Continental AG Q1 2010 Earnings Call Transcript

Executives

Rolf Woller – Head, IR

Wolfgang Schäfer – CFO

Analysts

Yann Benhamou – Exane

Philip Watkins – Citi

Francois Maury – Oddo Securities

Horst Schneider – HSBC

Christian Ludwig – Bankhaus Lampe

Stephanie Renegar – JPMorgan

Edoardo Spina – Morgan Stanley

Continental AG (CTTAY.OB) Q1 2010 Earnings Call Transcript May 4, 2010 10:00 AM ET

Wolfgang Schäfer

Welcome to everybody. Thank you for joining this conference call about our first-quarter performance. If I want to put it in four bullet points, we had a good start in the first quarter, we profited from good markets in the automotive and in the tire markets, we earned results from our restructuring efforts in the last two years and we see a promising comeback of our Automotive division. But in the last point, we are still somewhat unsure about the development in the second half of the volume development.

However, if I look on the presentation slide number three, the highlights of the first quarter. Sales were up by 39% year-over-year, of course compared to quite a weak quarter to a very weak quarter, first quarter last year, and 5% up against the last quarter 2009. The quarter one adjusted EBIT was up by 641 million year-over-year, and the adjusted EBIT improved now to 605 million, which is an adjusted margin of 10.2% in the first quarter. This is even above the first quarter of 2008, although sales are still down by almost 10% compared to this quarter two years ago.

The Automotive Group has an adjusted EBIT margin at 8% in the first quarter. Again, we had strong results in Chassis & Safety. We had a further recovery in Interior, though the commercial vehicle market did not yet really pick up, and we have a continuous improvement in Powertrain. The Rubber Group achieved an adjusted EBIT margin of 14.5% in the first quarter.

All divisions contributed to a sustained adjusted EBIT level compared to the fourth quarter of 2009. And we do not yet have impact of the escalated raw material prices into our profit, especially the natural rubber prices. Overall, we have almost no special items booked in the first quarter of 2010.

If you look at the first quarter from a balance sheet point of view, we managed to limit the cash consumption to 363 million, despite a strong increase in our business activities. We had no major cash out in the first quarter for restructuring undertaken in 2009. This will come in the second half of the year only and first half of 2011. We limited the Capex at 178 million, but that will increase in the coming quarters.

And the net debt was down to 8.2 billion at the end of the first quarter. The net debt to adjusted EBITDA was 2.7 times at the end of the first quarter.

If you look at the highlights on the sales and profit development, we managed or we reached 6 billion in sales, the 39% plus year-over-year. And you will see we are in a V-shaped curve as a group, the worst quarter, the first quarter 2009 now coming up back to the 6 billion in the first quarter 2010. Constant recovery of sales in those four quarters, quarter-by-quarter. But if you see here as well, it's still 10% below the pre-crisis level, which we had.

On the EBIT, adjusted EBIT, although we are below this pre-crisis level, we managed to come back to the old level, which was 10.2%. The restructuring over the last two years helped. If you just look at the personnel, we have 153,000 people in the end of the first quarter of 2008, just after the takeover of the Siemens VDO business. We are now at 137,000 people. We improved the footprint at the same time, and we had a tight cost control, specifically over last year and this is still in place and will remain.

Look on the next page, in the split between the Automotive Group and the Rubber Group, you'll see different patterns. We have the V-shape even stronger, the V-shaped recovery in the Automotive business. You can see that on the sales level, we are 3.77. We are still 13% below the peak in the two first months of 2008, but we are 50% up compared to the lowest quarter, first quarter of 2009. And this is mirrored as well on the profit side, where we have to compare the 300 million profits now in the first quarter of 2010 to the minus 146, which we had in the first quarter of 2009. And on the total level, we are back on the level which we had in the first quarter of 2008.

On the Rubber side, you see a more stable development. We didn't have – it's not really a V-shaped – about three quarters more stable. Though we still see an increase, we are now 3% only below the level of 2008 and we are 20% below as well a weak, but not such a weak quarter in the first quarter of 2009. Profit development improved against the first quarter 2009, but in the last three months, more on a stable level.

The raw material impact, as I said, is not yet seen in the first-quarter numbers. We are still profiting on the cheaper raw material prices, which we could get last year.

