Continental AG ADR. (OTCPK:CTTAY) Q4 2016 Results Earnings Conference Call March 2, 2017 8:30 AM ET
Rolf Woller - Head of IR
Wolfgang Schaefer - CFO
Elmar Degenhart - CEO
Kai Mueller - Bank of America
Chris McNally - Evercore ISI
Christian Ludwig - Bankhaus Lampe
Thomas Besson - Kepler Cheuvreux
Henning Cosman - HSBC
Tim Rokossa - Deutsche Securities
Ashik Kurian - Jefferies
Martin Viecha - Redburn
Edoardo Spina - Exane
Dear Ladies and Gentlemen, Welcome to the Continental AG Preliminary Fiscal Year Results 2016. At our customer’s request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation there will be opportunity to ask questions. [Operator Instructions] May I now hand you over to Mr. Woller, who will lead you for this conference. Please go ahead, sir.
Thank you very much. Warm welcome to our fiscal year results 2016 call and you all should have received a press release and as with every year end results, the fact sheet and the presentation. And if you have not received them you know that you can get them from the IR or from our internet site and you know that you can also follow us on Twitter. The Fact book 2016 will be available late afternoon, and on March 23, you will have the annual report online. So there should be no incremental news from the annual report, such for the gigs and for people who are particularly keen to get to know our pending obligations, for instance, they are summarized in the back half of the presentation on page 41.
I should remind you that this is an Investor Analyst call only, so if you are not belonging to one of these two groups, this is now the very right time to hang up for you. And before we go in the presentation, we should make you aware of slide 35 which is a disclaimer and we are all aware that you are taking good note of what is in there.
With that brief introduction, you know that as always I hand over to Wolfgang who will guide us through the presentation and afterwards we will host a question and answer session.
Thank you, Rolf. Good afternoon. As we have had the release of the – prelease of our numbers already in beginning of January and as we basically confirm the numbers which we have preleased some of the numbers are a little bit better. In prelease I would just start directly with the presentation on page three, and concentrating first on the most important KPIs for the full year 2016, sales were up by 3% to €40.5 billion is what we achieved, this is an organic sales growth so adjusting for a fixed and for consolidation effects of 5%. Fix was about €800 million
The adjusted EBIT was down by 1% to €4.3 billion which makes an adjusted EBIT margin of 10.8%. This includes the €400 million from these isolated events which we announced in the third quarter of 2016.
The net income was up by 3% basically because tax rate was down to 27.6% from – more than 28% in 2015 and because the net interest result improved by €93 million compared to 2015.
The free cash flow amounted to €1.8 billion and this number is including more than €500 million of cash out for acquisitions mainly Hoosier Racing Tire make in the U.S. and Zonar Fleet management in the U.S. Free cash flow before M&A activities amounted to €2.3 billion.
Gearing ratio was down to now below 20% to 19% and the equity ratio improved to 41%. The trailing ROCE achieved 20% and this is despite the impact from the isolated event as our ROCE calculation is based on EBIT and obviously this is all included.
Other topics to mention, three topics to mention. Order intake, lifetime sales in automotive increased more than €35 billion order intake so if you compare that to €24.5 billion in sales in 2016 this is a strong book-to-bill ratio and the order intake increase versus 2015 is more than 15%.
We closed Hornschuch for a couple of days ago as we got the last clearance from antitrust authorities in Europe, it will now be consolidated starting while it is consolidated now starting from yesterday and it will contribute about €300 million to the ContiTech sales in 2017. We – recommend to – increase the dividend by 13% to €4.25 for the full year 2016.
I’ll move to page five to get some more information about the sales and adjusted EBIT on a quarterly basis on the fourth quarter as I talked already on the full year effect, the organic sales growth in the fourth quarter was plus 6% nominal sales was plus 5.1% which led to sales in the view of €10.5 billion with an adjusted EBIT of €1.29 billion up 23.2% compared to the previous year and the adjusted EBIT margin achieved 12.4% compared to the 10.5% in the fourth quarter of 2016.
As always this is to be followed by a split of those numbers in automotive group and in the rubber group and here I would comment as I briefly on the 12-months figures, so getting set for the automotive was plus 5.3%, nominal growth was 3.9% to sales of €24.49 billion. The adjusted EBIT margin, and the adjusted EBTI achieved €1.63 billion which is 20% down from a year before the adjusted EBIT margin 6.7% from the 8.6% the year before and most of you are aware of the fact that the €480 million I mentioned already before isolated items announcing the Q3 completely attributed to the automotive group.
The fourth quarter in the automotive group showed that the third quarter results included in this €480 million are in the fourth quarter showing again normal results if I compare this to the previous year, a nice increase, organic sales growth of 7%, nominal 6% to sales of €6.3 billion and the adjusted EBIT was up 14% to €608 million from €534 the year before which is an operating leverage of 22% and the adjusted EBIT margin achieved 9.6% again up from the prior year fourth quarter which was 8.9%.
And to add it we will see this later in the presentation, all automotive divisions have improved the adjusted EBIT and the adjusted EBIT margin in the fourth quarter of 2016 compared to the fourth quarter of 2015.
Moving on to the Rubber group, the right chart on page six, 12 months organic sales growth for the full year was flat at 3.9%, nominal 2.5% to say to €16.1 billion and the adjusted EBIT was up 13.8% and the adjusted EBIT margin was up from 15.8% in 2015 to last year 17.8%.
