Continental AG Q2 2010 Earnings Call Transcript

Executives

Wolfgang Schaefer - CFO

Rolf Woller - IR

Analysts

Horst Schneider - HSBC

Philip Bukins - Citi

Gaetan Toulemonde - Deutsche Bank

Aleksej Wunrau - BHF

Thomas Besson - Bank of America Merrill Lynch

Eduardo Spina - Morgan Stanley

Continental AG (CTTAY.OB) Q2 2010 Earnings Call July 28, 2010 10:00 AM ET

Wolfgang Schaefer

Good afternoon, thank you for your interest and your time. With some general comments from my side before I would like to explain to you the information on the charts and the second quarter numbers approved that we are gaining speed on the road to set back to the road to success. We are profiting from the strong ebusiness worldwide, in addition we achieved market share gain in the replacement in the US and in Europe.

And our product over proportionally growing because there are parts of the megatrends in the auto industry and we are as well as seeing positive results from a continued type cost control to gather with the results from the restructuring. And I think finally we proved our ability to improve the maturity profile and the debt structure of our company with the issuance of the bonds two weeks ago.

Now I move to the slide3, we highlight a summary of financials starting with the P&L effects in the second half sales in the first half are up by 40%, second quarter being still 10% or even 10% above the first quarter year-over-year 40%. First half of the year with adjusted EBIT up by 1.1 billion year-over-year. The adjusted EBIT improved to 1.3 billion with a margin of 10.4% and the half year 2010 the first quarter was 2.2%, the second quarter 10.6%

The automotive group achieved an adjusted EBIT margin of 7.7% in the first quarter. Power train breakeven if possible to be reached in 2010 if a positive business development as we've seen it in the first half of the year. The rubber group achieved an adjusted EBIT margin of 15.5% in the first half but we have communicated already for some months there are on 250 million burden from raw materials cost are expected in the second half of 2010.

Special items now at around 70 million most of them in the second quarter, $32 million of that are related to the Hanover/Stoecken plant closure, we still the expect the special items to be around 100 million for the total year. We had in the second quarter write down of tax loss carried forward burden of 88 million which is non cash effective but influencing our after tax profit. If you look at the balance sheet, cash consumption was limited to 44 million in the first half of 2010 despite a strong increase in our business activities, we had no major cash out in the first half for restructuring still excepting that to come in the second half of the year. Capital expenditures at $430 million in the first half of the year so far below depreciation by it will increase to around $1.3 billion in the full year so back to the depreciation level.

Net debt was down to $8 million at the end of the first half, net debt to adjusted to EBITDA at 2.3 end of June. We received the Financial Reporting Enforcement Panel report I think you are aware that they were doing an investigation in Continental on the 2008 numbers. The objections regarding the justification of the growth rate in 2008 are finished, they don't require any changes to our previous financial statement.

Last highlight I would like to mention the bond issuance, we have placed the bond as always announced within the six months some days later we decided to issue Continental first bond since a while as a benchmark bond versus maximum volumes to make sure that it is well received but (inaudible) I think both targets were achieved. The bond was now just before we start the conference ranging around 105%. It's a senior secure note with an amount of $750 million it took off 8.5%, five year duration with a rating of S&P Moody's of B1 so that same as the company's rating.

The net proceed have been used to repay an amount of transfer be under the syndicated loan facility. And in the end it helped to further improve the maturity profile and the funding diversity of the company. The next step will be done on an opportunistic basis when the market allows for it. We saw direct effect in Moody's which changed the corporate rating to B1 with a stable outlook compared to the negative outlook which we've had before.

Moving to slide5, we are back on the sales to pre crisis in the quarter too with 6.6 billion but if you look at the margin it's up from around 9% second quarter of 2008 pre crisis level to now 10.6%. $700 million adjusted EBIT in the second quarter I think this is confirming good performance which we have shown already in the quarter one. And the quarter one we are as I said already we are gaining speed back on the road to success.

If you spilt the groups into automotive group and rubber group so I'm moving to chart 6, auto is getting close to the pre crisis sales level is 4.089 billion in sales compared to $4.1 billion which we've had in the second of 2008. And rubber is already above the level which we've had in the pre crisis time. Profit wise auto is back to the pre crisis level unfortunately we had high extra cost due to the scarcity of electronic components and that constrained further improvement on the profit side and this extra cost were all due in the second quarter of 2010.

