Continental Aktiengesellschaft (OTCPK:CTTAF) This autumn 2022 Outcomes Convention Name March 8, 2023 9:00 AM ET
Firm Members
Anna Fischer – Head of IR
Niko Setzer – CEO
Katja Dürrfeld – CFO
Convention Name Members
Jose Asumendi – JPMorgan
Thomas Besson – Kepler Cheuvreux
Tim Rokossa – Deutsche Financial institution
Himanshu Agarwal – Jefferies
Philip Koenig – Goldman Sachs
Operator
Girls and gents, welcome to the Continental AG Analyst and Investor Name Full 12 months Outcomes 2022. At our buyer’s request, this convention shall be recorded. At the moment, all members have been positioned on a hear solely mode. The ground shall be open in your questions following the presentation. Let me now flip the ground over to Anna Fischer, who will lead you thru this convention. Please go forward, madam.
Anna Fischer
Thanks, Beatrice, and welcome, everybody, to our fiscal ’22 outcomes presentation. At the moment’s name is hosted by our CEO, Niko Setzer; and by our CFO, Katja Dürrfeld. Small reminder that each the press launch and the presentation of immediately’s name can be found for obtain on our Investor Relations Website. Earlier than beginning, we would wish to remind everybody that this convention name is for traders and analysts solely. If you don’t belong both of those teams, please kindly disconnect now. Let me stroll you thru immediately’s agenda on Slide 2. Niko will begin with our enterprise highlights. Then Katja will evaluation monetary highlights for ’22 and shut with our expectations for ’23. Following the presentation, we are going to conduct a question-and-answer session for sell-side analysts. To provide an opportunity for all to ask questions, we’d kindly ask you to restrict your self to not more than three questions. This may assist us conclude our name on time. With that, let me now hand over to you, Niko.
Niko Setzer
Sure. Thanks, Anna. So welcome to all people, and let’s soar into the subject and let’s start on Slide 3. Many of the KPIs you see shall be already referred to as we’ve got launched on January seventeenth. So I believe it is not essential to learn by way of every quantity, nonetheless, crucial ones I like to debate and describe. Total, on group stage, we got here out at EUR39.4 billion and the adjusted EBIT margin was 5%. Particular efforts of greater than EUR1 billion are predominantly noncash postings, primarily ensuing from goodwill in addition to property, plant and tools impairments, consequence of rate of interest hikes used within the valuation. We’ve additionally impaired all the intangible in addition to property, plant and tools belongings in Russia. These are all of the burden to the online revenue, which finally quantities to EUR67 million. Adjusted free money circulation is EUR200 million was considerably decrease than our expectations. This is because of significantly delayed assortment of account receivables as per the reporting date in addition to excessive stock ranges nonetheless weighing closely on working capital. So fiscal ’22 was dominated by excessive inflation in all sectors, which led to cost negotiations in addition to all prospects. Our primary goal was to realize sustainable and honest compensation for our merchandise, providers and options by reflecting this inflation in new costs agreed with our prospects. And searching again, we are able to say that this course of was concluded to our satisfaction to our satisfaction in all sectors.
The outcomes of these negotiations are clearly mirrored within the monetary years’ gross sales and earnings. So general, we achieved a robust natural progress of 12.3%. FX influence on high line was 4.5%. In Automotive, we have been capable of outperform the market by round 10%. So we see this in a while as effectively. Gross sales have been weighted with our gross sales, and Katja will refer extra to that. And this robust outperformance can be attributable to a big enchancment of our product combine, the next content material per car in addition to robust demand for our excessive know-how merchandise. One other spotlight in Automotive actually was the robust order consumption, EUR23.4 billion, 26% larger than in 2021, which can safe worthwhile progress within the subsequent years going ahead. As a method of handle similar portfolio measures, which we’ve got at all times talked about, we take into account partnerships as enormously vital, particularly in our progress areas. So we’re happy to have entered the strategic partnership with Ambarella to collectively develop full stack software program and {hardware} system options for each assisted in addition to the upper ranges, the automotive driving ranges. As to our newest financing actions, it is value mentioning that in November 22, we issued a brand new Eurobond on favorable phrases. Continental is understood for its robust steadiness sheet and strong financing construction, and that is one more proof of it. Additionally, general indebtedness elevated on the finish, reflection of upper working capital, as already talked about, dependable long run refinancing will not be a difficulty and displays excessive urge for food in addition to the belief of debt traders in Continental. Our gearing ratio at 32.8% is in step with our goal ratio and elevated even barely from final 12 months.
