Continental CEO Discuses Q3 2010 Results - Earnings Call Transcript

Executives

Rolf Woller - IR

Wolfgang Schäfer- CFO

Stefan Scholz - Head, Finance and Treasury

Hannes Boekhoff - Head of Press

Analysts

Horst Schneider - HSBC

Philip Watkins - Citi

Yann Benhamou - Exane

Henning Cosman - WestLB

Gaetan Toulemonde - Deutsche Bank

Aleksej Wunrau - BHF Bank

Christian Ludwig - Bankhaus Lampe

Thomas Besson - Merrill Lynch

Stephanie Renegar - JPMorgan

Henning Cosman - WestLB

Bastin Wagner - Old Material Asset Management

Philip Watkins - Citi

Continental AG (CTTAY.OB) Q3 2010 Earnings Call November 3, 2010 10:00 AM ET

Operator

Ladies and gentlemen, welcome to the conference call of Continental AG Nine Months Results 2010. This call is being recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions) I now hand over to Rolf Woller. Please go ahead, sir.

Rolf Woller

Thank you very much. Warm welcome to everybody here from Hanover. Good morning, good afternoon wherever you are in the world to our nine months conference call. Together with me here in Hanover I have Wolfgang Schäfer, our CFO; Stefan Scholz, the Head of Finance and Treasury, Hannes Boekhoff, the Head of Press and myself from the IR team.

Before I handover to Wolfgang, just some housekeeping items. First of all in the press release interim report and the presentation should have been sent to you already during the morning. If you has not received it you can download it from our internet page which is www.contiir.de or www.conti.com. Those actually were not able to join the conference call can listen to the webcast in the internet. After Mr. Schäfer has lead you through the presentation, there will be the chance actually to raise questions which we are hopefully able to answer in an appropriate way.

With that, I’d like to hand over to Wolfgang. Please go ahead.

Wolfgang Schäfer

Good afternoon. Thank you for your interest and time in Continental AG. I will take the next roughly 45 minutes to explain the Quarter Three developments of Continental in the structure which you are used to from us. Before I start with slide three probably let me do some very high level summary of the last nine months and of the last quarter.

We are still benefiting from the tailwind of the economic recovery. For us, it’s no doubt that will prevail for the whole year now and we have no indication that it will not prevail at least under the first quarter of 2011.

Now, due to this development, we have increased our guidance to somewhat little bit about €25 billion sales, but these do not expect any further increase when we are going to present our final year numbers in February.

Second, we have managed to transform this momentum into the profit margin so, our guidance from 8 to 8.5% can be rate to 9% for the full year. This is including our all the negative effect of scarcity of electronic components we have talked about that already in the last year which are decreasing then over the next six months and of the raw material and natural rubber issue and of the ramp up of electronic vehicle components which was all in this quarter.

All three effects basically have major strong negative impact on quarter three. Same message here. The 9% is more probably what the value will be around at year end and again do not expect any further raise in this guidance from our side.

Third issue, the net income is negatively impacted by and the improvement in the operating margin is not brought forward to the net income mainly due to tax effect on cash and P&L tax rates and smaller one in this quarter, a one time effect related to the bond issue.

Fourth and last, summary issue nevertheless, we see a positive free cash flow development in quarter four somewhat better than expected whether on €500 million free cash flow generated in that quarter. This will help to reduce debt and in addition, the bond issuance of the €3 billion in the last three months will have to reduce our or it help to reduce banker.

Much as the summary of the development in the first nine months and have said this, I would move to page three to a summary of the financial highlights of the group and as you know it from us all of these highlights mentioned here will be later on be explained in more detail.

The sales up 33% year-over-year on the first nine months and the adjusted EBIT up more than €1.1 billion year-over-year which means an improvement to €1.8 billion of the adjusted EBIT in the first nine months with the margin of 9.4%.

The Automotive Group all of it have an adjusted EBIT margin at 6.5% after the nine months. The Quarter Three adjusted EBIT in automotive was depressed by special freight cost and by the ramp-up cost in Powertrain.