The rubber group is quite above the pre crisis level because of the effect of restructuring and of market share gain in the replacement markets but the growth was not only on the OE side but as well on the replacement tire market side which is the one with even as high margin for us.

Moving to slide 7, the net debt is down and now I'm not referring to the chart but just to the fourth quarter number by another 250 million compared to the first quarter of 2010 where still it was at 8.2 billion. This is mainly due that we only had a slight increase in working capital and that allows we achieve still comparing to the first quarter that we achieved a free cash flow of $390 million in the second quarter.

Now looking at the chart, the net indebtedness starting at the year end 2009, starting with 8.9 billion we have now CapEx in the first six month of $430. You will see that depreciation and amortization mentioned later on this chart with $830 million including the PPA if you take PPA out. It's still around $650 million so below the depreciation.

Change in working capital overall minus 885 million and first quarter number was already 857 million so not changed in the second quarter. And then we have the other free cash flow basically coming out the other position rather the profit of 437 million and then the capital increase of February which in the end makes up end up at the first end of the first half at $8 billion net debt.

The effect on the leverage covenant on page 8, leverage covenant ratio is now at 2.3 so it's a constant improvement over the last quarters. Quarter one we were still at 2.68 which is not only because of the increase of which is now at 3.4 billion and due to the debt reduction as I've mentioned already through the year end '09 $900 million and to the third quarter $200 million.

Head room to covenant which are in the second quarter, you will see that the grey line on top at 4.25 is plenty compared to the 2.3 and so no reason to worry about.

Moving over to the group financials, slide 10 comparing here excellent situation first half of 2010 on sales, EBITDA and EBITDA margin till the first half of 2008 so pre crisis in the first half of 2009. You will see that the sales volume is still $600 below the pre crisis level with $12.65 billion but this $600 million are completing coming out of the first quarter. The second quarter was on the level of the pre crisis volume, the margin EBITDA was up to 14.4% compared to the 13.4% which we've have had in the first half of 2008 and again this reflects the work on our cost side. Even though it is overshadowed by this extra freight cost which I mentioned due to the scarcity of the electronic product but it shows as well I think our strength on the pricing strength in the rubber group. We have this very, very receptive new products in the tire divisions, the passenger car tires, new tires which we were well received in the market and on the commercial tire side we profit from the complete renewal within the last two years of our product portfolio. And as well in the automotive it shows the singularity and well positioning of lot of our product in this division.

As this move over to the automotive group, you would see the sustained recover on page 12, we have gained quarter 2009 to second quarter 2010 1.5 billion in sales and we have gained out of it 207 million additional profit. Now just to come ahead with the question which might come your side first quarter was 8% margin now we are in the automotive group at 7.5% so this is less than we've show in the first quarter. This is not a change in trend or in the quality of the profitability of the automotive group I think the cumulative first half number of 7.7% is probably the most representative of how we are running in this year.

And if you take then the firs half of the '09 and compare to the first half of 2010 then we have a sales plus of 2.5 billion and an adjusted EBITDA of $740 million which makes a operational leverage of 30% and this is what you would expect from us. Why do we have this slight decrease in the second half in the second quarter compared to the first this is we've said in some one to one this is customer reimbursement which was specifically in interior quite strong in the first quarter. And then this was corrected then in the second quarter this is mix and other factors which are always residing some variation.

The only thing which is indeed burdening the second quarter is the extra cost for the shortage of electronic component.

Looking on slide 13 on the different division in automotive, first looking at the growth rate, chassis and safety and Powertrain both with growth rate above 40% and 44% (inaudible) 54% interior with only 36.7%. The variance between them is explained by two factors the one is the commercial car business in interior, we have a higher percentage of truck business and as you all know the truck will only picking up in the last two month. So this is reducing growth rate second sector is the business in the Asia and in US is already stronger in chassis and safety. And in Powertrain we have a higher percentage there than we have in interior and both areas Asia and US specifically China and US for those region which we growing the most in the first half of this year and this is as well reflected in those numbers.

Looking at the adjusted EBIT and the adjusted EBIT margin by division chassis and safety on the quarter was around 12%, PT improved Powertrain improved to 2.5% and as I have mentioned already under the highlights we seem to breakeven as already possible in 2010 if positive environment prevails for the breakeven which we have announced and we are working for the full year of 2011 only.