Wanting forward, ’23 will convey alongside some tailwinds. So Katja will speak about this later. We see the state of affairs enjoyable in some areas, no less than sure uncooked materials costs reducing, for instance. Nonetheless, general, we anticipate additional inflationary headwinds in ’23, impacting all three sectors, particularly, automotive once more. Due to this fact, our deal with ’23 is once more on worth negotiations with all our prospects. For tires alternative enterprise, we’re absorbing the markets very rigorously and won’t hesitate to extend costs as effectively the place crucial and potential. Important pillars of our ’23 program for achievement are the development of our operational efficiency of our R&D effectivity in automotive and persevering with the strict price management in all areas, mainly. The rigorous execution of our structural program is essential as effectively. And naturally, we are going to work on the additional stabilization of our provide chains. Sensible stock administration means aiming for minimal unit ranges whereas nonetheless securing the provision of our important parts. Above all, we are going to proceed to place our folks first trying to retain the unimaginable group we’ve got whereas attracting on the similar time, new abilities to help us to realize our objectives. So shifting to Slide 4, in search of the tire highlights. And right here, you see the progress we made within the final fiscal 12 months in addition to within the years earlier than, beginning with the chart on the left facet. This exhibits our important progress for our EV tire enterprise, so we are actually certified to be match for greater than 400 totally different homologations. A couple of 12 months in the past, we counted round 300. So we made important progress, one other 100, which we added and we’re pleased with. From the ten largest international EV producers, and I assume they’re well-known, 9 of them depend on our prime quality merchandise. On the broader stage, the overwhelming majority of OEMs select Continental tires for his or her EVs too. Given rising necessities on this space, the rising homologations present the belief that these buyer place in our applied sciences, which we’re constantly creating additional.
On the suitable hand chart, you’ll be able to see the 2 additional drivers of our combine enchancment. One is the continued enlargement of extremely excessive efficiency tires and our passenger and light-weight truck combine, who’s rising share of gross sales has effectively outpaced unit progress, demonstrating the general proportionate progress contribution from extremely efficiency tires. This pertains to all manufacturers, for our Continental model tires, the share developed much more considerably from 52% to 56% of PRT gross sales, a lot larger than within the general. Additionally contributing to combine are leading edge applied sciences. You see them the three beneath, ContiSilent and ContiSeal, for instance, in addition to within the center superior compounds for elevated mileage. Coming to the following level, dividend earlier than we’re turning to the monetary efficiency, let me handle our proposal. Right here in precept, we’re dedicated to distributing a dividend client proper to the event of our web revenue, our dividend coverage is to pay out between 15% and 30% of web revenue attributable to the shareholders of the guardian. And this meant legitimate January, nonetheless, intervals that are untypical, require totally different choices and we’re not afraid to use once we see it match a extra applicable strategy. As mentioned earlier than, fiscal ’22 was burdened by excessive noncash results within the web revenue in a simplified means, let me name them accounting results, pushed by rate of interest hikes in addition to impairment losses on belongings in Russia. Additionally contemplating a complete shareholder return view with the share worth beneath stress, significantly final 12 months, we proposed a dividend of EUR1.50 for fiscal ’22. This shall be topic to approval by the Annual Shareholder Assembly finish of April.
With this, I wish to hand over to Katja for the monetary evaluation.
Katja Dürrfeld
Sure. Thanks, Niko, and likewise a heat welcome from my facet. Let me now first transfer on to the This autumn efficiency by group sector on Slide 6. In Automotive, we see a robust improve of 17.9% within the year-on-year natural gross sales and margin improved by 570 foundation factors to 2.1%. Each results, after all, have been strongly supported by the value agreements concluded in 2022 and to a small extent from newly signed contracts, which we’ve got a retroactive impact to January 1, 2022. In tires, natural progress of 12.3% primarily displays, once more, the robust worth/combine within the alternative sector. The adjusted EBIT margin decreased by 70 foundation factors to 10.3%. Optimistic results on the highest line have been sadly countered by decrease volumes and better inflation results in This autumn. At ContiTech, the natural progress of 12.1% additionally displays optimistic results from worth agreements, particularly with automotive OEMs. Adjusted EBIT decreased by 340 foundation factors to 2.3%. Now persevering with with the evaluation Automotive This autumn gross sales and adjusted EBIT on Slide 7. Automotive gross sales totaled EUR4.8 billion. The influence from FX was optimistic 3.5%. Key drivers for the robust natural progress in addition to the adjusted EBIT margin of two.1% have been new worth agreements in place, larger quantity in addition to larger content material per car. Inflation headwinds totaled greater than EUR100 million. For the fourth quarter standalone, autonomous mobility reported gross sales totaled to roughly EUR0.5 billion and confirmed an natural progress of 21.2%. This was primarily pushed by stronger demand in lengthy and quick time period vary radars in addition to entrance cameras. Security & Movement reported gross sales totaled round EUR1.8 billion and confirmed an natural progress of 15.2%. Sturdy demand in our new braking system era and sensors enterprise confirms we’re heading in the right direction. The brand new enterprise areas, structure and networking, sensible mobility and person expertise reported gross sales totaled round EUR2.5 billion and confirmed an natural progress of 19.4%. Gross sales have been primarily supported by stronger volumes within the space of connectivity merchandise in addition to digital clusters and show options.
