side. And I thought it should be incremental to your passenger cars business because if I adjust for that, then it looks a bit weak overall, especially in Safety and Motion and user experience segments. And also on the EUR 4.8 billion, is it all hardware? Or does it also include some expectation of your new business model related to revenue per mile? And also if you can talk about the duration of this EUR 4.8 billion of order intake because it looks like it's slightly longer dated than a normal contract from a passenger car OEM of 5 to 6 years.

Okay. So let me start with the first one. As you all know, order intakes are not linear or are not always comparable quarter by quarter by quarter. And we have also said that we do have a quite nice order intake on the Safety & Motion business this quarter. So I don't see that this is any signs of weakening order intakes. You are right that we don't show one big UX order intake this quarter, but this is also due to the reason that we have already had a significant order intake for UX during the course of the last quarters in general, yes. So I think all that really is really still strong. And with regards to the 4.8%, this business does not only include hardware. This also includes the full fallback system, which is required to keep the truck on the road in case the artificial intelligence driver does not perform anymore, and this will help to stop the truck in time. So this is something -- this is a systems development that's completely coming from Continental in that case. And the duration of the sales, when you keep in mind that we said that we expect the start of production to start from 2027 on mid-2030 is not a longer period than usually with regards to full serious production running.

And just to confirm, so any revenue based on per mile basis, is that going to be incremental to this? Or is that already included in...

That is included in the EUR 4.8 billion.

The next question is once again Giulio Pescatore from BNP Paribas Exane.

I'll try my luck on the UAW negotiations. Can you just give us an idea of your exposure to Stellantis, GM and Ford in North America?

What I can give you is an exposure of our sales in 2022 to North America. We generated 27% of our sales in North America in 2022.

Okay. And no, 1/3 of that with the Detroit 3. Can you give us just a general sense?

No, nothing more in particular, Giulio, I'm sorry.

Okay, well, I tried. And then -- sorry, second one on the order intake. I think one of the key problems today, at least when I speak to investors, is that generally, they don't believe that these order intake numbers are credible or real. And I think that's because in the past, suppliers in general have given big order intake numbers that never translated into sales and growth. So can you maybe just elaborate or give us some confidence around the type of assumptions you make when you book an order intake on volumes, pricing. How credible is it -- are these numbers?

When you look at our outperformance of the market, Giulio, and the order intakes of the past, I would say that we do have some proof points that we are growing over proportionately and in line with the order intakes that we have -- that we do have. But what we do is we take the volumes from the quotations, and we project them into -- to determine the lifetime sales of the order intake -- so that is a credible business.

Okay. So you used the assumptions given by the carmakers. You don't take a discount to those volume assumptions?

Only if we have significantly different experiences.

The next question is from Frank Biller from LBBW.

It's on your outlook, when taking the outlook here, you reduced the revenue line by EUR 0.5 billion and talking about lower headwinds in the range of EUR 0.3 billion. So what is missing here on the margin side? So normally, that should increase the margin by about 0.7 percentage points, but you're leaving with your margin targets of 5.5% to 6.5%. Are you here? Have you more room for reaching the guidance? Or was it a clear missing of your margin expectations in the first half? What's behind that here?

So where we do -- so we don't guide on margins per quarter or per half of the year. When you look, for example, at the tires business, we are significantly above our current margin corridor on the tire side in both quarters. So I would not speak about investing of the -- about missing margins. And also with ContiTech, we are pretty much in the middle of the guidance at the moment with regards to the margins. Where we fell short was Automotive, especially in the second quarter compared to the expectations, but we are still confirming our guidance for this year, the 2% to 3%. When reducing EUR 500 million on the tire side, this also comes with a margin. And that is the effect and I've also spoken about some of the effect on the tire side, like the raw material index clauses kicking in on the OE side on tires, which will be a burden for the second half of the year. So overall, I would say, by reducing the sales expectations, especially on replacement tires by EUR 500 million without adapting the margin expectations, I think this is a good sign that we are managing our cost positions quite well and that we are confident that we will be able to achieve the margin guidance, especially on the Automotive side for the second half.

So the operating leverage here is in the range of 40% in tires? You will reduce the headwinds by EUR 200 million and still leaving the margin guidance and EUR 0.5 billion lower revenues, so this should lead to a 40% operating leverage.

Well, we do have a mix effect coming from more OE sales, which have a different margin profile than the replacement tire business. And as you've also seen, we've increased sales expectations on the OE side. Don't trust the raw material index clauses kicking in.

The next question is from Horst Schneider from the Bank of America.