We still what we have always mentioned though the startup cost in the second half of 2010 show the electrical vehicles and hybrid vehicles think was a good performance. We've shown now compared to the losses which we have still shown in the first three quarter of 2009. We feel confident to reach breakup already this year.

Interior is down to the 7.5% from the 8.6% but overall at 7.5% now in the second quarter this is no change in trend. I have mentioned that already and those reasons are mostly true for interior customer reimbursement. So I was overstating a little bit first quarter extra cost on freight and some mix. The accumulative number of 7.7% in this division is probably the better number for the extra level and quality of the profit.

We have on chart 14, we had some correction on individual discussion about how do we foresee this second half of the year and specifically how do we see the effect of the scrappage last year and still somewhat in the first month of this year in Europe and in the US mostly the question concerning Europe. And we have tried to give an answer to this by this slide here, you will see the grey bars the left chart is Europe and right chart is NAFTA. If you look at the left chart the grey bars are the average number of units sold 2005 to 2008 to give some idea of probably normal season of distribution of sales and then this dashed grey in 2009 and the orange one is 2010 included the 2010 estimate for the third and fourth quarter.

And what we want to show is that we don't see anything as but seasonal adjustment over this periods over this quarters and probably something which is this is basically true to NAFTA as we all know this cash as this Cash for Clunker program anyway didn't had such a strong effect than the European program.

If you look at Germany you do see in the car sales within Germany you do see the effect of the scrappage team we are 30% below this first half of 2009, in the first half of 2010. if you look at production we are 20% up and this is not going into inventories but this is export to US and export to China. So short answer to the question are we afraid of the effect of scrappage scheme in the second half of we see this effects already in the first half numbers. There are over compensated from the European OEMs by most of the European OEM by export through the US and business in China. And we don't foresee this business to get on a lower level in the second half of the year than we have seen in the first half of the year.

Moving over to Powertrain, I've mentioned already we have now the third quarter in a row where we are showing breakeven, our numbers are better than breakeven. But basically breakeven fourth quarter of 2009 and 2% respectively 2.5% in the last two quarters.

The restructuring works I mean the individual work on the project helps the mix we have mentioned that already. US business stronger has Powertrain and the US business is more favorable on the far ahead of 11 maybe in cars and of course overall the volumes help. So we see that to breakeven on adjusted EBIT level is now already possible in 2010 if the business development prevails on the five year level as we've seen it now.

The mid term EBIT margin target of at least 8% on the recorded level is of course unchanged from that. Moving to the rubber group on slide 17, passenger car tires is not only the OE business which is helping to have this sales increase of 28%. This is rather replacement markets is Europe who plus 11% and NAFTA was plus 10%. And we managed to gain market share in those markets so we over proportionate about going there.

And we have still manage restore the volume even on a level above in the second quarter of 2008. We have still reported already that already on the first quarter numbers that we have confronted that in the second quarter the OE in the Americas is now positive as well and the first half of 2010.

Commercial vehicle tires to compare the first half of 2010 to the first half of 2008 we have almost restored the profitability level to be around 4% but at 15% lower volume. We see now in the last two month that the kilometer driven on the German roads for the last three month continue to improve. We have now in the second quarter 8%, this is true for the tonnage index in the US as (inaudible) it's about 6% and as thereabout we see more recently a pickup in the OE business so overall the way back to recover ton the volumes there has started as well.

Architect showed a record half year on margin and industry business is now 10% above the previous year, the year in the first quarter its not back here to the level we have see in '08. the mix of OE and non OE business is now at 55% to 45% because the OE business of course was growing much stronger than this 10% we have seen in the industry business.

The volume increase have continued next slide page 18, in the second quarter I have mentioned it already. We have to replacement tire market which were strong, we have the mileage driven on commercial truck which is increasing. We have this strong OE business and we have the gains in market share which helped to get this sales increase up 15% quarter-over-quarter. And we see the margin and operational leverage at 23% if you take the $648 increase in volume quarter two 2010 compared to quarter two 2009 and take the $152 million which we gained in addition to profit.