If we walk through our indebtedness on the page six, you can see that starting with a net debt of 8.89 billion end of last year. We had Capex now in the first quarter 178 million, and we had a net change in working capital of 857 million. Now the change in receivables, up 700 million, there is no change in the overdue, so it is just due to the higher business volume which we had in the first quarter. We have only a very small increase in the change in inventories, and the change in payables are not as strong as you might expect.

But this is mostly due to special measures, which you really normally take at year-end and which we did take in the year-end as well.

We have a positive effect from the other free cash flow. Basically, this is the profit plus depreciation. And then, of course, the big impact of the capital increase. So this, in the end, leads to the 8.2 billion net debt at the end of this first quarter. And in the end, there is a reduction of 663 million, including the capital increases shown on this chart.

If you then move on, if we move on to the leverage covenants, you will know, a renegotiation of our covenants in December 2009. This is shown here, the old level is shown on the upper line, dotted line. We had for the fourth quarter a level agreed upon with four. We changed that in the negotiations to 4.75 until the end of the first quarter, and then assuming that the capital increase would only take place in the second quarter, it went then down to 4.25.

If you look at our LTM EBITDA for the last four quarters, we reached 2.977 billion. But we always said that our EBITDA is, of course, burdened by the bad number of the first quarter of 2009, only 250 million. Now we got it out, we exchanged it with the 888 EBITDA of the first quarter of 2010. And this leads then to a multiple of 2.68 net debt to EBITDA. So again, a big improvement, again, compared to the fourth quarter of 2009, where we still had 3.66.

You will see right at the headroom now which we have is quite high. Even if you compare it to the 4.25, which is really from the next quarter on, 2.68 to 4.25 it is quite some headroom, and we feel much better positioned than we have had some months ago.

And I would just like to jump over to the next topic, the rating of S&P. You know we are rated B+ with a CreditWatch negative. And one of the arguments of S&P was the tight covenant conditions. We think with this new situation and development, the strong performance in the first quarter and, I said already, the high EBITDA we had in the fourth quarter of 2009, this argument should no longer be of such importance.

Now, the current credit ratings, and I am now on page eight. Due to the acquisition of Siemens VDO and the beginning of the financial crisis in middle of 2008, Continental's corporate rating was downgraded several times. And the actual rating at Moody's is B1 with a negative outlook since August last year. S&P, as well, since August B+ with a CreditWatch negative, with a confirming of the rating in January and we expect S&P to resolve its CreditWatch within the next weeks. The main concerns from S&P, according to the latest publication in February about us, were on the finance side, and they said, "We consider that headroom under the new covenant structure could prove tight in 2010 and beyond." I think we saw in the numbers before this concern should be less, or from our point of view, should be gone.

The second point was, "and the relationship between Continental and Schaeffler remains the key risk for the rating." We do not follow their assessment. You all know about our (inaudible), which we think is strong. But we are not assigning the rating to us, and from this point of view, we see a risk for a potential new rating.

Now I would come to slide 10, to the Group financials. The EBITDA in the first quarter of 2008 was 884 million. Now on the new sales level of 6 billion in this quarter, we reached the same level, which is 888 billion, which leads to the LTM EBITDA of 2.977 billion. The EBITDA margin even increased from 13.3% to 14.8% in the first quarter of 2010. And again, as I said, we managed to adjust our cost structure to the lower business activity. And the restructuring after the takeover of Siemens VDO is now showing up in the numbers, and we will make sure that this tight cost control will be continued so we can earn the profit out of this cost control in the last month, that we are not going to lose it on the way through a year with better numbers.

We still have – so in these numbers there is still room – the low raw material prices, which will no longer be the case starting now in the second quarter; the higher raw material prices come into our P&L, and will show their effects.

A small analysis on the Automotive Group, some highlights on page 12. We again compared here over the last nine quarters the Car & Light Vehicle production of our main markets, Europe and NAFTA, and the change which was there quarter-to-quarter or year-over-year. And we compared to that our organic sales growth year-over-year; only started in – this change only started in the first quarter of 2009 because Siemens VDO was only then in our numbers included from 2008 onwards. What you see is that in the fourth quarter already, while the markets were growing 6%, we managed to grow 22%. And even now in the first quarter, again markets 46% up, Continental 50% up. And we have to consider that into our numbers, though we say Automotive, there is some commercial vehicle business in there, which did not really pick up, so the number even understates the development which we were showing in the last three months.

