Continental AG

XETRA:CON

Earnings Call Transcript 2021-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call of Continental regarding the Q1 results 2021. At our customer's request, this conference will be recorded. [Operator Instructions]May I now hand you over to Bernard Wang, who will lead you through this conference. Please go ahead.

[Bernard Wang, Head of Investor Relations]

Thank you, operator. Welcome, everyone, to our Q1 2021 results presentation. Today's call is hosted by our CFO, Wolfgang Schafer. Also here in the room with us is Stefan Scholz, Head of Finance and Treasury. If you have not done so already, the press release and presentation of today's call are available for download on our Investor Relations website. Before starting, we'd like to remind everyone that this conference call is for investors and analysts only. If you do not belong to either of these groups, please kindly disconnect now. Following the presentation, we will conduct a question-and-answer session for sell-side analysts only. [Operator Instructions] This will help us conclude our call on time. With this, let me now hand you over to Wolfgang Schafer.

[Wolfgang Schafer, CFO & Member of the Executive Board]

Thank you, Bernard. Let me begin today's presentation on Slide 3, starting on the left. All approvals for the spin-off of Vitesco Technologies with the subsequent listing have been secured, the last one at our shareholder meeting last week. I'm sure you are aware of this. Operationally, we had a very solid start into 2021, as already announced in our release on April 23. The recovery trend of the group's businesses that started in the second half of last year continued in the first quarter. Ongoing discipline in cost and strict working capital management supported our results. In Automotive Technologies, we were able to generate solid profitability despite the continued shortage of semiconductors. Thanks to the hard work of our teams, 24/7 of basically 700 people, we were largely successful in managing this constraint. It did come at the expense of higher supply chain cost of about EUR 70 million, in line with our expected full year headwind of EUR 200 million that covers both automotive and powertrain and is included in our guidance. We received further orders for high-performance computers, bringing our cumulative order intake in HPC to about EUR 5 billion of lifetime sales in all world regions. Our digital display business also accumulated EUR 1.3 billion of new orders, predominantly for display solutions. In Rubber Technologies, operational excellence and favorable price/mix helped to achieve solid volume and profit growth. In Powertrain Technologies, Electrification Technology revenues continued their strong momentum and were up by 65% compared with the year ago quarter. We were also successful in securing a major order for silicon carbide inverters for the first time from our customers, Hyundai Motor Company. Now switching to the right side of the slide, our current priorities. Operationally, we expect the shortage of semiconductors to further worsen and reach its peak in this quarter 2. Full recovery of the volumes [ reflected ] probably will not be in 2021. This goes in line with price increases for semiconductors and continued extra freight costs. Customer demand will stay volatile. Raw material prices for our rubber products are further increasing as well as logistic costs. We do see a market environment in both rubber business areas, though, which allow us to compensate for this risk pricing. Strategically and in order to increase transparency and ownership, we decided to realign our ADAS business into an independent and separately reported autonomous mobility business area. This change will take effect on January 1, '22. More details will follow on the next slide. As part of its expanding partnership strategy, ADAS has also concluded an MOU with Horizon Robotics. The joint venture is positioned to provide local and global vehicle manufacturers with industry-leading advanced driver assistance systems as well as autonomous driving software and hardware system solutions. Based in China, Horizon Robotics is a pioneer in developing software and hardware AI edge solutions, focusing on ADAS and autonomous driving. On top, we have announced a collaboration with Amazon Web Services to develop the Continental Automotive Edge platform, we call that CAEdge, which will allow automakers to efficiently and securely develop, deploy and manage software on connected and autonomous vehicles. We are already realizing the benefits of CAEdge in our first projects with AWS related to high automated -- highly automated driving. Outside of those examples, we are working on deploying further operational portfolio and optimization initiatives. We have also made major progress in the last month in implementing our cost-reduction program. Most notably, we have agreed with labor representatives on a social plan for the tire plant in Aachen and on basic points for the automotive plant in Karben. Basically, all major agreements are in place now and in line with our assumptions for the cost-reduction program. We are well on track to achieve our target operating at EUR 1 billion gross cost savings from 2023 onwards. Last but not least, with all approvals in place, Vitesco Technologies is, of course, to complete its spin-off and subsequent listing this September. Moving to Slide 4. As mentioned, our car ADAS business unit will become an independent automotive -- autonomous mobility business area with the sector Automotive Technologies starting in January '22. The structure will allow us to more effectively leverage our capabilities and technologies in this area to size attractive growing market opportunities. The realignment will provide greater transparency, including more detailed financial report. You can see that ADAS has achieved impressive growth over the last years with solid profitability. The additional R&D expenses we announced are aimed at sustaining the long-term value creation of this business. As a consequence, there will be a separate business area covering our safety activities, with our braking, Passive Safety and Sensorics business. This will allow the organization to focus on their value strategy to enhance profitability and cash conversion. And now I come to the Q1 financials, next slide. Reported sales came in at EUR 10.3 billion, 3.5% above last year's comparable period. Excluding negative exchange rate effect of EUR 426 million and changes in the scope of consolidation, organic growth was 8.6%. Adjusted EBIT increased year-over-year by just over EUR 400 million mainly due to a recovery in volumes and ongoing strict cost management. The adjusted EBIT margin was 8.1%. Please note that due to the intended spin-off of Powertrain Technologies, IFRS 5 noncurrent assets