We have the raw material impact already in this numbers but with this growth which we have seen in the second quarter we have it now in the second quarter in this number specifically May and June but this effect could be now offset by the strong volume growth,

Looking at the different division on slide 19, Architect a growth of 26% and a margin of 13.6% I have mentioned that already strong over the last quarter on a double digit margin number in this region. We have on the passenger car again I've mentioned that we have now in the first half 18.6% margin and we achieved in CVT the close to 4% margin following the pickup in the volumes and for the restructuring effects which we have see. So overall we added 15.5% margin in the first half of the year adjusted EBIT in the rubber group.

The raw material prices on page 20 is shown again this slide now didn't change very much, it's stable on the high level of around $3 per kilogram natural rubber. This is as I said for the two months already in our numbers could be compensated. We have done the price increases in May and June we have reported on that already in both tire division. This has to be reduce the burden partially in the second half of the year but with this strong raw material effect it will be not be sufficient to compensate it on a full year effect for 2009. So the growth effect be to expected up around 250 million in the second half of the year 2010.

Moving to page 22, the net indebtedness and gearing ratio of the group, we ended the first half with $8 billion net debt which transfers then to a gearing ratio of 133% another improvement compared to the 145% we have had in the first quarter and a dramatic improvement of course very much helped by the capital increase as well in February to the year end number of 219% as well of the numbers which we have seen before. So what we see is now reported by quarter reduction of this numbers.

Our maturity profile I've mentioned that already and the beginning on page 23, we had cash and undrawn fully committed credit line of $3.8 billion at the end of the first half. We have now the Tranche D drawn with $269 million at the end of the first half of 2010. This is accounted as short maturity that Tranche D is only due in 2012 and we have other maturities if you take out the Tranche B in 2010 and 2011 which are $867 million and as you know with forward facility as Tranche B is already taken care of. Now this is reduced by the placement of the bonds of $750 million. The picture now looks like that in 2012 we have $7.4 billion maturities and then we have later due to the bond and some other maturities of 800 million this is later than 2014. And as I have said already the bond will step benchmark on which we have placed in the market and we will use now opportunities in the market to improve our maturity profile and to funding diversity further over the next time.

Moving to 25, we have increased our forecast on the production volume in the markets if you look at the passenger car and light truck production volumes we are now foreseeing for Europe plus 6% market volume of 17.7 billion this was in our latest forecast 17.1 billion. In NAFTA we have moved up to 11.5 coming from 10.5 in Asia as well moved up to 30.3 and so overall we see more positive picture on the total production of passenger car and light truck. Same is true for the truck production moved up in Europe plus 46% and NAFTA plus 17% and Asia plus 9% as compared to the low volumes of 2009 and the replacement markets we have the numbers now at plus 4, it's 6% in Europe and the same number for NAFTA and for the truck business plus 9 and plus 16 in those markets

Now in the end this makes up for a guidance where we say that the sales volume should at least be plus 15% in 2010 and there is no change in adjusted EBIT automotive. We foresee that at least more than of the adjusted EBIT compared to 2009 which was 192 million and the rubber we want to sustain the growth we've had in 2009 despite the raw material price burden. We talked about the burden of the $250 million which will see out of the raw material price increase. So do special items around $100 million, $70 million of that already in the extra numbers first half of the year and back to the normal level which Continental as a group has.

Interest rate is somewhat lower than we have seen it before because the base interest rate is lower and the higher bond is burdening the number less than we had forecasted before. Free cash flow our message to that doesn't change the ability to generate free cash flow is limited to achieve because of rising CapEx because of the restructuring from 2009 becoming now cash effective in 2010 with $300 million in the second half of the year and the higher working capital due to the higher sales volume.

CapEx as we said will increase to the level of depreciation before PPA so to around $150 and just repeating dividends, we don't plan at the moment to pay any dividend in 2011 for 2010. So much from my side for the numbers of the second quarter and the first half of the year, thank you for your attention and we have now time for questions.

Questions-And-Session

Operator

The first question comes from Horst Schneider of HSBC

Horst Schneider – HSBC

Good afternoon Horst Schneider here from HSBC. I have got three question if I may the first one is with regard to the tire divisions and your guidance for the full year with regard to earnings so if I look at your volumes in tires I get some impression that somewhere scrappage scheme on tire is being introduced.