On Slide 8, for a greater understanding of present profitability inside automotive, I’ll break down gross sales and adjusted EBIT for fiscal 2022 by the transction view. Let’s begin on the suitable facet of the slide with the figures for fiscal 2022. For 2022, general automotive gross sales sum as much as EUR18.3 billion with an natural progress of 13.9%. Adjusted EBIT margin is unfavourable 0.2%. Our largest motion area Security & Movement with reported gross sales totaling to EUR6.8 billion and an natural progress of 12.1% additionally makes largest optimistic contribution to adjusted EBIT at EUR164 million. Adjusted EBIT margin is 2.4%. Sensible Mobility is contributing with gross sales totaling EUR2.4 billion and natural progress of 4.3% and an adjusted EBIT margin of three.6%. Consumer expertise reported gross sales totaling EUR3.7 billion and confirmed an natural progress of 12.5%. Adjusted EBIT margin is 0.4%. Structure and networking and autonomous mobility are working in progress areas of future know-how, each confirmed a robust natural progress of 23.4% and 19.3%, respectively, and we anticipate them to positively contribute to EBIT sooner or later. At the moment, their result’s burdened by the DNA of this new and transformative enterprise. Particularly, the brand new applied sciences require fairly excessive pre-investment whereas economies of scale are ramping up. Due to this fact, our absolute focus right here is to considerably enhance our R&D effectivity and safe the volumes for the long run by way of additional robust order consumption. It’s our perception that these progress companies shall be drivers for future outperformance.
Let me now evaluation natural gross sales efficiency for automotive versus regional car manufacturing in This autumn on Slide 9. Segmented by area, automotive natural progress was capable of outperform car manufacturing once more considerably in our European market in addition to in China. Our natural progress in North America in This autumn was solely barely above native car manufacturing however is principally because of the buyer combine on this area. Total in This autumn, automotive outperformed its regionally weighted common by round 13 proportion factors, which is a noticeable quantity. The robust outperformance was once more primarily pushed by the numerous results from elevated buyer pricing. However apart from in earlier quarters, there have been no important retroactive results in This autumn. Moreover, we have been capable of additional improve the content material per car. And now turning to Slide 10. Allow us to take a look at our cumulative outperformance for complete fiscal 2022. European market exhibits a really robust outperformance and so does China. North America is outperforming, too, however simply barely. Total, automotive outgrew its regionally weighted common by round 10 proportion factors. On Slide 11, we see once more a really pleasing complete order consumption of automotive of greater than EUR5 billion of lifetime gross sales. For Security & Movement, we achieved an order consumption of EUR3.1 billion lifetime gross sales. We report right here a significant enterprise wins for brake techniques, MKC 1 and MKC 2. As well as, our enterprise space structure networking, sensible mobility and person expertise continued its success story and confirmed additionally within the fourth quarter, a noticeable order consumption of EUR1.4 billion. The largest wins have been associated to an order for L-shaped show answer and orders for mild management items. Autonomous Mobility achieved an order consumption of EUR0.9 billion in This autumn, including enterprise in almost all sensor classes and a further system help, together with a computing unit.
Shifting from automotive to tires on Slide 12. Regardless of the as anticipated troublesome market atmosphere and a big decline in volumes of unfavourable 6.8%, tires was capable of improve gross sales by 15.7% to EUR3.7 billion. Worth/combine confirmed a really pleasing and an impressive efficiency of 19.1%. This greater than compensated for the inflation in This autumn. Shifting on to ContiTech on Slide 13. Regardless of a lower in volumes within the industrial and aftermarket enterprise, ContiTech confirmed a strong natural progress of 12.1%, primarily supported by worth results with industrial and aftermarket in addition to automotive OEM prospects. The profitability of the interval was clearly beneath our ambition being extremely impacted by larger manufacturing prices. Whereas demand elevated on the automotive facet of the enterprise, we skilled reducing volumes on the trade facet. ContiTech’s fragmented footprint supplied few alternatives to instantly and domestically substitute workforce, which was unsufficient within the auto vegetation whereas having to take care of over capacities within the trade half. ContiTech additionally skilled elevated illness charges usually and significantly in places beneath restructuring in excessive price international locations. COVID associated enterprise restrictions in China and excessive vitality prices within the quarter have been a further headwind. With a excessive labor content material and a robust footprint in Germany, onetime funds negotiated with unions weighed over proportionately on the EBIT too.
Let me now proceed with the overview of free money circulation for full 12 months 2022 on Slide 14. The primary driver for the lower of the working money circulation from EUR2.5 billion to EUR2.3 billion was robust working capital headwinds from excessive accounts receivables because of delayed money inflows from our prospects on the finish of this 12 months. Inventories continued to remain at a excessive stage as a mixture of securing provide chain and better costs per unit. The investing money circulation of unfavourable EUR2.2 billion was primarily influenced by excessive capital expenditure on property, plant and tools and software program in all sectors. For instance, we elevated investments in person expertise to increase capacities demanded by the excessive order consumption. As introduced, we proceed to additional improve capability within the tire section, primarily in North America for truck tires and in China for PLT tires. Additionally, the enhancement of extremely excessive efficiency capability in EMEA and for extremely excessive efficiency on mild truck in North America stays a spotlight matter. On Slide 15, our expectations are based mostly on presently foreseeable results. Given this assumption we’re anticipating a year-on-year improve in mild car manufacturing of two% to 4%. For passenger automobile alternative tires, we anticipate demand to be up from plus 1% to plus 3% with the demand being flat in Europe with out Russia and North America, however with a rebound within the Chinese language market after the COVID-19 associated disruptions in 2022. For the economic manufacturing, we anticipate volumes to remain flat within the Eurozone, develop into barely unfavourable in USA and clearly optimistic in China.