On the Rubber Group, we have an adjusted EBIT margin of 14.8% after the nine months despite a €170 million cost burden from the rising raw material cost in this quarter. Special items amounted to roughly €77 million after the nine months.

I said that already increased our full year out of €25 billion sales and an adjusted EBIT margin to stay at around 9%. We have the tax ratio impacted by the write down on inter carryforwards and other factors, it will stay at around 50% in 2010, I will come back to that later.

Now, if you look at the balance sheet effect in the first nine months, we had cash consumption limited to €170 million despite a strong increase in all business activities, free cash flow will amount to €500 million in the fourth quarter and will allow for further debt reduction.

We had CapEx in the first nine months at €782 million. This will increase to around €1.2 billion in the full year 2010 so; roughly go through depreciation not accounting for PPA. Net debt at €8.1 billion after nine months so, basically stable on the numbers we have seen after the first half of the year and the net debt to adjusted EBITDA is at 2.3 after the nine months.

We have managed to balance out the maturity profile considerably by issuing bonds, four bonds in the amount of €3 billion. If you move to page four, I have some details here of the recent bond issuances. The issue of the bond was (inaudible) financed. It is senior secured notes with maturities in 2015, 2016, 2017, and 2018 and the net proceeds were used as you have expected that to repay the Tranche B and Forward Start facility in full and to partially reduce the amount of the Tranche C so, overall we have now €4.1 billion on the Siemens VDO debt which is maturing in 2012.

We achieved our target to improve the maturity profile. We diversified the funding profile and we have no further issuances planned in 2010. We feel well prepared now for the next step which will be initiated towards with our bank on the remaining Siemens VDO facility.

If you move to page five, the gross indebtedness for September and of September is €9.3 billion. This includes cash of €1 billion. The net indebtedness for September 30 is €8.1 billion and we have available and fully committed credit lines of €2.3 billion. If you add up the cash we have €3.3 billion of available liquidity.

If you look at the gross indebtedness of €9.27 billion, which is shown here in the pie chart, the VDO facility now makes 50% out of that €4.7 billion is the Siemens VDO facility 50% of the €9.2 billion. The bond €3 billion maturing 2015 and later make €3 billion which is 32% out of the total and then we have other bank lines including the EIB credit of around 10% and other indebtedness CPs, financial [EDC] of around €0.8 billion so that makes up for around 8%.

The maturity of this Siemens VDO facility which was still at something around €9 billion at the beginning of the year is now after the €1 billion capital increase and €3 billion bond issuance is down to €4.7 billion.

Moving on page six and looking at the sales development and at the EBIT margin and EBIT development. Sales in the third quarter was slightly down compared to the second quarter. This is due to vacation months, July and August and only seasonal, so we don’t see any change in trend in our business development.

If you look at the adjusted EBIT margin compared to fall pre-2009 to 2010, the margin is slightly down from 7.9% to 7.5%, though total profit in absolute numbers is up by around €70 million.

Reason for the reduction is negative hit in the automotive group, ramp-up cost of PT and still special freight issuance as electronic components. I come to that later on page 16. The ramp-up cost of PT I can say that already now are mostly occurring in Quarter Three and will be much lower in quarter four.

On the Rubber side, the influence on the margin is raw material price increase as it was expected the fourth quarter in the margin will be up again because we have some of these effects we had in the third quarter, a one-time effect and will not reoccur again in the fourth quarter of 2010.

Now, if you look at the two groups on page seven separately on the sales development, you can see that the sales trend is still intact €3.2 billion third quarter 2009 compared to €3.9 billion in the third quarter of 2010. A little bit below the second quarter of 2010, but as I say purely seasonal effect.

The profit increased from €99 million from €159 million by €60 million adjusted EBIT and the volume increase has to over compensate the negative impact which I’ve mentioned already ramp-up PT EV vehicles and the electronic scarcity.