So maybe you can give us an update to which extent you intend to gain market share? Also in H2, what was precisely the reason for the strong market share gain in H1? And should we assume then declining profitability in Q3 and Q4 in tires, which would be an unusual pattern if you look back to the past. So otherwise I arrived at the conclusion that your rubber regards should rather increase than remaining stable compared to 2009.

And the second question is with regard to China. You mentioned that also that you do some exports to China. Could you please quantify again what is your China exposure in tires? But also in rubber, but also in automotive. And to which extent you already produce locally in China? And then the last question is with regard to (inaudible) we heard yesterday from Mr. [Geisinger] some statements with regard to the timetable of the merger. I think he said a merger is now planned for late 2011. So if there is an update on that case, it would be good if you could also comment on that. Thank you.

Wolfgang Schaefer

First question, the market share gains in the first quarter and the second quarter are due to our products and our set in the distribution centers. We have to say specifically in the passenger car tire market we have introduced new products which are very successfully introduced in the market and they have helped to increase our market share together with price increases as I mentioned. Thus this helped as well as to improve our standing in the phase and the distribution organization and those are the effected for the market share gains in Europe and in the US. And the profitability level for the second half of the year and our message is mainly $250 million in raw materials which are running against the positive effects which we have out of the strong volume gains.

China, exports to China at the moment you are right in the tire business and we are exporting from [Asia] and from Europe to China. And we are now building up our factory in China, we did that probably half a year later than we had originally planned last year I think all of you are aware of that. We have announced that we starts with plans factory buildup were delayed and the crisis here a little bit but now we are on the way, we are doing that and the production will start next year so that we can then replace exports by own [production] and probably if you needed with the volume as well as still continue with the exports.

In the automotive area, we have around 18 factories in China which are producing automotive and ContiTech together. So producing already parts for the automotive suppliers for the OEM there and our efforts to increase our market share in China and our total share of the company going on there by looking for business and searching business of local OEM as well as increasing our market standing at the international OEM.

Third question, (inaudible) I think there is no change in communication, we have already said its not before 2011, this is what is still true and which was not changed I think was what (inaudible) had said yesterday.

Horst Schneider - HSBC

Sorry, then an add-on question with regard to China and automotive, so how many percent of your revenues are now coming out of China?

Wolfgang Schaefer

Well I think we have in different division by division if you see that (inaudible) safety and (inaudible) we have opportunity, we are in Asia overall. We have a market share of about 20%, in power train we are below and I think we have said that 1.2 billion sales which we had in China we grow this year by around 50% to more than 1.8 billion.

Horst Schneider - HSBC

And with regard to tires, it is wrong to assume that a large part of the revenue increase came out of OE tires, right? So it's replacement in OE?

Wolfgang Schaefer

Its both, you are right.

Operator

Your next question comes from Philip Butkins of Citi.

Philip Bukins - Citi

If I could just follow-on on the question on the combination. I'm just wondering if you could perhaps elaborate on what factors would actually have to be in place for you to achieve a combination earlier than late 2011? And I'm thinking here in the context of lender approval.

The second question is for the remainder of this year, 2011, 2012, is there any reason why you shouldn't continue to grow faster than the market at the automotive side? And actually how much might you be able to grow more than the market on that side? And just finally, if I may, is it possible to get an idea at the auto side what percentage of your sales in Europe are to the upscale names, BMW, Daimlar and Audi? Thank you.

Wolfgang Schaefer

Question of the combination we have said its first step as the precondition for the combination is the reorganization of the Schaeffler Group and the holding and the upgrading company I think they are well on that (inaudible) and doing that and then I mean we have to start to give to discuss it, we do not feel under pressure I think this has been other message from (inaudible) yesterday. We do not feel under pressure to do this faster than we have said not before 2011.

And automotive growth, 2011, 2012 Continental is well place their products concentrating on the high volume growth products being megatrends as we have said in the automotive, safety, digitalization, information, environment and affordable cars. So we think that our growth rate in automotive should be about 5% always on the market growth.

Philip Butkins - Citi

And on the upscale exposure?

Wolfgang Schaefer

For the upscale we do not give numbers on the distribution between our different customers. So sorry for not answering that.

Philip Butkins - Citi

Okay. And actually in the first half on production were you growing more about 5% more than the market as well on the auto side?