Just concentrating on the fourth quarter in the rubber group, your January [ph] organic sales growth plus 4% sales of €4.1 billion adjusted EBIT €790 million plus 26% which is an adjusted EBIT margin of 17.4% and again previous year number was 14.2%
And again here it’s true as well for both rubber divisions we improved the absolute adjusted EBIT as well as the EBIT margin.
We have to take into account on the fourth quarter numbers that we did not have any more any inventory revaluation which was impacting tires still in 2015 by about €50 million, even you have adjusted those for those €50 million. I mean the – what I said before is a true improvement of the absolute adjusted EBIT as well as of the adjusted EBIT margin, but you might want to take this into account when you compare the years.
There was still [ph] very small but still tailwind from raw materials of €10 million which is included in our numbers of the fourth quarter.
Page seven is showing our growth profile. Automotive growth was 5% in the group, organic growth that I mentioned this number already and it is showing a clear improvement over the quarters in 2016 from plus 3% in the first quarter to plus 7% in the fourth quarter and it is including starting in Q2 the dampening effect of roughly for the three quarters together €100 million lost sales because of delivery problem of an electronic component supplier and I think the good news is that it looks like in the first quarter of this year we should clearly achieve as far as these fourth quarter gross numbers which I just mentioned.
This compares to a passenger car and light truck production growth rate of about 3% and worldwide and the same number for Europe around 2%, Europe and North America about 2%.
The Tires growing with 6%. This is volume growth, with coming back so to quite impressive growth numbers and this was different in Q3, where we had in tires only plus 1%. The main reason was in Q3 a very weak winter tire business. Winter tire business was nicely developing in Q4, so overall for winter tires we achieved €21 million, winter tires were just plus 2% compared to the year 2015.
Replacement tire volume growth in Europe was about 2%, replacement tire volume growth in North America was around 2%, so with our 6% we have managed to gain market share and basically in big growth regions and worldwide.
Moving onto ContiTech, sales growth of 2% still waiting for mining and oil exploration markets to recover and it compares to GDP growth of the advanced economies in 2016 of 1.6% so basically in line with this growth. And if I go to the commercial vehicle tire volume growth move onto the fourth chart on this page, growth of 4% as well outgoing replacement tire volume growth in Europe and in North America.
All advance per year we’ve basically reconfirmed what we do at just our adjusted EBIT versus the recorded EBIT and this is shown on page eight, it is basically four categories. The grid starts with the reported EBIT in 2016 the €4.09 billion then we have an adjustment for PPA €144 million, this is ContiTech was €83 million and Interior was about €40 million. We have consolidation effects, which make up for €32 million, and all those acquisition targets and we have assets, impairments of €42 million, there are no goodwill impairments included here, these are assets impairments which we have done on machinery and some equipment basically in some other topics which are no longer in use or no longer show the value and then we have as a force element the restructuring cost of €43 million. Two divisions, mostly one interior in Brazil and in Australia where we adjusted capacity to lower market volumes and that’s well in ContiTech very specifically and restructuring in our Greece facility in the first half of last year.
This leads to the adjusted EBIT of the €4.3 billon as already mentioned before. We have managed as shown on page nine to again create value ROCE it was 20% in the fourth quarter so up again from the third quarter 18.9% within our target range. The goodwill which is included in our operating assets which are the basis for this calculation is €6.9 billion. Overall we see €20.4 billion as operating assets which is an increase of roughly €700 million compared to €800 million compared to the fourth quarter of last year. The major part of it is due to the M&A activities which we have had in 2016 and then in addition obviously the growth in the machinery and equipment in our investment to further the growth of the company.
Our Maturities for Bonds on page 10, very much in line for the requirements of the company. We have still five bonds in the markets. First one we see on the next page 2.5% €750 million. This was basically already refinanced with a bond we have placed in the end of last year €600 million a zero percent coupon which is included in the 2020 numbers.
2018, a 3% bond due in July, 2019 and 0.5% coupon bonds due in February and then in 2020 the €600 million I mentioned already and in September another €750 million, 3.18 coupon bond maturity.
There are no amounts drawn under the syndicated loan, syndicated facility at the end of the year. If you have a look at the two numbers on our liquidity and cash, first one cash, cash was €2.1 million significantly higher than we normally show those numbers previous year was €1.6 billion. Our target was around €1.5 billion to €1.7 billion as cash, this was only due to the fact that potentially we could have been close at the year end, we had a little bit more of cash on our balance sheet to be sure that we could fulfil all the requirements short term. And the second topic I want to mention here is the total liquidity of the company was close to €6 billion, a number which is as well slightly or little bit above our targets of above €5 billion and same argument as I mentioned before.
With an increase of the EPS to €14.01 per share, it’s shown on page 11, we recommend our shareholders to approve a dividend increase to €4.25 in our annual shareholder meeting in April which is a payout ratio of 30.3% it is a stable increase in the dividend and basically as well in the payout ratio over the years since 2012.
I’ll move now to more detail of the automotive group and start with the left graph which is showing the sales of the automotive group by division. Chassis and Safety showed an organic sales growth of 7.5%, main driver for this growth is advanced driver assistance systems which achieved €1.2 billion in sales. We kept and even improved the opposition being the number one in the worldwide market and the goals will continue in our guidance for the next year, for this business we need other things clearly in place.