And the adjusted EBIT margin level was almost restored now to the quarter one level after two years despite this decrease of 1.7 million units.

I think what you can see here as well, and which we added in the lowest line, the working capital is under control in the first quarter of 2010. Although sales increased by 1.2 billion compared to the first quarter of 2009, the working capital was only up 312 million.

You see on the next page the continued growth. If you look at the change year over year in our sales numbers. Since the fourth quarter of 2009, with 18%, and now in the first quarter of 2010 with nearly 50%, we are back on a growth level. We achieved 3.77 billion sales in the first quarter of 2010, so this is 1.25 billion more than a year before.

And if you look at the profit development, same pattern. And out of this 1.249 million more sales, we managed to get 464 million additional EBIT, which is 60 – 36% of the sales increase. And I think again this shows the restructuring efforts which we have done. And in the end, we ended up in this quarter with 8% adjusted EBIT margin into the Automotive Group.

If you look on the different divisions on the chart 14, we are Chassis & Safety with a 56% growth. We are still at a quite impressive 12% EBIT margin. Powertrain was at 61% growth, higher growth than Chassis & Safety because of the footprint, stronger in the US and stronger in Asia. We managed a 2% adjusted EBITDA margin, so after the breakeven we had in the last quarter, we managed now a 2% adjusted EBIT margin. Though, again, the mix helps to achieve this.

And if you look at Interior, the 35, 36% growth, there you see that the commercial vehicle business did not pick up here in a manner like the passenger car business did. We achieved here – even with this low volume in the commercial vehicle business, too, we achieved 8.6%; so overall Automotive, 8%.

The EBITDA increased by 426 million. The Capex spending declined compared to the first quarter – still lower than 2009 – by 44 million to 106 million, and the R&D expenses declined by 3.4% to 318 [ph] million, so these are still the effects out of our cost control of last year. Which these – very tough control and reduction of these numbers will somewhat fade out over the next months, as we have to prepare for the growth of the next years and the next months and as we have as well to make sure that we can develop those products, which will assure our growth in the next years.

Now specifically, we will have a look at Powertrain on the next slide, 15. We see here this V-shape as well, and we see now two quarters in a row back into the black numbers. We are – still, again, some help from regional and product mix as we explained it already in the fourth quarter of 2009, our commitments to there to reach a sustainable breakeven on an adjusted EBIT level in 2011, and the midterm margin target of at least 8% on a reported level for the years 2013, 2014 following.

Having a look at the Rubber Group, page 17, highlights of the three divisions – passenger tires, the markets were up stronger than we had expected – 11% up market in Europe, 10% up in NAFTA, after, of course, quite a weak first quarter of 2009. We had even a stronger volume recovery, gaining market share in Europe and in the Americas, replacement tires in the first quarter. And of course we had the good volume of the OEM production. And we are back now almost to the volumes which we had in the first quarter of 2008.

Because of the raw material price increase, we just increased the tire prices in Europe between 3% and 5%, just starting a couple of days ago. And we will do that 6% in the US starting in June, to make sure that we can get at least part of the raw material price increases back.

And it will take, like we have communicated that in the past, over three to six months for us to get the complete cost increase out of raw materials over to our customers. And with such a strong increase as we have seen it in the last month, it might even take a little bit longer. If you look at the commercial vehicles, you easily see that the volume did not pick up in a way as it did in the passenger car. We managed to restore profitability on much lower volume level. And as we just communicated the decision to close the Stoecken production here, very close to us in Hanover, we just communicated that because we still have overcapacity, which we do not see fade out within the next months and quarters.

On ContiTech, we are still on a two-digit EBIT level, 13.1% in the first quarter, as well on a lower sales level, as we had it in 2007, 2008. We see there a strong recovery in the OE business, of course, like we see it in the other Automotive divisions. The industry business is at a previous year level, so the mix of OE and non-OE changed to 55% to 45% in quarter one. For all three divisions, of course, raw material prices – I've said it already twice – is not yet included in the first quarter, but will impact the profits of the next quarters.