If you look at the rubber side, same message, say positive sales trend is still intact if you compare the first quarter of 2009 to the third quarter of 2010 moving up from €2.1 billion in sales to €2.57 billion in sales. Now, the absolute EBIT number being stable so, the adjusted EBIT margin at 13.4%. The main effect and basically only effect here is the increase in raw materials, which we could not fully compensate via the price increase is obviously which we have done already in May and June in the passenger car business as well as in the truck business and the increasing sales have to keep the absolute profit stable.

I’m moving to page 8 now, we have a disconnect, as I have mentioned already, between the allocation of tax assets and profit generation. The tax rate in 2010 will be at around 50%. This is impacted by strong earnings recovery in the automotive group, which has impacted this tax situation negatively; it's mostly the regional mix.

The gross was very strong from China, from South America, and this is market driven and very much from Eastern Europe. This is very much Continental driven because we are delivering our components from these Eastern European countries to other areas and we cannot offset the profits. Again, burdens which we have in other regions specifically in Germany where we have the high interest to be paid due to the Siemens VDO acquisition or basically all the interest are paid in Germany and we have the PPA allocation the same is too for US. This cannot be offset against this other effect.

Now this year around 50% will be decreasing in the next year. If you look at the graph, we are showing the net interest before taxes being in the first nine months at €845 million. If you will take the current tax rate we will calculate with something a little bit about 25% makes €209 million and then you will see the special effects, which we have.

The write down of the interest carryforward in Germany and as well as the write down in the US of deferred tax assets. Part of it is only previous year effect, but part of it’s around €80 million, but part of is the current year effect, which is the capital addition at the same time the depreciation of these amounts.

We have the €50 million non-controlling interest, minority interest, which ends up at a net income after-tax of €363 million makes €1.82 per share. If you would add like it is nominate on the PPA after-tax to this where you come up to €608 million net income after-tax, before PPA makes €3.4 per share.

We are starting and we have started an action plan to improve the situation in the coming years. First evaluation indicates that the tax rate will go down in 2011 to stay at 40% in the worst case; this is measured against reported NIBT. More details on this I can give with the presentation of the full year 2010 result in the first quarter of 2011.

Moving to page nine, we are showing the radial return of Continental to value creation in a clear and stable trend. The graph is showing on the gray bars the trailing operation assets; on the orange lines, we are showing the trailing return on capital employed, return on operating assets and dotted lines show the corridor in which the weighted average capital assumptions by the market are so in between 8 and 10% as what the market is assuming for us is weight average cost of capital.

Now, if you look at the trailing ROCE, you’ll see that in Quarter Three we are starting to be in this corridor with a 8.9% and latest in Quarter Four, we expect to be back to the value creation which Continental had done in the years prior to 2008.

Walking through the net indebtedness on slide 10, we have started with a net debt of €8.9 billion and of 2009. CapEx in the first nine months was €729 million. We have the change in receivables with roughly €1 billion which is only due to increase in business volume there is no change in the payment terms is our customer is no change in over dues even a slight important in the over dues.

We have the change in inventory same seasoning there increasing business volume. Depreciation and amortization is €1.2 billion going down including of course the PPA, other free cash flow basically the profits and other effects summarized there of €581 million and the capital increase if €1.56 million. The net debt at the moment is standing at €8.092 billion, €8.1 billion with the gearing ratio at 138%.

I would move over now to the group financials on page 12. This plays comparing to 2008 again the effects of our work on the cost side and the message is the same as it was in the quarters before. We have exactly the same sales volume first nine months of 2010 than we have added in the first nine months of 2008 and the pre-crisis nine months of 2008 at a margin of 12.4% and this is lower than the after crisis at nine months now in 2010 with 13.6%.

For us this is showing that the cost restructuring was really structural and these costs in 2010 includes those effects which I have mentioned already, the ramp-up of the EV and the extra freight burden. Still we have 1.2 percentage points better than we have been in the nine months of 2008 and I have given this adjusted and (inaudible) improved already in the last conference call.