Since we still got some time left, so it's worth trying. When I look at your free cash flow guidance, and it implies also for H2 quite strong cash generation, which maybe is also linked into some of the earnings and Automotive, even though that does not explain then the full part of the needed cash improvement. So is it more a last-minute issue if this cash flow guidance will be reached or we see already in Q3 then some substantial progress? Or what does it depend on that this free cash flow guidance remains achievable, number one, and number two, just a follow-up on this UAW potential strike impact. In case of a more severe strike, you would say that your Automotive guidance could be challenged, let me put it that way.

Let me start first with the cash flow topic. So you've always said that the improvement on the EBIT line in Automotive is going to be a driver for the cash flow guidance for the second half of the year. What will also kick in is the improvement on the working capital side, which is still required, which was always also said very, very clearly. That means get the inventories to the level that we are expecting at the moment, make sure that on the receivable side, on the OEM side, we will get the payments as expected. I think that is also clear. It's always been the case on the Automotive business that with the Q4 reimbursements on the R&D, that this is a very strong contributor also there to the cash flow achievement in the second half. So we will see improvements in the third quarter because we are managing our working capital differently now. And we expect the price negotiations with the OEMs to continue to be successful, but this is what I would say with that regard. And as I said, the UAW negotiations and potential strike impacts are not part of our guidance. If that has an effect and how much of an effect, I can't tell you at the moment, Horst.

The next question comes from Tom Swift from Morgan Stanley.

I guess just a question from the credit side, and I think just a follow-on from Horst's question. So if I look at the working capital for the year, it's a consumption of, call it, EUR 1.8 billion or so. But then, what's -- how much of that do you expect to unwind back in the second half? And then following on from that, you've obviously got some maturities that I imagine one of the pieces have been refied. But I mean, what's the expectation? Are you going to pay some of the bonds down when you refinance them. And then on top of that, what's the implication for the interest cost going forward? Because when I look at the interest paid, it's half-on-half. It's kind of more than doubled. So how do you factor that in and think about the free cash flow as well from that perspective.

That is -- these were a lot of question, I hope I've got them all. So in general, with regards to the working capital, our smart inventory program that we have established in automotive will play a major role in reducing the overall working capital in general. And this does not only include the inventory. So inventories is one piece to it, the accounts receivables are a second part to it. And the payables are the third part to it to really manage that. So overall, our working capital should decrease by at least around 10% from the current level. So that is the expectation. That was the first question. With regards to the maturities, you can see in the lineup that we do have two bonds that will mature this year. We have already done refinancing in the fourth quarter of last year and also already this year, where we've issued another bond with a value of EUR 750 million. So we have already done our homework, as I would say, with regards to the refinancing of the maturities that we are expecting for this year. And we've done that, by the way, at a good pricing level. That is also something I need to say. So there is not too much of an expectation or negative impact for this year coming from the refinancing. And then the last question, I kind of -- I think that was it.

Well, just the interest cost going forwards because it has substantially increased in terms of the cash interest paid, given that you are refinancing or you've already refinanced some really cheap debt beforehand. So just any clarity on what you think for cash interest costs going forwards?

I would say there are more -- so in general, we do have a quite good maturity level on our bonds overall so you do see them when you look at the lead time for the rest, I don't expect significant impacts from the interest rate developments in the near term for us.

The next question is once again from Thomas Besson from Kepler Cheuvreux.

I would like to come back to ForEx headwinds in Q2 and whether you could give us any more indications on how we could expect this to develop going forward? So you mentioned the Mexican peso and the Chinese RMB are the two main headwinds. Can you give us more details on whether we are talking about just translation hits or some transaction headwinds as well, whether it's purely operational ForEx headwinds or also partly linked with your debt? Well, any indication on what we should expect and how we could model the expected impact forward would be helpful.

If I would know the exact development of all the FX rates worldwide for the rest of the year, I would be a very, very smart person. So I think it's both, it's translational and transactional effects that we're currently seeing, not on the debt side. But overall, we are currently really working heavily Thomas, to find out if -- and in which regard we want or we can do something to derisk overall. There's nothing else I can talk about at the moment, yes? I think the Mexican peso is really due to the fact that we are producing heavily in Mexico as a lot of other Automotive suppliers are currently doing and have already spoken about. This is an effect that we are monitoring really closely.

At the moment, there seems to be no further questions. [Operator Instructions]

That seems not to be the case. So I say thank you, everyone, for participating in today's call. As always, should you have further questions, the IR team is available. Please get in touch with us. With that, we would like to conclude today's call. Thank you so much and goodbye.