Powertrain growing by 5.1%, the nice message is that in H2 as we had expected growth rate was moving up in both quarters of the second half of the year 8% growth was achieved and we expect this growth to continue now as well in Q1 specifically new orders for injection as well fully turbochargers and electronic control units are driving this growth.
Interior 3.3% growth, affected by roughly €100 million losses due to deliver both product management already from an electronic supplier. Overall for all three divisions if we look at the growth rate which we have achieved in the fourth quarter, this is a good indication for a number which should not – which should be achieved in the first quarter, definitely the first quarter should not be below that number.
If we move onto the profitability in the automotive group adjusted EBIT, Chassis and – well first probably to mention all three divisions sold of profit margins in 2015 obviously affected by the €480 million of isolated events reported in Q3 and therefore I want to comment here more on the Q4 performance, which as we can see was back in line before the performance of the quarters before Q3 where all three automotive divisions have improved their profitability.
Q4, 2016 showed for chassis and safety, adjusted margin of 10.9% which was in 2015 9.6%. Powertrain achieved 6.7%, Q4 which was 5.7% in 2015 and Interior improved to 10.5% which was 9.8% in 2015, so overall automotive division moved up Q4 9.6% to 8.9%.
R&D moved up from 8.9% to 9.9%, I want to mention two reasons here, one is order intake, order intake was up 15% and this is actually explaining basically 50 basis points although the increase in the R&D quarter which we always manage to -- come to that on a later slide and then the consolidation of electrobit, which makes up for another 25 basis point as electrobits has basically all of their cost 80% of their sales in the R&D and by that the quota for the total automotive group even goes up.
The leftover 25 basis points are basically higher software content. We are -- I mentioned this already in another call, we are not worried about this, as our customers finally pay for it. Nevertheless R&D efficiency is a constant topic for us and it’s something that we constantly try to further improve and then I’ll come to that on a later side.
The organic growth in automotive as shown on page 14 accelerated through 2016. We saw that’s already on an earlier slide. The left graph of the two on this page are showing the organic sales growth versus the production growth of the passenger cars and light trucks. We have been growing faster in all quarter and our growth was increasing to the 7% world car production moving up from 2% to 3% and then 4% in the fourth quarter.
Then by division on the right side of this page, Chassis & Safety with the growth rate of 4%, 8%, 10% and 9% saw increase over the year to the on average 9% to 10% in the second half of the year, the same development for Powertrain which is now over this lower growth rate which we have had for one and a half years and back to in the second half of the year 8% growth each quarter and the growth rate of Interior is with only 3% and basically stable on this level of in between 2% to 4% not increasing over the year and here I made the comment already the impact 100 basis points from the supply shortage of micro controls over the total year of the shortage only really showed up starting Q2 and Q3 is [Indiscernible] show that in the first quarter of this year we will see a return to higher growth rates.
This is already what I was saying now about Q4, I think confirmed with the performance in Q4 where we are back to the outperformance of the world car production in the range 3% to 5% which we as a company do expect.
The order intake of automotive as shown on page 15 is fully supporting our target for the group to achieve target sales of more than €50 billion in 2020. The book-to-bill ratio in Chassis & Safety was 1.5 very much driven with advanced driver assistance system business which had a book to bill ratio of 2.5. Order intake more than €3 billion. VED, the book-to-bill ratio was at 1.5 mainly on our new braking system MC 100 and MC 1 and it is good news that more than 40% of the order intake was acquired outside of Europe and North America.
Powertrain, book-to-bill ratio for the total division at 1.8. HEV by itself acquired more than €1.2 million in lifetime sales, so there is no book-to-bill ratio reasonably to be down 10% -- book-to-bill ratio at 1.5 and electronics as well with a strong book-to-bill ratio. All business units have had an order intake which was above the prior year number.
And finally, Interior book-to-bill ratio 1.2, now this is in line with the book-to-bill ratio of the prior year and same came in the last year, please take into account that this division includes the whole aftermarkets business for our automotive group, so this is aftermarket for interior for Powertrain and for chassis and safety, and obviously for this aftermarket business we don't record any order intake, so the number is always somewhat subdued due to these reasons.
The order intake as shown on page 16 is well balanced, 38% of the order intake was Europe, 38% is coming from Asia, North America with 23%, South America with 1%, so this is confirming our target to increase sales share in Asia over the next years and at the same time obviously to balance our sales portfolio more according to the world car production and we do see it at the moment.
I mentioned already that the one reason for the increase in the R&D trend and by that is by the R&D code which went up from 8.9% to 9.9% is that order intake has an influence on the R&D. Why? Because as soon as we have a new project, we start a new order, we start a project which is working on this order. This is R&D and only two to four years later are most in the range of three to four years later these orders intake is finally translated into sales.
So therefore here shown the ratio of R&D expenses to order intake on the left chart, and you can see that this number is much more stable than if you relate our R&D expenses to sales. I mentioned already if you would adjust for that 50 basis points on the increase of 100 basis points in the R&D ratio is basically attributable to the order increase in 2016.
The same we find true, CapEx is increasing in automotive because of this order intake and because of the preparation to produce those products. And R&D, as we find in auto -- sometimes in discussion of what is the right R&D quota and how much is being moving up?