Let me flip now to our outlook on Slide 16. Right here you see, as regular, our outlook KPIs for 2023. I am certain that that is the primary focal point immediately. Gross sales elevated to round EUR42 billion to round EUR45 billion are pushed by larger volumes outperformance but additionally by inflationary headwinds, that are anticipated so as to add as much as round EUR1.7 billion on group stage. For 2023, primary causes are nonetheless a fabric, significantly in digital parts, proceed at decrease ranges than earlier 12 months in vitality and logistics. A brand new factor which must be talked about, not simply right here but additionally in our negotiations with our prospects shall be labor pushed inflation. On group stage, we anticipate an adjusted EBIT of round 5.5% to six.5%. Our prognosis for adjusted free money circulation is between EUR800 million and EUR1.2 billion. I am now on Slide 17. We anticipate quantity progress in all our underlying markets and we are going to outperform the market in all group sectors. Pushed by additional sustainable worth changes the ramp-up of recent product traces and the upper content material per car, we anticipate automotive gross sales to considerably outperform mild car manufacturing. We additionally anticipate tires to report sizable outperformance predominantly from continued optimization of worth and blend. Shifting on to the EBIT bridge on Slide 18. Beginning with Automotive. The rise within the international car manufacturing, the ramp-up of recent product traces with larger profitability and the enhancement of our operational efficiency, for instance, from R&D efficiencies and our structural program will help a year-on-year enchancment in EBIT. Inflation of round EUR1 billion shall be a headwind once more.
As in 2022, we’ve got began negotiations with our prospects with the intention to go on as a lot of that inflation as potential. Altogether, we anticipate automotive margins to additional considerably enhance in direction of our midterm targets and on the finish of the 12 months quantity to between 2% and three%. In Tires, optimistic market developments in addition to a strong worth/combine will help the adjusted EBIT margin. Inflationary headwinds of round EUR400 million are primarily pushed by larger labor prices, an additional improve in freight prices in addition to some vitality prices. To date, we do not predict a rise of price for uncooked supplies, but it surely’s too early to say that there may very well be a tailwind. Primarily based on these assumptions, we anticipate a year-on-year secure tire margin between 12% and 13%. At ContiTech, the development in adjusted EBIT can be supported by market growth out efficiency, deal with the trade enterprise and now in focus operational efficiency enhancements. Inflationary results ought to add as much as round EUR300 million. Primarily based on this, we’re predicting ContiTech’s margins for 2022 to be between 6% and seven%. Persevering with to our expectations of money circulation on Slide 19. There are various shifting elements once we take a look at our working money circulation. First, the year-on-year enchancment in EBIT shall be a optimistic. Moreover, the optimization of our working capital supported by our sensible stock administration and assumingly excessive well timed money inflows for receivables will help enchancment of the working money circulation. For our restructuring program, we anticipate a money out of round EUR200 million, which shall be about EUR100 million lower than fiscal 2022. As for investing money circulation, we anticipate capital expenditures of round 6% of gross sales. As in 2022, automotive investments are primarily pushed by the excessive order consumption, in addition to by new high know-how merchandise which require the next manufacturing automation stage. In Tires, we are going to make investments to additional lengthen our capacities, for instance, in China and North America, in addition to tooling for additional combine enhancements. And in ContiTech, we are going to deal with investments for the economic and aftermarket companies. In complete, we anticipate group free money circulation earlier than acquisitions and divestments to be between EUR0.8 billion and EUR1.2 billion.
With this, I wish to finish immediately’s presentation. Niko and I’ll now be out there in your questions. Operator, may you please open the road?
Query-and-Reply Session
Operator
[Operator Instructions] And first within the line is Jose Asumendi from JPMorgan.
Jose Asumendi
I needed to ask, please, and thanks for the incremental cut up we’ve got now by division inside the automotive division, and you’ve got a 2% to three% margin steerage for 2023. So I’d love to know a bit higher in these 5 subdivisions that we’ve got, how will we undertaking [Indiscernible] three, of which divisions do you suppose shall be clearly within the optimistic, which of them do you suppose shall be extra within the breakeven or perhaps barely loss making? And what are the perhaps the most important highlights or the most important drivers of the profitability throughout these subdivisions?
Katja Dürrfeld
So initially, I wish to remind you that usually, we do solely information on automotive stage. Sure, we mentioned that we offer you revenue indications from time-to-time to just be sure you’re capable of fill your fashions. However usually, we do solely give steerage on the automotive sector itself. Once you take a look at the presentation that we’ve got shared with you, you do see that we’ve got three primary drivers for the development of our operational efficiency in automotive. The one driver is the pure quantity driver, which comes from the market that we anticipate to be between 2% and 4%. The second pillar of our success in 2023 would be the outperformance we — I believe we indicated fairly clearly how robust the outperformance within the automotive sector was in 2022 past pure market progress or manufacturing quantity progress. And the third pillar is, for certain, the operational enhancements that we predict to realize in the course of the course of this 12 months. There, we do see a number of contributors to it or totally different contributors to it. The one contributor is to indicate our R&D excellence program, of which we’ve got began in 2022, which already had some minor results in 2022, however will come to extra impact in 2023. A second pillar is the contribution from our transformation program 2019, 2029, the place we additionally anticipate extra optimistic contribution. And the third is the pure enchancment of operational efficiency, which consists additionally of various pillars. So one matter is because of our larger working capital, we anticipate to smoothen and stabilize our provide chain, which can assist us to scale back particular impacts on our plant’s efficiency and likewise to scale back the need of particular freights, for instance, to both provide our vegetation or provide our prospects. So all these three components will play a job once we discuss in regards to the enchancment of the automotive enterprise.