Looking at all footprint, this has improved from 42% of our employees being in best-cost countries before the crisis and now only 18, 20 months later it’s 48% of the people being in best-cost countries change which in the end is positively improving our cost base. Of course, as well in the next months and years got still in the focus of our attention.

Concentrating more on the Automotive Group, we move to page 14. Sales increased in the nine months year-over-year is 37.3%. We are growing fastest in Powertrain with 45% Chassis and Safety 37%, and Interior is now 31%, interior picking up on the gross rate because interior is well including our truck market segment and truck and the commercial vehicle business now improving strongly as well in the last months.

Interior as well including our aftermarket business and this was more stable and that’s one of the reason find here is only a 30.7% growth compared to the other two automotive divisions. If you look at the EBITDA, we had an increase versus the nine months of ’09 by €952 million to €1.3 billion.

The previous year was €343 billion. If you look at the different divisions, you will see that chassis and safety ended up with the 11.2%. Adjusted EBIT, this is a decrease to the first half of the year and the main reason for that is the extra freight, which we have in the business and which we specifically have had in the third quarter.

Powertrain is now at a margin of 0.3%, €10.2 million absolute number, and we have an announced already at the last call. This is the ramp-up of the electrical vehicles and hybrid vehicles, which will show up in the market next year. All these ramp-up effect basically can be found now in the third quarter so, our commitment to the breakeven for 2010 is still intact and that can reconfirmed that account that in one of the next pages.

Interior with 6.7% as well suffering somewhat from the electronic component scarcity and the high additional logistics cost were still over as well as the operational efficiency within the factory on a level of €278 million.

If you move to the next page, we show the additional cost burden in Quarter Three which has impacted the adjusted EBIT margin and here we are likely do that or as compared to the first Quarter Three of ’09 with a Quarter Three of 10. We had roughly €700 million more in sales a quarter of the year before.

Additional profit out of it €60 million, EBIT margin adjusted up from 3.1% to 4.1%, but you would have expected the higher operational increase as we see it here and again reason for the all those two effects, which I’ve mentioned and to come to a little bit of the issue please move on to page 16.

We have display here the adjusted EBIT you see the development over the last five quarter, 6% in the fourth quarter of ’09, 8%, 7.5% Quarter One, Quarter Two 2010 and now 4.1% in the third quarter of 2010. We have as well added in gray the special freight cost effect which was in the quarter which by the way is not included in this relative EBIT numbers and the ramp-up cost of PT. You’ll see that we had the special freight cost starting a little bit in the first quarter, being there in second quarter, being there as well in the third quarter even a little more and in the third quarter in addition to ramp-up cost of PT.

We don’t see anything of these ramp-up costs anymore in the first quarter and so Powertrain will move back to the profit situation which we have seen in the first two quarters. We still see special freight cost in the fourth quarter of 2010 and we only see them disappearing in the course of first and latest in the second quarter of next year.

This is probably when you move over to the next page, you see again the Powertrain numbers here quarter-over-quarter starting in the first quarter of ’08. You see the constant increase which we have in the last quarter is only now the third quarter of 2010 being at minus €48 million.

As I said, ramp-up cost mostly due to that Powertrain will return to profitability in the next quarter. We will achieve the breakeven which we have announced in 2010. One year earlier than we had still expected at the beginning of the year and I can confirm as well the mid-term EBIT margin target, which is at least 8% on a reported level.

Moving over to Rubber Group. If you move to page 19, passenger car and light truck tires, the volumes in million units is now back in the first nine months of 2010 back to the old level, which we have had, plus 19% to the previous year. Replacement tire market in Europe is only up 9% and up to 5% so, we have gained the market shares and we could just stay these market share gains from the first half of the year in 2010 in Europe and the Americas and in Asia.

The price and mix contributes to the top line after the nine months and we had a good start at the winter tire season in 2010. We expect it to be at the level of the good last year. We have in the OE business in the Americas long discussion which we've had over the last year we are now positive in the first nine months of 2010.