And our answer is principle obviously we are very much concerned with the efficiency of our R&D, but as long as we create with our R&D in an efficiently way, electronics and specifically software which has value the customer and the customer is paying for it, we like this software business and this is the transformation of Continental over many years to come, the next decades to a company which is more in software and less in hardware producing than we are today.
This is just giving a comparison year of our gross earnings over the last six years and compare the development of the gross earnings to our R&D expenses and you can see that there are well in line which is confirming the message, yes, we do have high R&D expenses but obviously those high R&D expenses are value to our customers and they pay for it or the R&D they pay for it and as they are no additional production costs related to those R&D, meaning software expenses, this is for the profit development of the company the right way to go.
So much for the Automotive Group, I move now on page 19 to the Rubber Group. ContiTech was showing same logic of these slides, left side organic growth, organic growth 2.5% at ContiTech specifically the OE business was contributing.
Benecke-Kaliko, the seat covers, mobile fluids products and the aftermarket transmission bids similar product. The deliveries to mining and oil exploration as I mentioned before was too weak. The good message was that order intake in 2016 was on the sales level, so this is at least guiding for finding an end to the reduction in sales and actually the last week were even showing for us not so much expected at the moment, a nice increase in the order intake and those two fields its little bit too early to talk about change in market trends but it is at least good news for those two markets.
We have by the way on 2016 kept our market share in those two areas mining and oil exploration. The adjusted EBIT margin was up to 9.7% from 7.2% of the previous year, and restructuring in conveyor belt and the smooth integration of trains [ph] and I’ll come to that another slides. I have contributed mostly to this development.
Now on tires, I think to explain the sales development, the bridges is always the most helpful, volume increase we saw this number before by 6%, price was down by 3%, mix was up by 2%, so price mix minus 1%, and FX was minus 2% and this leads to nominal roles of plus 3%, or the organic growth if you take out FX of plus 5%.
The EBIT margin improved in tires to 21.7%, this includes 250 million of tailwind from raw material for the full-year. Fourth quarter to 10 million on the P/M, although we already that the raw material prices -- spot prices were increasing in the fourth quarter. And the bridge obviously will change in 2017, 500 million headwind been from raw materials.
We have already started price increases in late 2016. In many market we have decided on further price increases in 2017 and we have already implemented basically in all markets and price increases in this year. We are confidence that the price up in 2017 will materialized but we only see in the course of the second half of this year that the price increases will finally match the raw materials.
Just I want to mention again, these numbers in the fourth quarter for tires do not have total evaluation included anymore, so if you -- 2015 was 50 million, if you want to grew an adjustment for that 50 million was the number for 2015.
In the Rubber Group, those segments were showing volume growth as shown on page 21, PLT by the fourth quarter or I’ll start with the third quarter, but the third quarter was weaker because for Continental, because winter tire business was weak. This was clearly compensated in Q4, and I mentioned already that we had a good winter tire season and to my knowledge now the inventory levels at the distributor [ph] so the season is not yet at an end on an attractive level.
The outperformance, growth outperformance is true as well for truck tires where we manage to grow by 3% in the fourth quarter to concentrate here on the fourth quarter numbers while overall the market was just stable, so we gain market share in both areas and basically all third regions.
The volume growth in tires throughout 2016 has shown on page 26 concentrating here on volume and price mix in 2016 where we can see that in Q4, our tire volume was 6%, the price mix sector is the fourth quarter was already basically zero, slightly positive. In the third quarter it was basically – it was already balanced.
And if you look at the growth metric over the last six years which 2010 is the year by the second phase of our tires strategy was starting, we see the positive mix development and that time we see obviously the growth which we have had in segments and specifically we can see that the unit sales growth of tires is inches 17 and bigger 13% and was 18 inches and bigger 20% is clearly attractive for us.
We will and starting now with this year, we will base our mix calculations only on tires 18 inches and bigger to partly take account of the development that more and more cars are already coming on 17 inch tires, we will still include obviously winter tires.
Raw material prices development in 2017 already mentioned, we see quite some headwind, natural rubber price expectation is on an average of $2.25, this compares to $1.38 from compared to last year and our prior forecast was $1.210 [ph]. The synthetic rubber price average to 45 from 113 and our forecast was 195. It is still true that US$50 million growth burden is expected for every US dollar to rise in oil price. The average in 2016 was $44 and the headwind from these raw materials mentioned before 500 million while our prior forecast was at 400 million.
ContiTech was over achieving the 2016 target. What I have added here is a slide on page 24. Its a slide which we presented to you in just one year ago on 3rd March 2016 with the preliminary results of 2015 where we were showing that the 2015 ContiTech numbers adjusting for all effect not only our classical adjustments, but for all potential effects would have been at roughly 8.6% and this is something which you can compared to the 9.7% which ContiTech has achieved now in 2016 showing clear improvement in the integration of Veyance, and in the overall performance of all these segments including the restructuring which I have mentioned before. The expectation for 2017 is around the 10% adjusted EBIT margin for ContiTech.
And the last information specifically on the Rubber Group through the oil and mining related sectors are impacting specifically ContiTech and the exposure was in 2016 now at around 15% which is just reconfirming a strong reduction which we saw over the last three years. The number has been at close to 20%. Three years ago if I do for [Indiscernible] and we don't really expect the recovery in the mining related business before 2018.