Jose Asumendi
I’ve one fast follow-up, please. Niko, are you able to remark a little bit bit across the enterprise alternative bringing in Ambarella as a accomplice into the enterprise, have you ever began to ebook orders on the again of this partnership?
Niko Setzer
The bottom of this query, I imply, look, we’ve got a robust information on the sensor suite. We’ve a robust information since [indiscernible] on integrating on automotive assisted driving, whereas Ambarella could be very robust on the one facet on the chip facet, system on a chip, which we’re already integrating our merchandise however on the similar time with their synthetic intelligence and their environmental mannequin, we’re compiling a full stack strategy. This full stack is as effectively open for the OEMs so as to add functionalities, that are developed for them or others. So that’s the goal of our strategic partnership. It took already of velocity. We’re discussing now with a number of OEMs by which course they need to go. And we are going to report as soon as we’re going additional how profitable we’ve got been with these particular functions than for the OEMs as we communicate. It is foreseen if it takes off then to have first functions out there 2026, that is the horizon, which you must take a look at.
Operator
Subsequent up is [Josh Gale] from Goldman Sachs.
Unidentified Analyst
The primary query I had was only a clarification when it comes to how a lot recoveries are assumed within the steerage for this 12 months? And is your assumption round skill to cowl inflationary prices confirmed already together with your OEM companions? The second query I had was on the subject of free money circulation. Clearly, you probably did point out excessive ranges of stock and receivables weighing on working capital and free money circulation on the finish of 2022. What are you anticipating when it comes to the reversal of working capital in your free money circulation steerage for 2023?
Katja Dürrfeld
Let me perhaps discuss in regards to the restoration of the inflationary results in 2022 first. So in 2022, we didn’t say something in regards to the particular restoration of the inflationary impact. We at all times mentioned that we intention to recuperate as a lot as we have been capable of do. And from immediately’s perspective, I’d say that we’re glad with the achievements that we’ve got made in all our areas and within the sectors. When speaking in regards to the free money circulation expectations for 2023, we additionally mentioned that we’ve got taken aware choices to extend stock ranges, not solely quick time period but additionally midterm to safe provide chains and guarantee that we’re capable of ship to our prospects what they anticipate us to supply. We’ve applied a program final 12 months, the sensible stock program and the end-to-end enterprise course of administration to essentially guarantee that we align demand from our prospects with the supply prospects and potentials on the provider facet early sufficient within the course of. So usually, we do anticipate to maintain larger stock ranges than what you could have seen prior to now in Continental. There is a second impact within the money circulation and this additionally comes from further worth impact. So the extra inflationary results may even have an effect on the stock ranges. Final 12 months, the impact on the stock stage composite of three totally different components. That was, one, the pure improve in quantity. The second was the pricing that was actually important, you all know what we guided for on the subject of inflationary headwinds from materials. And the third one was FX. And we do anticipate to have further inflation of round EUR1 billion in automotive this 12 months and a part of that can be attributed to particularly digital element costs.
Operator
Subsequent up is [Michael Cluck] from Financial institution of America.
Unidentified Analyst
I’ve two, each on prices. The primary one, simply when it comes to the price information. May you maybe present a little bit bit extra granularity on the constructing blocks for the EUR1 billion price inflation information within the automotive enterprise? And as a part of the price information, is it honest to imagine then that you have not factored in any uncooked materials tailwinds into this information or the tire price information? After which my second query is simply individually on logistics prices. Given the sharp decline in sea freight charges, and I’d think about a decrease want for particular freights, why would this line merchandise not present a tailwind in some unspecified time in the future in ’23?
Katja Dürrfeld
So let me first discuss in regards to the constructing blocks for the price inflation. We do not break it down intimately, however if you wish to perceive what’s comprised in there. So usually, this once more contains headwinds from supplies, particularly from the digital parts. It additionally contains to a sure larger vitality and logistics prices, but it surely additionally, and that is what we talked about particularly, contains larger prices for wages and salaries the world over. In order that was your first query. I believe the second query you had was why we’ve got not included tailwinds into the tires steerage or if we’ve got included tailwinds into the tires steerage. Is that right?
Unidentified Analyst
Sure, simply from logistics prices, primarily.
Katja Dürrfeld
Sure, I’d say that logistics prices have improved in comparison with the best peak ranges in final 12 months, however in addition they didn’t begin initially of the 12 months on the highest peak ranges to date. And also you do see a fairly totally different distribution from area to area and likewise totally different developments there within the pricing, usually plus there’s a drop in sea freight, which we do see in one of many different area. However whenever you take a look at the land charge and transportation, there you do not see as a lot of a reduction as you presently would possibly anticipate.
Unidentified Analyst
After which simply to make clear on the uncooked materials facet, you are not factoring in any tailwinds into the information for tires this 12 months?
Katja Dürrfeld
Not considerably, no.
Operator
The following questioner is Thomas Besson from Kepler Cheuvreux.