Commercial Vehicles, again you’ll see the worldwide volume and units. We are back to 4.56 million in the first nine months of 2010, but back is still far below the nine months of 2008, the pre-crisis level. Still our EBIT margin if you take out the special effects of the closure of Stoecken is 4.9% above the 3.3% which we have had two years before.

Indicators from the market are still positive. The kilometers driven on German roads continue to improve, 6% plus in the third quarter of 2010 and basically the same is true for the freight on in the US, which is as well continuously recovering.

ContiTech on the stable development, which we have seen for long time. Solid margin level from the first half of 2010 has sustained. The industry business is now picking as well, 16% about previous year after we had seen the rate increase in the OE business since the beginning of the year.

The mix of OEM and non-OEM is now at 54, 46 after the first nine months in 2010. Probably additional comment on the tire business on slide 20. We have decided to add €700 million in invest through BRIC countries to increase our market position there. This includes the China greenfield in Hefei, an investment of 170 million.

The first tire is just coming out of the factory which is just going to be opened. We will invest €280 million in Russia and India to improve our market position and the possibility to delivery tires from local production to the local market inside and we will as well extend our capacity in Brazil with an investment of €260 million.

Target, we have announced it already, is to (inaudible) our market said in Asia and in BRIC countries and to participate from the future growth in those markets.

If you look at the financials of rubber group on the slide 21, an overview of the first nine months of 2010, growth rate in commercial in ContiTech with 25% stable on what we have seen in the quarters before. Passenger car and light vehicle tires plus 20% and now commercial tires is 25% growth as well clearly coming back to the growth rate following the increase in the total commercial vehicle tire markets. The sales increases 26.6% for the whole rubber group.

If you look at the adjusted EBIT margin, ContiTech 13.3% stable, PLT with 17.4% now in the third quarter below what we have seen in the first two quarters. This is the raw material effect, which is showing specifically in the third quarter and will as well be seen in the first quarter.

The commercial vehicle tires now at 4.9% and which is up from €24 million profit in the first half of the year now at €50 million profit margin up from 3.9% to 4.9%.

The R&D expenses was slightly up versus 2009 by €3.5 million and are at €169 million, also 2.3% of sales. The volume growth has flowed in quarter three as expected but the trend in the industry is still intact; we don’t see any basic change in demand.

If you look at the adjusted EBIT margin compared to the €456 million increase in sales, we have a stable adjusted EBIT which means that the adjusted EBIT margin is down from 60.4% to 30.5%. Again, this is only due to the raw material price increases.

We have already talked about the price increases which we were doing during this year. Now, we have announced further price increases for November for the commercial tire business and for the beginning of next year generally for the passenger car tire business in around 5% and 6.5% for Europe and US respectively.

If you look at the raw material prices, in 2010, we have now switched our documentation here from a basically net effect, which we have shown until the first half of the year we are now moving over to the growth effect, which is easier for us as well to get the right numbers. I would not going to the left chart which is just showing the raw material price effect. We have talked about these numbers in the last quarters. Now you see that the full year growth effect is something around €480 million for the whole Continental Group and of course in the Commercial Vehicle Tire business this is impacting relatively more because commercial vehicle tire is 20 out of 60 kilograms (inaudible) in the passenger care tire is only 2 out of 10 kilograms.

Moving over to the financial indebtedness and the gearing ratio of the group, this is the chart now added with the nine month figure of 2010. I have mentioned the number already €8.1 billion is the net indebtedness at the end of this quarter, roughly stable what we have seen in the first half of the year. We had a strong September sales so, the account receivable adjusted in this month going up made up basically for the increase in the net indebtedness and you see that the gearing ratio due to this effect was slightly increasingly from 133% to 138%.

Moving further to the financial indebtedness and the maturity profile just to probably give a brief summary of what we have done this year. This recent bond issuance is the part of the integrated refinancing plan, which we started end of 2009 starting with a negotiation of the forward start facility and then next step was the equity increase of €1.055 million, which we have done in January 2010. Money was used to repay in part Tranche B, which was due in August 2010, and then we had the issuances of the four bonds which I have mentioned already.