I mentioned already there are some nice signs in recent order intake probably it is a little bit better, but I think much too early to have a final comment on that. The graph on the right side are just showing that we saw this downturn in oil price or rig counts data, mining CapEx but as well we can see a stabilization, now at stabilization on this lower level.
Opportunities in ContiTech clearly the Hornschuch integration of starting yesterday which was strengthen not only the automotive OE part of the ContiTech but as well as the industrial portfolio. Oil related business, we are somewhat more optimistic recovery in 2017, possible and as I mentioned before, the cost structure in mining is aligned to the actual business, so it will benefit from increased in volume.
And some comments now to the – like to the group level indebtedness and cash flow. The indebtedness bridge of the total year reads as follows; the net indebtedness beginning of the year was 3.5 billion, reduced by our increase indebtedness, increased by dividend payments 750 million, CapEx 2.7 billion. The M&A mostly Hoosier Zonar, with more than $500 million, also from change in working capital in line with the growth of the company 200 million and then depreciation and amortization 1.96 billion, and then we have these other free cash flow basically our net income which makes the indebtedness be reduced to 2.7 billion, 2.8 billion basically.
Gearing ratio down from -27% to 19%. This is shown as well on page 27 in a long time period. I think this is not necessary to command on. The leverage ratio according to our syndicated facility which we regularly communicate is 36% for your information. Indebtedness and cash flow on a cash conversion ratio is in the range in the years before, around 80% or better this year, we achieved 82%, so cash conversion of the 2.8 billion net income compared to the cash – free cash flow before M&A activities leading again to I think an attractive number.
If I compare the free cash flow on page 29, before M&A to 2015, we do see a reduction from $2.7 billion to 2.3 billion for 100 million, and as easy – I think it easy explanation here, the cash flow used for investing activities increased by little more than 400 million and this is one to one translating to the free cash flow generation before M&A. The reason behind it, on the one end side the growth, which we have seen in our tire business which needs now adjustment in capacity and the strong order intake which we saw in the automotive division.
This leads to outlook 2017 page 30, passenger car and light truck production by quarter in major regions. In the Europe we do expect an increase to 21.7 million cars, about 2% growth with similar distribution, somewhat stronger first half of the year than we have this specifically the first quarter. Then we have seen it in the prior year in North America we see a reduction of 2% to 3% to 17.4 million cars, but quite as stable development over the quarters and in China we do expect an increase of plus 4% to 27.7 million. I think if this expectation from us is finally materializing can only beyond through that at the end of the fourth quarter of 2017 as again we do expect a very strong fourth quarter.
If this is over achieved or unachieved will make a big difference on the overall cars produced in China in total year. And this is summarized as well on page 31 for the passenger car production, so 2% growth in Europe, 3% reduction in North America is on a very high level, 2% growth in South America from a very low level, which lead Asia plus 3% driven again by China which leads to a world-wide production increased to 94 million, about 1%.
Passenger car and light truck, replacement tire market, 2% growth in all our regions expected. And the commercial vehicle while Asia focusing – sorry, for the South America, North America, and Europe, 2%, focusing for Asia worldwide 2%, commercial vehicles down in Europe, North America with minus 2% and minus 5% worldwide and increase, thanks to specifically the Asia development of about 1% and finally replacement tire markets increase by 3%, 2% Europe, 1% North America, 2% South America, 4% Asia.
And that leads to our guidance, we expect to increase sales to more than $43 million at a constant FX rates, adjusted EBIT margin of more than 10.5%, automotive group, 26 billion at constant FX rates, 8.5% adjusted EBIT margin and on the Rubber Group, more than 17 billion at constant FX rates, more than 50% adjusted EBIT margin, so basically a growth of 6% in the group in the two division. Raw material cost mentioned than once already 500 million, headwind special effect is always guidance for our group without any specific topics yet in line, about 100 million.
Net interest result around 200 million again it kept stable and the tax rate below 30%. CapEx is around 6.5% of sales, PPA around 200 million and the free cash flow before acquisitions here including some outflow of this effects which we reported in Q3, the 480 million which we reported in Q3, 2016 at around 2 billion. Overall this guidance is well in line as shown on page 33 with our expectation to grow to more than 50 billion for the group in 2020, the sales line and to achieve and return on capital employed of more than 20%.
And I leave with it and we are open now for your questions. And please in the question answer session we know that you have all pressing question, so please limit yourself to maybe the two most pressing questions you might have. To know that all your questions will be answered and then you can always call us here and hand over in the IR department. But just to be fair and give others all a chance to ask questions, if you could limit yourself to two that would be greatly appreciated.
[Operator Instructions] The first question is from Kai Mueller of Bank of America. Please go ahead.
Hi. Thank you very much for taking my questions. Just two, if I may. First one, you've kept the commentary on your Powertrain strategic review relatively limited so far. I'm aware you haven't concluded it, but can you just quickly elaborate possibly the options you are considering that includes only diesel or petrol? And this is particular in light of you still showing a pretty strong backlog actually in book-to-bill in the Powertrain division.
And secondly, on the tire price you just alluded that you have already increased prices to some extent. Can you elaborate a little bit the level? We see in the market big announcements by some of your peers of up 8%, up to 9%. What level would we be looking at and what holds you back from making these large announcement? And maybe concluding to that how much of your €500 million headwind that you allude to do you reckon you can offset by these price actions?