Again, a small analysis on page 18 on the Rubber Group; we see here comparison of the first quarter 2010, first quarter 2009, 448 million more sales. And out of that, we managed an increase in profits of 190 – of 200 million. So 44% margin out of this increase. And again, raw material prices, of course, will only show up later on. What helped as well, traditionally, if you look at the sales numbers, the fourth quarter is very good because of the winter tires. Now we see that the first quarter was on that level, so a very good first quarter. Even a little bit better on the profit side.

If you look at the different divisions, we talked already about the ContiTech and the commercial vehicle profitability. You will see here on the passenger and light truck vehicle side, profitability was 17.4%, adjusted EBIT margin on a very high level, with a growth of 25% quarter-over-quarter.

Overall, the EBITDA increased by 200 million in the Rubber Group to 416 million, the Capex spending decreased by 20% to 72 million, and the R&D expenses is basically stable on 57 million, 2.5% of sales.

Coming to the financial indebtedness, on page 21, you know the charge it is just now completed with the numbers of the first quarter. Of course, the reduction in the debt was first helped by the capital increase of 1.05 billion compared to the year-end number, and but, as I said, I think we managed investment and working capital. So we only had a negative cash flow of 363 million, which is, considering the increase in the business activity for the first quarter, I think okay. So total debt at the end of the first quarter, 8.2 billion. Now, the gearing is down to 145%. What helped there as well was the equity effect of the FX. We had an FX effect of 300 million, and of course net profits of 227 million, which increased the equity.

I think to the financial indebtedness on page 22, I do not have to comment too much on that. There is no change to what we have shown in the last quarters and at the year-end presentation. We have at the moment cash of 1.4 million, and we have fully available credit lines of 2.15 billion.

The Forward Start Facility moved over to 2012 in the maturity, and the next step will be to balance out the 2012 maturity by issuance of a high-yield bond. With the results of the first quarter and our coverage covenant ratio now, we are quite relaxed and we feel in this situation that we can pick the right moment in the market to do this next step.

Coming to the outlook on page 24, we changed the outlook somewhat in our expectations on the production volumes in Passenger Cars and Light Truck Vehicles. The old number we gave you was, for Europe, minus 1%. We see now plus 2%. For NAFTA, we increased from an expectation of plus 20% to plus 26% on this low level of 2009. And for Asia and the rest of the world, we see the 9%, respectively, 4%, which we communicated already at the last time.

We see as well an increase in the replacement market of tires, Passenger Cars, and we said last time 2% to 4%. We think now the 4% is probably the better number for Europe; same for NAFTA, we've seen our 4% compared to the 3% which we said last time. And again, in Asia and the rest of the world, we don't see any change to our expectations of last time. On the Truck side, we do not see any change in our expectations – 9% for Europe, 19% for NAFTA and then 9% for Asia and the rest of the world. And same numbers as we showed last time as well for the replacement tire markets – plus 7% and plus 8% Europe, respectively, NAFTA. Asia with 1%, but only very light growth. And the rest of the world, plus 5%.

Now if we transfer all this information into our guidance, last time, we said at least 5% in sales. We say now it could be up to 10%. If we look at our numbers for the second quarter what we have already in our books, we see a stable development on the first quarter and we have no direct indications of the third and fourth quarter of the year.

Should be much weaker, so there is some caution, because the scrapping schemes in Europe have been running out or are running out at the moment. This will some pull ahead demand, which gives us some reason for caution. We had some filling out the inventories at the O&M level, so this cannot go on forever. So this might as well be some caution for Europe and for the US. And so this is why we think now the up to 10% is possible, but again, some caution on that.

The adjusted EBIT on the Automotive side, last time, we said we foresee a doubling of the result of 2009. We now foresee that it could even come up to a triple adjusted EBIT compared to the 2009 numbers.

On the Rubber side, we do not see any change to our guidance last time. We think we can keep the good 2009 result despite the raw material price burden. And this raw material price burden might even be a little bit higher than we have foreseen it last time. We foresee now up to 250 million burden out of this price development.