Thomas Besson
I’ve three questions as effectively, please. I might like to come back again to Josh’s query on the free money circulation. I imply, is it honest to imagine that both in ’23 or in ’24, you ought to be recovering a considerable quantity of working capital as a result of these inventories you’ve got constructed for the quick and midterm in your prospects, you must be capable to cut back over time as the provision of semiconductors turns into extra regular than your prospects’ manufacturing normalize as effectively? That is the primary query. The second query on tires. Are you able to speak about your winter tire volumes in 2022, how they’ve modified versus ’21? We have now had 5 consecutive tender winters in Europe and there appears to be nonetheless inventories within the distribution channel. So we appear to be going right into a tender winter tire season. Are you able to discuss in regards to the evolution of winter tires contribution to tire earnings and the way a lot that accounted for the decline in profitability within the tire enterprise? And lastly, on the automotive enterprise, two of your companies are successfully most likely trying extra at future merchandise. And you have talked about that they endure from a excessive depreciation price. I imply one among them, particularly, has seen substantial natural progress however on the similar time, extra doubling of its losses. Are you able to simply assist us understanding whether or not this particular enterprise will discover sort of the ground when it comes to profitability in additionally in autonomous mobility in ’23 or whether or not we have not seen the low level but?
Katja Dürrfeld
Let me begin with the free money circulation query first, Thomas. I believe — so usually, you might be proper, that is the stock ranges that we’ve got seen for 2022, have been considerably larger than we had them prior to now. However, I wish to point out that a few of this stage is very requested and contracted from and with our prospects. So there are particular requests to carry extra stock on the midterm than what we had prior to now. If you happen to take a look at the previous, Thomas, you do see that Continental most likely has the bottom stock ranges and the best churn charge in additionally why the semiconductor scarcity in some areas hit us over proportionally in comparison with perhaps a few of our rivals. So usually, there is a request from our prospects to extend security shares on this enterprise. Additionally, whenever you take a look at our expectations for the semiconductor provide state of affairs, you do see that for 2023 and likewise for 2024 we nonetheless anticipate results from shortages. We anticipate enhancements general in the course of the course of this time however we don’t anticipate to come back again to, as an example, completely regular ranges earlier than 2025, and this is also the rationale why we won’t return to working capital as we had it prior to now. In order that was the one query. The second query was in regards to the winter…
Niko Setzer
Sure, perhaps I add there one thing. Sure, winter tire enterprise was solely respectable in 2022. So it has proven as effectively weaker market and a sure stoppage on the prospects. Nonetheless, we see as effectively an inclination, particularly, in these markets with not that robust winter that the outdated season space in addition to our product is rising. So we’ve got a compensation to a sure extent from the winter facet to excessive efficiency or season tires the place we’re as effectively very effectively positioned, which suggests to the final latter a part of your query, how a lot contribution has the winter tires to our portfolio, it is getting much less and fewer with our progress in all season, with the expansion we’ve got seen earlier than as effectively in sure markets, such because the [Americas] and as effectively Asia coming, the portion of winter tires and due to this fact, the dependence on the revenue line is getting diminished. Nonetheless, we watch, clearly, intently the markets and shares, however we’re not involved getting out of 2022 that we’ve got right here one thing like legacy, which we are going to see in 2023. To the final level, you requested within the portfolio, I assume, to the 2 progress yields inside automotive, structure, networking and autonomous mobility, which have been a unfavourable territory as effectively ’22. I imply on structure community, you could have seen that is the world which was harvested by the transformation software program outlined car and adjustments to centralized compute.
We’re additional working there and have structured this space, mixed all excessive efficiency compute on this space, have it straightened out to product traces and performing right here now with synergies. You’ve got seen that we improved already our outcomes there. We had a robust progress final 12 months 23% natural that was even the strongest one, which we see right here and through progress and all of the components, which Katja talked about earlier than, we’re working additional in an effort to enhance our margin. On the autonomous mobility facet, you see we mainly deteriorated by EUR100 million versus the 12 months earlier than, we’ve got talked about as effectively earlier than going into the 12 months that we make investments laborious on this space, as a result of I referred earlier than to Ambarella, however you’ve got seen as effectively another order consumption, which we took in final 12 months and which we’re nonetheless engaged on to go sooner or later. That is why we’re investing, in complete, we had a particular funds of EUR200 million. This was EUR100 million extra final 12 months than the 12 months earlier than, which we’re spending in partnerships, which we’re spending on the R&D facet changing into full stack and supplier. You see that this delta is strictly the profitability, which we have been diminished from ’21 to ’22. The remainder was secure on the go together with comparatively second largest progress, which we’ve got on this space 19%. Nonetheless right here the main focus is on executing the expansion alternatives, which whereas over time bettering as effectively the profitability stage extra on the long run than within the worth segments, resembling our security enterprise and/or on the [Indiscernible] facet.
Operator
The following query comes from Tim Rokossa from Deutsche Financial institution.