Well, first question, the Powertrain topic is a topic which we talked about in the fourth quarter where we said that first I was disappointed over the last year’s where some of the targets were not achieved on one side, other side that the chances of electrification and the potential increase of this share of electric cars might be fast in the market than was anticipated a year before. This is what we are working on. What are the consequences? For Powertrain we have to adjust investments. We have to concentrate on certain growth areas more than others and all these questions the moment worked on and we will come back to you as we have said latest with the first quarter when we announce the numbers of our first quarter.
Tire prices, I mean increased prices in the end of last year. We have increased no win in our market, the market is I think not so different from one player to the other as far as I know what the announce price increases are and clearly I mean the 500 million is something which our target as I mentioned it pass on in the market, and there is – our expectation that in the second half of the year the price increase is then should be on a level as the raw material price increases.
Thank you. Just to clarify, would that mean throughout the year, you will have in H1, a little bit of pressure and then the second half should be net-net offset?
Yes. There will be pressure in the – clearly in the first and second quarter, no doubt about it. When I saying, in the second quarter half of the year, this is not necessary meaning, beginning in 1st of July, so there still might be some pressure in the Q3 --and on the Q3 prices before it is [Indiscernible].
Okay. Thank you.
The next question is from Chris McNally of Evercore ISI. Please go ahead.
Thanks so much guys. Just two questions. The first, if we can outsize the Powertrain review, can you at least just say where some of the margin gain that you're building in this year, I think you have about maybe 30 basis points on the auto side. How we can think about that from the three divisions? And the second is on the order backlog. If we look sort of on the four-year orders equal revenue on a four-year or four-year plus basis, it would assume acceleration from your current levels, 5% to 6%. Can you talk a little bit about that, how we should think about that? Is that a sort of a 2020 type phenomenon?
Well, as I mentioned, if you take a growth rate of the full year of 2016 and that we saw really an acceleration first half to second half of the year in two of the three divisions. And as I mentioned in the first quarter of 2017, I mean, it looks like that we are confirming the growth rates of the end of the year and not of the beginning of the year, and so this is partly confirming what you were assuming in your question. And the margin development within the automotive divisions is well, I mean, you know that we don’t do any adjustment for any of these effect which we have announced in the third quarter is positive. We see a growth of the top-line and this should as well as we have seen it as well in the fourth quarter, this should as well give some support to the margins in Automotive.
And just one quick clarification, I mean if we ex out some of those charges obviously in Interior and Chassis on sort of a “clean basis”, would we still expect -- because you've obviously done a really good job in those two divisions. Should we still expect margin development in 2017?
This was hard to understand. Could you repeat that question?
Sure. Just if we ex out the charges, so if we think about it on a clean basis, if we back out the €400 million from those two divisions, should we see on a pro forma basis, margin expansion in both Chassis and Interior, because you're clearly getting closer to your 10% target and historically the bigger amount of the margin gap was going to be fulfilled in Powertrain over the next few years?
Not necessarily in Chassis & Safety. In Chassis & Safety, had this high intake, which we’ve talked about before in the presentation at Advanced Driver Assistance Systems and this is now a strong burden obviously on their R&D cost now capitalized and the business which we are taking in this order intake is again with the margin which was attractive, above the average around or even above the average of the division, but at moment is this something as I try to explain before which is increasing our R&D cost. And by that is somewhat against positive development of the margin of Chassis & Safety.
Thanks so much.
The next question is from Christian Ludwig of Bankhaus Lampe. Please go ahead.
Yes. Good afternoon, gentlemen. One more question on the pricing on the tires. I had to look back basically as far as 2011 to see the last time you were facing material headwinds. At that time, we saw a margin decline but absolute EBIT from the tire division was up year over year; is that something you would expect for this year as well? Question number one. And second question is also Powertrain. When do you believe will see a positive development of the HEV contribution; is it initially a decline of the losses of HEV is going to be in Powertrain? Thank you.
Well, if you follow my comment before 500 million headwind not compensated in Q1 and Q2 with prices. Hopefully when this is our expectation actually and then finally on the same level in 2014 this is indicating that at least the raw material burden will not be – clearly not be fully compensated with seem this year. Obviously there is some compensation via mix improvement and via growth, but it is a big challenge to achieve absolute EBIT which is on the level of the previous years.
Powertrain HEV, we see growth, we see the order intake, we’ve seen all the HEV systems ramping up to 48 volt, HEV systems specifically ramping up. This is already positive. We do notice though as well that the moment is big interest in our customers, and a very wide range of applications which are not yet always easy to identify its strategies, but which are very much building up very fast electric cars to get to the market in 1920.
This is for HEV for the whole investment in HEV besides the 48 volt system, still a challenge to make sure that there is not too much different activity started on from our client base which in the end do not really materialized in product which have a long term future to go. So we are now faced with that challenge in the last one or two quarters, this is coming up more and more, that customers are very actively trying to develop new things and other things and even in the same group of the same customer is starting from different engines with different technology. We try to manage this right. And contribution in HEV should be more positive but just to mention it is a challenge with all these new things which are suddenly coming up. Good for the long term development, challenge in the mid-term. 48 volt is nicely developing.
But that means we may not see a breakeven HEV before 2020?