Total special items, which was a very high number of 1.755 billion last year, we still see around 100 million specifically restructuring costs this year. Interest, last time we talked about up to 800 million. We see now 750 million to 800 million. So the base interest rate is a little bit lower than we have expected.

Last time, free cash flow, no change to what we have said when we talked to each other last time. Three reasons still – rising capital expenditures, preparing for the future; restructuring from 2009 will become cash effective in 2010 and 2011 as well; and the higher working capital rate because of higher business activities.

Capital expenditure is expected to increase up to 400 million, no change to what we have communicated last times. And dividend, as well, no dividend planned for this year. Now 2012 or 2011, we could. If the business level keeps on the level which we have at the moment, we could expect some dividend payments at that time.

So that is our guidance for the year 2010, and this is everything which I would like to present to you, and now we are open for your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) First question will be from Mr. Benhamou, Exane. Please go ahead.

Yann Benhamou – Exane

Good afternoon, this is Yann Benhamou from Exane. First question is related to your issuance of a high-yield bond. We have seen market quite concerned by your debt markets over the past weeks. My question is what would trigger for you the issuance of this bond? Is this a question of credit rating, or is it another reason? Second question, on raw materials, you are speaking about the headwind of 250 million which is corresponding roughly to 4 to 5 points of price increase for your tire sales. How much is realistic to cover next to price hikes this year?

And last question, you have realized your numbers for – given for replacement tires. Do you think that there is something fundamental behind this, or is it just the restocking effect, which is going much faster than what you had in mind, meaning that you are anticipating the restocking that would have been spread over the whole 2010? Thank you.

Wolfgang Schäfer

I think on the high-yield bond, this is not the issue of the credit rating. Of course, this is part of our consideration, but it is, as we have communicated in the last meeting, that we would be prepared for that and then will be ready when the market, from our point of – from our assessment is at the right moment, and we will go to the market and place it. As I said before, we do not feel under pressure to just do it on a straight way in a very short term of time. But as well, I reconfirm that we have said we want to do it in the first half of the year or somewhat later if the market is better, and this is still what we follow up.

Yann Benhamou – Exane

What would be appropriate market condition in your view?

Wolfgang Schäfer

This is, of course, taking all the different aspects of the market under consideration here. I have named one or two. And we would put them all together and then we will decide on that. On the price increase, on the Rubber side, they have this price increase is now announced in Europe, we will announce it in the US for June. And this will not be sufficient to cover the whole price increase of the raw material if it stays on this high level. At the moment we see, it seems to be stable on this high level. So there will be some impact on our P&L, as I said before, which probably can be then covered by the somewhat better volume than we had seen it before.

And this is your third question, the revised replacement tire market expectations, where this is – well, we learn out of the first quarter and we look at the markets, it is not only restocking. I think the markets are somewhat stronger than it was expected before, as we see it as well in the OEM business. The second issue, by the way, which helps us to grow our business, as I have stated, that we were able to gain market share in the US replacement market and in the European replacement market.

Yann Benhamou – Exane

Okay. Just to come back on your second question, what is realistic in your view to cover just with price increase compared to your headwinds? What share?

Wolfgang Schäfer

That remains to be seen of the further price development of the market prices. They are not – our own determining the market price.

Yann Benhamou – Exane

Okay. Thank you.

Operator

The next question will be from Philip Watkins from Citi, please go ahead.

Philip Watkins – Citi

Good afternoon, thank you. I'm just wondering specifically on the Rubber market or the Tire market, given its replacement, for overall volumes for that business; Passenger Tire and Commercial Vehicles – could you perhaps give us an idea of where you think those could go for 2010.

I guess part of that question, actually, I was wondering on the overall top-line revenue, consolidated revenue, you have very helpfully given us the up to 10%. Could you give us a feeling for how much that would mean actually, if it was 10%, for Auto Components and for Rubber? Thank you.

Wolfgang Schäfer

Actually, the tire volumes in the first quarter, probably to give you that information – replacement Europe in the Passenger Car was plus 15%, and in the Americas, plus 39%. And the market was only at 11% and 10%.

So what I said, we gained market share, but the market is stronger than what we had in our guidance. Now, let me talk about plus 10% for the whole Group. Then this would be more in the Automotive part and somewhat less in the Rubber Group business.