Tim Rokossa
Katja, as you rightly predicted the steerage is certainly the primary focal point to most individuals immediately, I believe. Once we take into consideration, particularly, how vital quantity is versus your personal execution, I’ve two questions on that. The primary one could be, you’ve got been fairly optimistic in your price initiatives over the previous years already with out us actually seeing a possible, an actual optimistic web impact from them. Why are you so assured that we’ll see that within the EBIT bridge this 12 months? Is it just because extra time has handed now and also you’re additional alongside in all of those tasks or have you ever actually began new ones develop into extra aggressive on sure assumptions? Secondly, a huge impact prior to now was additionally that you simply had very unfavourable contracts in there. And to one of many earlier questions as a follow-up to that, I believe, Jose needed to know that mainly, have you ever managed to cost out a few of these very unfavourable contracts that actually reprice them together with your prospects, does that replicate fairly a little bit of the improved earnings potential that you simply see there? After which lastly, Niko, I am certain you have been up in [Volkswagen] discussing with VW on their comparatively optimistic unit gross sales progress expectations for this 12 months. Now VW, everyone knows have been prior to now, fairly often means too optimistic on that assumption. However clearly, they want your backing as one among their key suppliers globally. Would you be ready or are you even anticipating that a few of your main prospects can develop effectively into the double digits this 12 months and does that replicate the outperformance that you simply’re seeing from a market positioning as effectively? And as a follow-up to that, when you could have these discussions, I spent fairly a little bit of time with the CFOs of your key prospects currently, they aren’t very assured that it is possible for you to to get any of the labor price inflation again from them, as a result of they are saying these are administration choices. You’ll be able to simply transfer to finest price international locations. What makes you so optimistic that on that facet you can be profitable as effectively?
Katja Dürrfeld
Effectively, Tim, that was an extended query. At the least have been fairly…
Niko Setzer
Greater than three…
Katja Dürrfeld
Effectively, very complete one. So let me begin perhaps with the primary query about why am I optimistic that we will enhance on our operational excellence and our operational efficiency. I believe once we take a look at this 12 months, Tim, we already made some achievements in that course. That is additionally the rationale why regardless of all of the challenges and all the issues we had, we have been ready in automotive to enhance our EBIT margin in comparison with prior 12 months by 1.2 proportion factors. I believe that could be a robust signal that we have understood how one can do it and how one can drive the enhancements, which weren’t solely coming from quantity. So I believe that is clear. So whenever you look additional, there are a number of issues that are actually falling into place, which we’ve got initiated additionally in the course of the course of the final 12 months. The R&D effectivity program is certainly one of many packages the place we’ve got a excessive deal with the place we glance actually rigorously to enhance effectivity and effectiveness of our R&D globally in automotive, the place we have seen some influence already in 2022 and by the place we all know that we’ll see extra influence in 2023.
I believe the second huge level is the discount in manufacturing price variations that we needed to face in the course of the course of the 12 months, primarily actually attributable to the instable provide chains that we’ve got to face. So by including the security shares that we have simply spoken about and flattening or smoothing our provide chain, that’s one thing that we undoubtedly will see to pay, A, on the manufacturing price variation but additionally on the premium freight facet, which has been a success for us. And final however not least, I believe what can be vital to say is that we’ll see further optimistic impacts from our transformation program 2019, 2029 in 2023 above what we’ve got skilled in 2022. So I believe that is the query why I am so assured that we will drive the operational efficiency enhancements in automotive. And the second level you’ve got talked about was that we had negatively priced contracts with a few of our OE prospects. And let me guarantee you that we’ve got been in very intense negotiations with our prospects in the course of the course of this 12 months to barter pricing and compensation for inflationary headwinds. And as you may as well see within the margin of automotive, we have been fairly profitable in doing so.
Niko Setzer
Sure. Coming to the outperformance otherwise you talked about the one or the opposite buyer, which has printed progress charges in 2023, which is perhaps larger than the common what we’re guiding or what the advertising and marketing intelligence is seeing. I imply, our steerage relies, clearly, available on the market, as you’ve got seen earlier than and as effectively on the order ebook, which we’ve got from OEMs. That is extremely dependent as effectively on new launches, which we’ve got, new merchandise which we’re bringing larger worth per automobile. You could have seen as effectively prior to now and we referred already that we’ve got the next web outperformance in 2022. However in the event you look a little bit bit longer, we had a portfolio which was strongly altering as effectively because of the market, analog to digital, in search of the UX facet, as an illustration. This has now phased out and we’ve got now the brand new merchandise coming in, which helps then our web outperformance on the automotive facet, and that is the primary motive why it is that enormous. Our bigger prospects are producing extra vehicles and are profitable in promoting them, that helps us, clearly. Nonetheless, our steerage to date relies on what we see out there in addition to on our order ebook. As soon as it involves labor price compensation or general compensation, we’re displaying transparently to our prospects how our prices have developed from ’21 to ’23. So what we’ve got seen final 12 months and as effectively what we see this 12 months, how profitable we shall be with the sure parts we are going to see, as Katja referred, we’re working in an effort to get as a lot compensation as we are able to. We’ve been comparatively profitable final 12 months to get a majority — elevate majority of our price will increase compensated, and we are going to do the identical for 2023.
Tim Rokossa
I battle on the inflation labor price facet, but it surely’s nice to see that you’re again on a way more secure path once more after some very tough years. So effectively carried out.
Operator
And the following query comes from Himanshu Agarwal from Jefferies.