To read this on the upper graph, the maturity profile here shown in 2010 was €3.2 billion. The €2.685 billion out of it is more an IFRS documentation as short-term debt. This is in the end revolvers drawn which are in the end only due in 2012 and this is the Tranche B included in their which is why the forward start facility as well only due in 2012.

Actually you should read this as maturities in 2012 of roughly €9 billion, still at the end of June 30 and now moving down to the slide below that by issuing the €3 billion in bonds, the maturity in 2012 is down to €4.7 billion in 2012 and again, of course, you have to add the revolver of €600 million so that so €5.3 billion overall, which we have maturities in 2012.

As we have said that already before, we feel with these number, we feel now very comfortable and in a growth negotiation position with our banks when we have to re-discuses or to discussed about the refinancing of the VDO facility in 2012 and we will start that negotiations not only in 2012, but definitely already in the course of next year.

Moving over to page 27, if you look at the leverage covenant ratio this is stabilizing at solid levels and the sufficient head room to the covenants which we have there. Adjusted LTM EBITDA is now €4.5 billion and net debt to adjusted EBITDA ratio is 2.28.

Finally coming to the outlook 2010, there is not the change on what we are predicting for the market, passenger cars and light truck production 6% up in Europe, 35% up in NAFTA to 11.5 million cars in Asia plus 17% and the rest of the world, mainly driven here by South America, up 9% to 5.8 billion truck production, up 43 respectively 23% in Europe and NAFTA.

The NAFTA number is somewhat increased compared to what we have predicted in the last conference, Asia plus 9%, Rest of the World is 8%. On the replacement tire markets, numbers are stable to what we have foreseen in three months ago, 4% to 6% in Europe and NAFTA and 9% in Asia and on the truck tire markets plus 16% and plus 20% in the replacement market. This is again an increase to what we have foreseen some months ago.

Now this transforms then in the outlook on page 30. We see, and I have mentioned most of these numbers are already more than €25 billion sales volume in 2010. Again, recommend do not expected now to be reason again when we show our final year numbers and around 9% adjusted EBIT margin, again a number which is now solid outlook for the year.

We have the adjusted EBITDA in automotive at around €1 billion is possible in rubber substantially better than 2009 despite the raw material price burden, which we have discussed. The special items will be at around €100 million as we have announced already last year, interest resulted at around €750 million in 2010 and the free cash flow. Due to the factors, which we have mentioned already before rising CapEx cash out for restructuring around €300 million in 2009 and higher working capital because of the gross, but we now foresee in Quarter Four €500 million free cash flow to be generated.

CapEx expected t increase of up to €400 million to €1.28 billion basically depreciation without PPA and no change in the dividend we do not plan to the decide in 2011 on an any dividend date for 2010.

Much from my side as comments to the development in the first nine months of the year and in the third quarter. Now, we are happy to take your question.

Question-and-Answer Session

Operator

The first question comes from Horst Schneider from HSBC.

Horst Schneider - HSBC

Horst Schneider here from HSBC. Two questions, if I may. The first one relates to your higher guidance with regard to burden from raw material prices. What I understood in the past, you are buying raw material prices six months in advance. You have got some lead time here, so I’m surprised that you are raising now the guidance for raw material price burdens after Q3 for 2010.

I would like to be interested what happened in the course of the third quarter that led you, then, to increase further guidance for this year. I know that we are not yet in the middle of 2011, but you have got by now already some visibility in which trends the raw material prices are going for next year, and would be interested if you should expect also some raw material price burden for 2011.

The last question relates more to your divisional targets in general. We saw yesterday that your spokesman, Hannes Boekhoff, commented on the midterm targets for the interior units for Powertrain units, and maybe you could explain us again what are the midterm targets in general for all your divisions, you referred through the 2012 and 2013?

Wolfgang Schaefer

First the raw material price, it is the guidance is now on a gross level so the €480 million is the gross effect of the raw material price increases and number we have given before the 320, which we were talking about at the first half of the year was net effect. It is not that we foresee you’re right, we have the raw material price and the material in our books and we are not affected by the extra price increase very much anymore for this year. This is the difference between the two numbers.