Wolfgang Schaefer

Again look at the different divisions and you saw the 55% which we have shown in power train it is definitely above the mark with new products which we had and if you go through division by division I think you see will see and I commented on that a little bit before. Yes, we are going faster and then we an interior we have a specific situation that there we have to truck business in there which changes the picture a little bit and we have more aftermarket business. And there of course which has another (inaudible) and seasonality.

Unidentified Company Representative

When you compare actually growth in Europe, North America combined for the first half which was 37% on production and compared that to the numbers we have given on slide 13 for the organic growth in the individual divisions than you would recognize actually that except as Mr. Schaefer mentioned, the growth was particularly stronger than the market growth.

Operator

Thank you, next question comes from (inaudible).

Unidentified Analyst

My first question relates to free cash flow. Do you have better [confidence] for the positive free cash flow compared to what you are expecting earlier this year given the positive outlook to revise and given you have below $7 million cash originates to working capital and CapEx stocking up. Do you expect to generate free cash in H2?

Second question in the entire business, you were mentioning $50 million investment can you quantify that? And also another (inaudible) next is going up, do you think that you have not an expert potential given that trucks or may be more profitable?

And my last question relates to the (inaudible) confidential page in Powertrain. Can you also give some indication on the amount? Please, thank you.

Wolfgang Schaefer

For the free cash flow, you are right the second quarter we had a free cash flow generated please take into account that we will have in the second half of the year. We will have this raw material cost burden and we will have specifically I think the restructuring cost which we always said is something around $300 million which was going out and of course this is burden for the second half of the year.

So yes if we seem a little more optimistic about the stability of the business in the second half of the year and its sales volume its on the better level more than 15% as part of the this might end up in cash flow but there is no dramatic change to what we have said or not, extensional change to what we have communicated up till now about the limitations on the free cash flow.

Unidentified Analyst

Do you expect the free cash in H2?

Wolfgang Schaefer

All right, I think I just answer that. The very limited ability -- and customer reimbursements I mean these are normal customer reimbursements which you get for development projects, I mean not a monthly basis stable but they are coming whenever projects are finished and so this is seasonality in there but this is not a typical pattern this can change from quarter-to-quarter. We had more in the third quarter than we had in the second quarter.

Overall, first half of the year was normal again so this is making up for the part we are making up for the difference. The shortage of the electronic components I would not like to be million there. But if I mention it you can sure it's a high number I mean it's not a number of just a couple of million euro.

Unidentified Analyst

And we have very nice question on the tax rate of the year, we have seen (inaudible) should we expect this to continue? Can you give a guidance on tax rates for the year?

Wolfgang Schaefer

Yes, unfortunately I mean this is (inaudible) we have seen in the first half of the year partly to that interest expenses can not be deducted in Germany from the taxes now and far this effects we will prevail for this year and probably as well for next year. So we have to expect it somewhat higher tax rate than we have seen that before.

Operator

Thank you. Next question comes from Gaetan Toulemonde from Deutsche Bank.

Gaetan Toulemonde - Deutsche Bank

I want to go back on that tire business because I'm a little bit lost. I think on one page, page 25, you gave some indication for the full year demand for the replacement market, 4% to 6% replacement tire market in Europe I mean in North America?

And a little bit more on the truck side. When I look at the performance of those markets in the first half, which you gave us on a different slide, that's underlined that the second half for volume will be negative. Is that something you really feel today? Because feedback I'm getting from Goodyear, some other tire companies is still a positive volume environment for the replacement market on the tire business in H2?

Wolfgang Schaefer

I think it might be somewhat conservative there. I would agree on that but we saw in June, we saw somewhat slowing down it too much but it was more quite in June than it has been before. So this is why we are now forecasting those numbers.

Gaetan Toulemonde - Deutsche Bank

So that will underline negative like for like big enough?

Wolfgang Schaefer

That will be consequence. Although we are probably somewhat conservative on that number.

Gaetan Toulemonde - Deutsche Bank

Other questions, still on the tire, when I look at your performance and the market share gain, can you tell us to which company are you gaining that market share? Because we talk about a pretty big number when the market is up 10% and you are up 25%. And since you have already significant market share on the replacement tire market in Europe that is on the line approximately a 300 basis point market share increase who has lost that market share?

Wolfgang Schaefer

That is basically we are (inaudible) on this, its coming from all of the competitors. Its not specific to be one where we would gain the market share from.