Philip Watkins – Citi

So volume is up for the Rubber business sort of 9%, 10% overall, taking into account the OE as well. Is that –?

Wolfgang Schäfer

Well, actually, our guidance would be a little bit less on that, and a little bit above 10% for the Automotive part.

Philip Watkins – Citi

And just very quickly, if I may, just on the interest costs – I know it's going to be slightly down to your expectations. Is that –that's IBOR-driven [ph], I'm guessing.

Wolfgang Schäfer

Sorry, I didn't get that question.

Philip Watkins – Citi

Just on the interest cost, I know it is going to be slightly down to your expectations, but that is IBOR-driven, the fact that the IBOR level is so low. Is that right?

Wolfgang Schäfer

Yes, that's right.

Philip Watkins – Citi

Yes. Thank you.

Wolfgang Schäfer

Yep.

Operator

The next question will be from Francois Maury from Oddo Securities. Please go ahead.

Francois Maury – Oddo Securities

Good afternoon, Francois Maury speaking from Oddo Securities, I have two questions. The first one is regarding raw material. You mentioned that you were not hurt in Q1 by the rise of the prices. But did you benefited from a decrease of the raw material billing during Q1? If yes, could you quantify this impact?

The second question is regarding restructuring costs. Could you remind us the timing and the magnitude of the cash out you mentioned as of Q2 and the breakdown between 2010 and 2011, please? Thank you very much.

Wolfgang Schäfer

There was actually not all these impacts, your first question, that you mentioned it was only a very slight effect. Second question, the impact of the restructuring costs cash-wise will be around 300 million this year and another 300 million next year. And both mostly second half of this year and first half of next year.

Francois Maury – Oddo Securities

Thank you very much.

Operator

The next question will be from Horst Schneider from HSBC. Please go ahead.

Horst Schneider – HSBC

Good afternoon. Horst Schneider from HSBC. Two questions, if I may. The first one is regarding of the level of visibility that you have got now regarding the volume development. So what can we assume with regard to Q2 volumes? Will Q2 be as strong in terms of volumes as in Q1, or is there any chance that it can be even higher, particularly in the Automotive Group? And the second question is regarding Powertrain. Now that we have seen here on a clean EBIT level also the breakeven in Q1, I would like to ask if there is some chance that the breakeven might be achieved already in 2010 or is it completely ruled out? Thank you.

Wolfgang Schäfer

Well, to the first question, the visibility of the first half is on a stable level as the first quarter, probably a little bit weaker. And Powertrain, I cannot completely rule out that we manage breakeven on an adjusted EBIT level this year. But as I've said, there are still some mix and country mix backwinds which we have, which is not necessarily to be expected for the whole year. So again, we confirmed next year, yes, we would reach it. For this year, I cannot rule it out, but we do not expect it at the moment.

Horst Schneider – HSBC

Sorry, and one question with regard to volume. So Q2 will be eventually slightly lower than Q1 – that refers only to Automotive or does that includes also Rubber?

Wolfgang Schäfer

Yes, Rubber also; Rubber as well, just seasonally.

Horst Schneider – HSBC

So, but then I would assume that Automotive maybe could be slightly higher even than in Q1. Is that right?

Wolfgang Schäfer

No, this was as well – this was for both. This was for Automotive and Truck.

Horst Schneider – HSBC

All right. Okay. Thank you.

Operator

The next question will be from Christian Ludwig from Bankhaus Lampe. Please go ahead.

Christian Ludwig – Bankhaus Lampe

Yes, good afternoon, just one question. During the call for the full-year figures, you mentioned that you expect a positive tax impact for the full year. Is this still the case after Q1, or has this changed?

Wolfgang Schäfer

No, unfortunately, with the better profit, I think this will change now. So we don't have that effect anymore. And if you look at the distribution of the countries where we do have the profits, I think I would rule that out now.

Christian Ludwig – Bankhaus Lampe

What would be your guidance for a tax rate for the full year?

Wolfgang Schäfer

I wouldn't like to give a guidance on that now.

Christian Ludwig – Bankhaus Lampe

Okay, thank you.

Operator

The next question will be from Stephanie Renegar from JPMorgan. Please go ahead.