Horst Schneider - HSBC

Hadn’t you mentioned in the Q2 conference call that part of the raw material price burden, and you gave us at that point of time also a number it was €70 million has been compensated to some extent by price increases, so I understood that number to be also a gross number?

Wolfgang Schaefer

No, with some un-security this is why we decided we said together or we decided to go over to a gross number because it’s always in security in that, which one is the real price effect in the year, which is not always easy to quantify so we say we go to gross and this is gross and this is easier for us to.

Horst Schneider - HSBC

Okay, then it was a misunderstanding. Okay. No problem. Thank you.

Wolfgang Schaefer

Visibility on raw material, that the market is extremely volatile and unfortunately the visibility has well limited for us because the reason for the volatility hard to determine and what we see actually is further increase in raw material now if you take one of the more taken and bought qualities by us moving up to 360 in the year after now from 180 in last year and in the last week this quality was moving up to more than $4 per kilogram.

We see an additional increase on heights, which we haven’t seen in the last 15 years. We will, as we have done in the past, we will react on average price increases if necessary. As I said, we have announced next price increase for in the Passenger Car Tire business for January, now this actually we need to compensate for the raw material price level, which we have seen up to now. If necessary, we will have to do a further price increase, we will reflect of their according to how the raw material price is going to develop.

Divisional target there, actually no change to what we have discussed before and we foresee for powertrain after we have said that the target of 8% profitability, we should be there latest 2015 with being now earlier in the breakeven we see that this target can be reached a year earlier and on interior, the 8% mid-term as well no change in that communication. Chassis and Safety target were represented, as well as target which we have. There is no change.

Horst Schneider - HSBC

The 12% target for Chassis and Safety is for when? It’s for 2013 or?

Wolfgang Schaefer

This is our target, which we have 2012 as the target for the division. If you look at the past performance and this is the value, which was achieved during the first half of the year.

Horst Schneider - HSBC

Your spokesman said the target of 7% to 8%, what was it, in 2013 already. He hasn’t said 2014, but it doesn’t matter.

Wolfgang Schaefer

This was the misunderstanding in the press.

Horst Schneider - HSBC

Just the last one, again with regard to raw material prices, so you say that if it’s now 480 gross, it was 320 net before. On a net basis, you think that would be then unchanged?

Wolfgang Schaefer

For this year?

Horst Schneider - HSBC

Yes.

Wolfgang Schaefer

I have talked about this somewhat un-security in this number, which is in there because you might imagine it’s not so easy to see a real net price effect out of price increases in different reasons of the world. Yes, but there is no reason at the moment with the increase in raw material prices, which we see at the moment. This will not change the burden anymore.

Operator

The next question comes from Philip Watkins from Citi.

Philip Watkins - Citi

I just got a couple of questions. First of all on the tax, if the cash tax impact, I presume, is going to be relatively similar to the actual tax impact. If I may, on the freight costs, you’ve talked about the extra freight costs for the shortage of components reducing, what gives you confidence that will actually happen in 2011?

Are you able to actually quantify what the freight costs were and the extra powertrain start-up costs? That would be helpful. Sorry, if I could, just even adding on to that, for start-up costs, could there be any other start-up costs we can think about for next year for other divisions?

Wolfgang Schaefer

Your assumption on the taxes is right. Cash tax about the same as we have seen on the numbers before. The reduction of the freight costs would makes us optimistic there, this is of course our suppliers are giving us messages, how this is developing as well internally we were adjusting to the one or other shortage, which we have by trying to find additional sources for the products and the total value of these and as well as the start-up costs I probably if you look at the graph that what we have done if you get an idea on that, I would not like to give numbers, concrete numbers on that, but it’s gives an idea how that is developing and probably some idea about the size of the amount of the value.

Philip Watkins - Citi

The specific components, are you able to help us understand what those are, whether the shortage?