Well, our guidance for the breakeven even in HEV, would be in 2019 and I’m not changing this guidance.
Okay. Thank you.
The next question is from Thomas Besson of Kepler Cheuvreux. Please go ahead.
Thank you very much for the questions. I'll ask my two questions. Can you get back to what you called the replacement business and explain a bit more what it involves and the side of the business to help us understand the effect impact into your orders?
And the second question, if I come back to the question that has been asked multiple times but maybe more precisely, what do you assume for 2017 in terms of price versus price mix in raw materials, so what's your big assumption to get to your adjusted EBIT in 2017 equal to the adjusted EBIT in 2016? Thank you.
Overall the replacement content in interior is below 1 billion, but this is a number which below that 1 billion, this is a number which we don’t show any order intake for, obviously we call it as short term. On the price mix for this year, obviously quarter by quarter price mix should be improving as we have seen it already in the last years. But it could be clearly positive in the end of year and we will see the EBIT – we still have the EBIT targets to stay on the previous year’s level.
As I mentioned, it’s a challenge that will clearly not be achieved in the first two quarters as their price increases far away from the additional burden of the raw materials as we saw the strong raw material price increase. And as you mentioned, notice from my answer, I’m not going to give this concrete numbers.
Understood. Can I just quickly follow up with my first question on the replacement business? Do you including the Tachograph business there and can you make even a vague comment about the profitability of this €1 billion business within Interior, please?
This is how Jonathan the…
Do you include the Tachographs business in the replacement and can you comment on the profitability of that replacement please? The role of the enrol division.
What do we include in that not understand, but your telephone line? Tachograph your truck business.
Now this is now the Tachograph is not included in that maybe after parking business.\
And the margins.
Margins are attractive from tachograph.
The next question is from Henning Cosman of HSBC. Please go ahead.
Hi. Thank you. Can I maybe try and ask something else on the Rubber division, not on the EBIT so much, but more on the top line. If I strip out the Fuji and Honcho acquisitions, it seems like at the bottom of the range, the implied growth is only 3% organically and I think the guidance is probably, as usual, conservative on a lot of elements that’s here, it seems quite strikingly because probably the 3% should be the pendulum for volume growth in tires.
And then, of course, you said some price, some mix, and maybe you could just conceptualize that a little bit. In the second question, please, on the original €30 billion target for 2019 automotive sales, if you could comment on your confidence level regarding that which implies barely a 7% CAGR for automotive until 2019? Thank you.
By the Honcho acquisition also very close in third quarter so yes, this is partly supporting growth, so the growth number is -- the overall sales number is not so significant. Honcho was only partly included in our guidance.
I think all the consolidation elements, I mean if you take Hossier, [Indiscernible] and Honcho they would account for about a percentage point rather than the 2% to 3% you had mentioned. The other question was if we still stick to the €30 billion is a good proxy for 2019 as sales to be achieved in automotive.
And if you look at the growth rates which are showing now, which we have shown in the last quarters in which we expect for Q1 I think that should not be a challenge.
Okay. Thank you.
The next question is from Tim Rokossa of Deutsche Bank. Please go ahead.
Yes, thank you for taking my question. This is Tim from Deutsche Bank. I understand you expect to see the good growth of H2 run rates in automotives, also in Q1 this year, but you also said you expect the normal outperformance of 300 basis point to 500 basis points going forward. Now we have just seen one of your competitors basically guiding for stronger acceleration in growth from here, obviously I don't expect you to comment on any of your specific competitors, but there's also different exposures to internal combustion engines and so on and so forth, but when we look at your investments rates they keep going up obviously relative to your order intake.
Why would we not expect an acceleration in your revenue growth going forward beyond the usual 300 basis point and 500 basis points that you're guiding for a couple years now, maybe not this year but certainly 2019 plus.
And then as second question, just to come back of the discussion topic, when we look at your group margin outlook I noticed you eliminated the comfortable you received about 10.5% that you gave within -- around Detroit. Does that have to do only with the tire business outlook in the tough comparison basis and the difficulties to pass on the price increases or -- that you just spoke about or is that something else in there? Thank you.
Now to start with the second question, your assumption is right. It is purely related to the raw material cost increase which is now our guidance; future guidance from January was €500 million moved up to €500 million nothing else.
And I agree – If I look at the order intake which we have specifically seen in 2016, specifically seen in some of those areas and the expected growth can be above our range of 3% to 5% in the years 2019 following this is not at all excluded.
Great. Thank you very much.
The next question is from [Indiscernible] Bank. Please go ahead.
Yes, good afternoon, thank you for taking my questions. The first one would be more in general, on regulation. With Trump now being President in the U.S. and also the European Regulation don't seem to be getting that tough, and maybe you can share your view what the impact is on Powertrain given that all this talk after the diesel scandal seem not to materialize or not trigger much tougher regulation, at least not in the near term, does that change anything or do you share that view or do you have a different opinion on that? That would be my first question.
And the second one, just for clarification, on your cash flow guidance, the €2 billion, the more conservative guidance in the terms of what you achieved in 2016, is that only related to the higher spending from 6.1% to 6.5% or are there other impacts in the cash flow guidance that I'm not -- that I'm missing here? Thank you.