Stephanie Renegar – JPMorgan

Hi, Stephanie Renegar from JPMorgan. Again, just some questions about the potential high-yield bond issue. You said on the S&P rating that you felt like due to the ring sensing that you put in place, I guess you meant for the syndicated bank lines, that you felt relatively comfortable about your protection from Schaeffler. The only thing – or at least from an unsecured creditor's perspective, but I was just wondering, since a lot of those would roll off when the bank facility is rolled off in 2012, unless they were negotiated with the same terms, is there any cooperation with Schaeffler to perhaps extend those protections for a high-yield bond issue, like what has been speculated in the press?

And just some modeling questions. On your Capex, are you still looking in 2010 to get even close to a 6% of sales ratio, because obviously it is very low? And how quickly would the Capex ramp up throughout the year? And finally, on working capital, you said that you had taken some special measures on payables when looking at the inflow in the first quarter. Can you just go through on the payables side, just what you are expecting, I guess, for the second quarter? And that's it for me.

Wolfgang Schäfer

Well, on the ring fencing, which I mentioned, I think we have three issues there. We have the investor agreement with the Schaeffler Group; we have, of course, the bank loans; and then we have the German corporate law, which is as well as protection.

And the latter point, of course, is going on even after 2012; the investor agreement is longer. Bank loans run out; I don't know how this would continue. But of course you can be sure whatever in a bond, we would play to the market that it as well includes some covenants with then some security for the high-yield bond owner.

Now, the question on the working capital pace, what I said is only that you might have expected a further increase in the first quarter. This did not happen because at the year-end, there are always, like I think everybody does, some special measures which you do at the year-end to get these numbers on a good level. And there we don't do them end of the year. So this was the reason why you probably did not see 100 million or so more than you might have expected there.

Stephanie Renegar – JPMorgan

Okay, thank you. And just on Capex, can you talk about the trajectory throughout the year, if that is possible?

Wolfgang Schäfer

CapEx coming back to the level of depreciation. This is still our guidance, so to 400 million more than we had last year, something around 1.25 billion. This is our guidance.

Stephanie Renegar – JPMorgan

Okay, all right. Thank you very much.

Wolfgang Schäfer

Welcome.

Operator

The next question will be from (inaudible), Deutsche Bank.

Unidentified Analyst

I have two questions. I want to come back to your previous question about the revenues in the second quarter, slightly below the first quarter, which makes a lot of sense to me. Now, when we strip out the negative impact of raw material in the second quarter, any reason why the second-quarter operating profit restated or adjusted EBIT should be significantly different than the first quarter, again, putting on the side the net impact of raw material on the Rubber Division?

Wolfgang Schäfer

No – raw material, big impact, we discussed that. For other reasons, I don't foresee any other major changes in the cost structure or in the mix structure which we are selling. So I would not foresee any major

reason for any change in profits besides raw material.

Unidentified Analyst

Okay, so when I look at your full-year guidance, that is underlined that you are very cautious. So it is a very cautious assumption for your tire production for the second half, correct?

Wolfgang Schäfer

Well, that is your assessment now, I mean. But we are probably on the more cautious side.

Unidentified Analyst

Okay, I understand. Now, I want to – my second and last question, regarding the PLT division, 28% volume increase is very strong in the first quarter. Since the volume more or less equal in value terms, that means that the mix is not that negative.

Can you expand a little bit more the situation mix, especially since probably OE has been stronger than the replacement? And the 28% volume increase, where you gain market share, because it looks very strong to me. Thank you.

Wolfgang Schäfer

Well, as we said, the market – you know that the markets in the US and Europe are stronger, the replacement markets. And we managed to gain market share there. And this in the end, of course, is helping for the margin, and this is the major effect for the increase in sales and in profits.

Unidentified Analyst

Okay. Can you tell me, for example, on the replacement market in Europe and NAFTA, when the markets were up approximately 10%, what your increase in volume in this – in both region?

Wolfgang Schäfer

We had 15% more in Europe, while the market was up 11% first quarter. And in the US, 39%, when markets were up about 10%.

Unidentified Analyst

Okay, that's very clear. Thank you very much.

Wolfgang Schäfer

Yeah.

Operator

The next question will be from Edoardo Spina from Continental. Please go ahead.