Gaetan Toulemonde - Deutsche Bank

And do you think it's a little bit more structural is because some of those guys are missing capacity and therefore that's the reason you gain market share and you might lose it again in the coming quarters? Or do you think what you have gained is a little bit more structural?

Wolfgang Schaefer

I think it's a good product. As I mentioned in passenger car I think the products are very well received in Europe and US and I think its rather systematic work on the distribution which as well helps I don't think that there is scarcity of the competitors which allow us to get more market share.

Gaetan Toulemonde - Deutsche Bank

Last question, when you mentioned the headwind of raw material, in the second half, 250 million, which percentage of that headwind do you think you will be able to offset through a price increase? Do you think that two-thirds of it will go against the operating level or do you think it's going to be less than that? What is your magnitude? \

Wolfgang Schaefer

Well, I gave you the numbers of the price increase which we have done in about two months of the first half of the year. So in May and June and now you know that this is not always fully implement within the market some of it fix is going lots of the way to implement it. if you take those numbers and which only have an effect of probably half year five to six months and compared them to the raw material increases which is a growth number 250 million might get an idea of what we are still missing to really compensate it.

Gaetan Toulemonde - Deutsche Bank

Okay. I get the net number approximately after a gross number, is that correct?

Wolfgang Schaefer

Yes, correct. Yes.

Operator

Next question comes from Aleksej Wunrau of BHF

Aleksej Wunrau - BHF

Just one question left on my behalf. Would you please elaborate on the plans as regards to your summer plant holidays this year, putting this into contrast to last year's duration of the summer plant holidays then?

Wolfgang Schaefer

Well just question to the OEM summer plant holidays I think our probably answer is starting with the other side and as we have already seen volume is much more than we have expected. So, we are running with our plant to make sure that we do not run into shortages and we are at some of the products which we have we already close to that, its gets almost as I mentioning from competition.

In the automotive side, the OEMs are doing summer plant holidays. They are much shorter than we have seen that last year of course markets are back higher volumes. But there is still summer plant holidays, we always follow of course hands of the customers just in time delivery. Now what we are doing is we have issues with scarcity of electronic components of course in those cases I mean there is no summer plant holidays at all and we produced to make sure that we some headwinds some head production now to be able to deliver on a better trends in September, October, November.

Operator

Next question comes from Thomas Besson of Bank of America Merrill Lynch.

Thomas Besson - Bank of America Merrill Lynch

Could you just comment on the overall vehicle mix developments you are anticipating in H2? Is it going to stay as supportive of which we've seen in Q2 and therefore continue to drive significantly higher revenues for you?

And can you also mention the kind of customer breakdown explaining your higher production goals, forecasts? Is it essentially driven with your premium makers, clients? Or is it general trends for all those players? The first question.

Second, coming back to the guidance, specifically on the rubber guidance, I struggled to get to a flat performance for the year, specifically when I look at what you've achieved with ContiTech. So can you please help me beyond the impact to understand, what's going to put your margins so much lower than last year in the Rubber Group specifically? We all, I think, expect a (inaudible). And finally, can you tell us what your plans are, what potentially implementing new price hike waves or a new price wave in Europe to offset a lot of proportion of [usual] materials development? Thank you.

Wolfgang Schaefer

I think of the vehicle in the second half of the year, we do not expect a big change in the mix what we have seen. And neither on different OEMs nor on the regional mix I mean the growth is still the forecast, the increase is coming from a stabilization of the US. Volumes which we have seen in the first half and this was more than we have expected as well as for Asia and so of course this makes up for some mix and this mix we would see as well in our company but this would probably not be so different from what we have seen in the first half of the year.

Now the Rubber Group for the margin I mean the main factor for the margin which we are forecasting or which are guiding is the raw material effect. And we do not see other major effects in there, and we have now the price increases May and June in the first half of the year in Europe as well as in May both in commercial and passenger car tires. There is no decision yet on what potential following price wave could be to (inaudible) but as we have already said we will do everything to pass over the price increases of the raw material to our customers to the end user.

And we have already managed that in the part now with high raw material price increases which we have seen in the last 12 months from the 182 in the top three 360 I mean it will need more than one price grant probably if surprises stay on that (inaudible) not yet decided when to do. But if necessary we will do that to make sure that we can pass it on.

Operator

Next question comes from Eduardo Spina of Morgan Stanley.