To start with the second question, cash flow guidance includes the part of the €480 million effects which we announced in the third quarter of last year warranty, the antitrust of it to have a cash outflow effect in 2017. They basically were not cash relevant in 2016, this is the main difference.
Regulation, U.S. Europe, you know hard to predict. We do not exclude that the U.S. regulation I believe there is some lobbying going on. It might be left up for the medium and long term and we thought half a year ago and as a consequence we do see that in China and in Europe potentially the way towards electric, electrified hybrid or specifically electric and plug in hybrids is probably stronger than this will be in the U.S. So Europe and China might be the countries with the highest share of those products compared to the U.S.
We do see that it is a share we have also rated on in Europe last year below the 50% there is further discussion about emissions specifically of diesels at the moment in cities of Germany, but overall we do expect that diesel for light and heavy trucks will stay the engine to power the cars we do see and expect this as well for the – and their share for the bigger SUVs and for the bigger passenger cars, we don’t see them so much anymore for smaller cars 1.4 liter and smaller, and on the one hand side the additional cost of diesel are even further increasing with the cleaning on NOx [ph] that as well needs more space and is potentially can no longer be borne by the margin in those car segments.
Okay. So you don't see the risk that now with all this talk about e-mobility. There is so much money going into the development of that area and the regulators actually not really following -- also in Europe. I think they have a much softer spend now than they had a couple of months ago. So you don't see the risk that there is a lot of investment going somewhere that will never actually materialize?
No. We still expect that the electrification will take place and we do expect that this will take place over the next ten years in a significant share of the automotive car production.
Okay. Thank you very much.
The next question is from Ashik Kurian of Jefferies. Please go ahead.
Hi, thanks for taking my questions. The first one is on the Powertrain group. I presume your guidance implies -- already includes the diesel business but maybe can you maybe quantify your order intake and book-to-bill without the diesel business, and also how much the diesel business was down and down in 2016 so we can have an idea as to what Powertrain business ex diesel could look like?
And then on tires, you've been impressively growing volumes way above the markets over the last couple of years, again in 2016. What is your volume target for tires in 2017 and does the higher raw material environment make it harder for you to grow volumes?
Well, on the diesel business, the order intake which I was showing was for obviously all of the business units of Powertrain. The order intake in diesel was clearly not the one which was driving the number which we are showing on this chart and this is already reflecting what I was mentioning before. The entire volume growth is our expectation is to grow again above the markets by a rate of around 4%.
The next question is from Martin Viecha of Redburn. Please go ahead.
Hi, this is Martin Viecha from Redburn. I have two questions, if I may. The first one is on ADAS. I just wanted to ask whether you would be able to split the let's say, the €1.25 billion of revenue achieved in 2016 into software and hardware?
And the second question would be on the butadiene price in your estimates. I've noticed that you are expecting butadiene to come down towards the rest of the year, and I was just wondering why that is? Thank you very much.
Well on ADAS hardware and software split is I would say in – I mean this is question on the – how do I understand that...
As and from the revenue, if you made €1.2 billion of revenue in ADAS.
Now the problem is that we are talking about embedded software, where very often we don’t make different prices to the customer from you know for a camera they get one price and this puts obviously a little bit of hardware and this includes many lines of software.
I see. I mean only with the software that would be additional to whatever is embedded already in the camera, for example.
70% or so is probably the right number. This is a very much rough guess.
So 70% hardware.
No software, software the other is hard.
Okay. And on the butadiene price?
Well I’ll pass it over to Elmar Degenhart.
Well we have seen for both, the natural rubber and the butadiene prices. I mean natural rubber was very much driven by the flooding situation in Thailand. So it has already come down, so currently this [Indiscernible] 209 and what we saw is that the butadiene prices are very much driven in from Asia whereas we see Europe and North American being a little bit more balanced. And this is basically would be still the 245 would be still a substantial move over 2016. We would regard the current levels of 299 is not sustainable. Or we might be wrong on that.
Okay. Thank you very much.
The next question is from Edoardo Spina of Exane. Please go ahead.
Good afternoon, Yes I have two questions. The first one is on the Powertrain. I saw the injector and a few volumes are growing; accelerate in the growth actually in the fourth quarter quite significantly. Can you give us an indication how much of the Powertrain revenue comes from those two injectors and ECUs and is it correct to think something like a 35% to 40% of Powertrain revenue?
And the other question is on ADAS, thank you for giving us a split of revenue. I see you indicated Japan around the 30%. Can you give us an idea how many OEMs that is -- that you get 30% of ADAS sales from? Thank you.
You’re a little bit too high was your estimation of those ECUs and injectors, but overall the direction is not wrong, it’s around 30%. I believe it’s more than 30% and obviously electronic parts and the injectors.
On ADAS well I mean many customers in Asia the split, worldwide split of our sales is very balanced in ADAS, it’s very roughly one third in Asia, one third in Europe and one third in the U.S. I would have to look up the right and correct numbers but it's roughly that number. And it is basically all OEs 15 or so OEs in the world are getting ADAS products from us.
There are no further questions. I hand back to the speaker.
Thank you very much. Then we conclude the call actually this time. And we are very much looking forward to welcome you again on May 9, when we will report on the first quarter results and wish everybody of you a good afternoon or a good rest of the day wherever you have dialled in from in the world. Thank you.
Ladies and gentlemen, thank you for your attendance. This call is being concluded. You may disconnect now.
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