Wolfgang Schaefer

This is semiconductors, which are used in automotive, which are used as well in consumer electronics and it’s not only automotive industry and competitors of us, which have this problem. Even the Apple iPad was not delivered for a couple of weeks because they didn’t get their component. This is really an issue in the industry, which had done restructuring last year and was now surprised to the strong increase in demand from automotive product as well as consumer electronics.

Philip Watkins - Citi

If I may, just finally, the rare earth, we’re hearing a lot about this right now. This sounds like it’s not connected at all, but what are the issues there around access to rare earth metals from China and is this going to be a problem for 2011?

Wolfgang Schaefer

This is not an issue for us. If at all indirectly problem for us should that be a problem for one of our suppliers in the component, which they are supplying to us. We are not aware of any negative effect on us at the moment.

Philip Watkins - Citi

They will find an alternative source if there’s no, they can’t get it from China, is that right?

Wolfgang Schaefer

Correct.

Operator

The next question comes from Yann Benhamou from Exane.

Yann Benhamou - Exane

Yann Benhamou. My first question relates to your tire business. If I look to PLT, you had 28% in growth in H1 and only 19% in nine months, so it implies that there is more volume increase in Q3. What is behind this number?

Second question, you mentioned the uncertainties about the pricing effect. Your competitor had difficulties to pass price hikes in some segments, so what’s your take on that? Finally, could you indicate to us if we have to expect linear improvement for the margins in Tire and Powertrain over the coming year?

Wolfgang Schaefer

The growth in the third quarter, this is not a surprise, if you look at our guidance and our market growth, which we have given constantly. We did not change that over the last two quarters. This is the result out of it. The market was already picking up already in the 2009 in the third quarter and so this development is somewhat as well, if due to base effect, which we have seen there.

On the pricing effect in the part II, we have done this pricing increases in May and June in Europe and in the US and we have managed to pass, but you never get the nominal price increase pass through the market, but we have managed to pass through more probably than historically because the demand increase in the market has had to pass it through and we foresee that as well as far as this is predictable at all we foresee that as well for the next price increases, which we have and on.

I would not like to give any numbers on the year-by-year profit improvement for the different division, but you can expect that there is not one single issue, which will improve the profitability in one year specifically strong.

Yann Benhamou - Exane

Just to come back on the volume issue for PLT, you used to out there from the trend, in terms of market volumes. It seems that it did not happen in Q3. Do you confirm that?

Wolfgang Schaefer

This is right. What we have kept those market share gains, which we have had in the first two quarter, we managed to keep that in the third quarter, but we did not market share further.

Operator

The next question comes from Henning Cosman from WestLB.

Henning Cosman - WestLB

Maybe as the first point, could you help me understand, again, how your Q4 stacks up with the full-year guidance? Because if I look at the Automotive Group and expect that trending up towards 7% adjusted margin again, and keeping the rubber adjusted margins stable, shouldn’t we expect more than at least 9.5%, then and that’s the reason that we might see a bit more of margin pressure, even in the fourth quarter, despite maybe we should even expect further price increases finally feeding through in Q4, and am I missing something here?

Secondly, maybe on the sustainable level, if you can give us maybe a bit more indication from that side in the Tire business and the Passenger Car Tire business, is a sustainable margin of 14% to 15% as we’ve seen in 2006 and 2007 more likely going forward then or should that be rather higher structure? Finally, if you could give us broad indication for CapEx for 2011, that would be very helpful.

Wolfgang Schaefer

On the guidance for the full year, we don’t see this special effect anymore in the fourth quarter you should not expect a positive effects from price increases in the fourth quarter compared to what we have seen in third quarter, they are basically in as well in the third quarter so there is no positive effect to be expected from that point.

If you look at the sustainable margin on the rubber business and we have said that the 15% is what we are medium term as soon as we have managed to pass on the raw material price increase, this is the margin, which we see as a sustainable margin over time. On CapEx 2011, I really give you a guidance there in the first quarter of 2011; I would not like to give any clear guidance on that at the moment.

Operator

The next question comes from Mr. Toulemonde from Deutsche Bank.