Himanshu Agarwal
The primary one is on the autos. I see you are speaking in regards to the operational enchancment. Is it potential so that you can quantify the profit that you simply’re anticipating from the transformation program on the bridge? In order that’s the primary one. And simply to make clear on the auto facet, have you ever obtained your whole retrospective pricing associated to ’22 or are you anticipating some profit to come back within the ’23 as effectively? And on the tires, two questions. One is on the stock revaluation impact. So final 12 months, you had round, if I bear in mind proper, EUR350 million to EUR400 million of optimistic influence and gross sales ramps are coming down. Is it going to weigh on the bridge for this 12 months? And lastly, on the tires, I believe within the bridge for ’23 steerage, you are speaking about some outperformance relative to the market. And I believe we have been seeing some downgrading in tires. So what provides you confidence that it is possible for you to to outperform the market in ’23?
Niko Setzer
Possibly I can begin with the second query, sustainable pricing. So that you referred to pricing 2022, onetime or not. I imply we assume, and I discussed this as effectively initially one commenting the slide {that a} huge portion of that’s sustainable. We’ve achieved to get sustainable worth will increase with our prospects means their function as effectively over then in 2023, the place we’ve got to handle as effectively the 2023 parts. What makes us assured to outperform the markets on the tire facet, on the regional facet, trying with our setup in significantly on the premium facet, I referred earlier than as effectively to a rising a part of season in Europe, the place we lastly with our product may succeed. We nonetheless see comparatively robust and strong demand for the premium space and we’ve got as effectively a robust portfolio, cashing in on tendencies in high quality and in funds. We’ve proven as effectively earlier than that we have been succesful to outperform the market on the Asia facet and on the North American facet. Truthful sufficient, trying on our market shares, which we’ve got, these are nonetheless underdeveloped. We’ve a really strong product right here however [indiscernible] applied sciences we’ve got a robust footprint, there are many causes with our prospects over there to develop and get as effectively our honest market share, so to say, in these areas.
Katja Dürrfeld
And perhaps simply coming again to your first query on the subject of our transformation program 2019, 2029. I have to inform you that we’ve got not damaged down the person gross results per 12 months to date. So all that I can inform you is that we do anticipate further optimistic results in 2023 from our program.
Himanshu Agarwal
So simply on the stock revaluation, in the event you may speak about that.
Niko Setzer
Stock valuation. And what was the query on stock valuation?
Himanshu Agarwal
On the tires EBIT bridge final 12 months, there was round EUR350 million to EUR400 million optimistic influence from the stock revaluation. After which now given uncooked mats are coming down, is it going to reverse this 12 months?
Katja Dürrfeld
I’d say, to reverse might be not the suitable method to body it. And as we do not know the general growth of the uncooked materials costs in the course of the course of the 12 months, it is fairly laborious to foretell how this can develop quarter-by-quarter. However I’d not take into account that to be a reevaluation impact in the identical quantity.
Niko Setzer
And you must take into account as effectively that uncooked materials pricing or prices have been rising in the course of the course of final 12 months and common have been this 12 months finish has as effectively an affect on the inventories then going into 2023. However as Katja mentioned, very dynamic space, let’s examine the place this works out. However there’s a sure impact out of the evolution of the uncooked supplies, clearly, from final 12 months, if you’ll. Trailing uncooked supplies taking place and the top is beneath the common, then clearly, you could have extra of the headwind. You’ve received the reevaluation than having a extra strong go by way of or perhaps a desk, however how that finally ends up stays to be seen.
Operator
And the following query comes from Philip Koenig from Goldman Sachs.
Philip Koenig
I’ve simply received two left. First is on ContiTech. Possibly are you able to simply elaborate type of what have been the primary drivers that weighed on the margin. You are mentioning unfavourable worth combine. Have you ever taken some motion on elevating the costs, each within the auto and on the economic facet of the enterprise and type of what makes you assured to get again into the 6% to 7% margin hall and ultimately to the midterm curve that you simply’re aiming for? After which my second query is simply on the R&D once more type of structurally, clearly, you could have a really wholesome and really robust order ebook after final 12 months. Can we type of anticipate in absolute phrases, R&D to proceed to step up over the following one to 2, to a few years? Additionally, do you anticipate the stabilization in some unspecified time in the future whenever you’ve made the bulk investments in a few of the secular tendencies of the trade?
Katja Dürrfeld
So let me first speak about ContiTech and about what we have carried out on the pricing facet. So let me verify to you, Philip, that we’ve got elevated costs on the trade and aftermarket enterprise in ContiTech in addition to on the automotive enterprise in the course of the course of the 12 months. You already know that we had guided for about EUR600 million price inflationary results in 2022 for ContiTech. And also you additionally noticed that we that we’ve got additionally guided for added inflationary results for 2023 to come back, which we are going to, for certain, once more, handle in the course of the negotiations with our prospects in all related enterprise segments. I believe that is the primary one. On the R&D facet, I believe already identified that we intend to take a position and proceed to take a position into our future companies and enterprise fashions. You’ve got seen the very robust order consumption that we had in the course of the course of final 12 months with being about 26% above the 2021 ranges. These new orders additionally require investments into R&D. However what we do undoubtedly intend to realize is a greater ratio in % of gross sales.
Operator
There are not any additional questions.
Katja Dürrfeld
Thanks a lot. And thanks, everybody, for collaborating in immediately’s name. As at all times, Continental’s Investor Relations group is accessible for you for any remaining questions. With that, we wish to conclude immediately’s name. Thanks, and goodbye.