held for sale and discontinued operations have got -- had to be applied. Due to this application, depreciation ceased for discontinued operations starting March 16, 2021. This is the day when our Supervisory Board approved the spin-off. And this obviously has a positive EBIT effect. The EBIT effect for the first quarter was EUR 22 million. It's only for the 2 weeks since March 16 in the first quarter, there depreciation ceased. And it is, not surprisingly, mainly a positive EBIT support for the powertrain business as this is the discontinued business. The effect will become more material in Q2. Without this application, the adjusted EBIT margin for the group would have been 7.9%. Special effects totaled negative EUR 71 million mainly related to the spin-off in the transformation program. Net income after taxes increased year-over-year by EUR 156 million to EUR 448 million. Trailing ROCE came in at minus 2% or minus 2.1% excluding IFRS 5. Free cash flow, excluding acquisition, divestiture and carve-out effects came in at a strong EUR 670 million, unusually high for Q1 in our business. Low inventory levels because of the semiconductor shortage and because of the high demand for tires as well as timely payments of our customers supported the numbers. Slide 6. In Automotive Technologies, we saw a rebound in volumes mainly driven by the low comparable base in the Chinese market from Q1 last year. However, with our disproportionately strong share in the European and North American markets, which were down year-on-year, we were disadvantaged by geographical mix. Thus, organic growth for automotive was 3.4%. Due to this growth and our focus on cost savings, we were able to increase our adjusted EBIT margin by 260 basis points to 4.5%. In Rubber Technologies, we achieved a very strong recovery in sales and adjusted EBIT. Organic growth achieved 11.7%, and the adjusted EBIT margin increased by 490 basis points to 14.5%. As mentioned already, this performance was achieved through solid operational excellence and a favorable price/mix development in tires. In Powertrain Technologies, we continued the strong sales development driven by electrification technology, resulting in an organic growth of 12.8%. Adjusted EBIT margin also increased from 0.7% in Q1 2020 to 3.8% in Q1 '21 or 2.9%. Here, the effect obviously is higher excluding the IFRS 5. Slide 7, showing our regional outperformance in Automotive and Powertrain Technologies adjusted for the unfavorable geographical mix. I mentioned that earlier, Automotive Technologies sales were about 200 basis points behind light vehicle production in Q1. Underperformance in Europe was a result of the anticipated decline in our analog instrumentation business, while the regional underperformance in North America was due to semiconductor-related production impacts. In China, we grew in line with the market. Powertrain Technologies, we considerably outperformed in Europe due to the continued strength of our electrification business. Our North American business outgrew the market as well. These drivers compensated for the regional underperformance in China caused by semiconductor-related production impacts. Adjusted for geographical mix, Powertrain Technologies outperformed light vehicle production by 400 basis points. Now I will go through the individual businesses, starting on Slide 8 with AMS. Sales came in at EUR 2 billion with organic growth of 3.8%. Stronger demand in China was the main reason for the sales increase, overcompensating a slight decline in North America. Passive Safety and Sensorics was the biggest contributor to growth. The adjusted EBIT margin increased by 190 basis points versus the year ago quarter to 4.8%. This was mainly enabled by organic growth and cost discipline, but partially restrained by higher premium freight charges of around EUR 30 million. A similar level of premium freight is also expected for Q2. Additional expenses for ADAS R&D was EUR 15 million in Q1. This figure will increase in the coming quarters, in line with our full year expectation of EUR 200 million to EUR 250 million, as explained in the last call. As customers delaying their sourcing decisions due to market uncertainties, AMS recorded a respectable order intake of EUR 1 billion in Q1. The biggest orders were related to electronic brake systems. VNI is covered on Slide 9. Organic growth was 3.7% driven by continued resilient demand in China and South Korea, while Europe was soft due to analog instrumentation, as commented earlier. The year-on-year margin increase of 330 basis points is tied to higher sales and focus on cost discipline. These factors compensated for higher logistic costs of around EUR 20 million. VNI recorded a solid order intake of EUR 2.9 billion. As mentioned earlier, this includes more than EUR 1.3 billion new bookings for digital displays, predominantly for display solutions for German and French customers. The other business win highlights is the first HPC for commercial application at a leading commercial vehicle application at a leading European commercial vehicle manufacturer. This product will fulfill the increasing requirements for connectivity, complexity and functional scope demand by truck manufacturers and fleet operators, such as for over-the-air updates. Order intake for the HPC, as mentioned, is exceeding EUR 5 billion with customers in all world regions. Slide 10, tires -- I don't know, cover the Rubber Technologies. Organic growth in the tire business was up 15.8% versus the year ago period. FX was a significant headwind of 5.4% primarily related to the stronger euro versus the U.S. dollar. Volume growth in Q1 was 9.2%, led by the recoveries in the Chinese and North American replacement markets as well as in our truck business. Price/mix achieved 6.7%. Pricing for replacement tires was positive in replacement in all regions, while OE prices suffered from annual price agreements and the pass-through clauses for raw materials. Mix was driven by a higher share of ultra-high-performance tires, a higher share of Continental-branded tires and a positive regional mix, especially from the U.S. and China.Together with fixed cost discipline, this resulted in a strong increase of the adjusted EBIT margin by 600 basis points to 16.6%. Some of the fixed cost benefits are expected to fade in the remainder of 2021. Also, we expect raw material headwinds to increase from EUR 200 million previously to now EUR 350 million for the Rubber Group overall. These headwinds will start becoming material in Q2. However, we did not revise our earnings outlook for rubber as we believe we can compensate for these additional costs through pricing. ContiTech on Slide 11. ContiTech showed a solid organic growth of 4.5%, supported by all segments, OE business as well as industry and aftermarket. Volume recovery was led by Mobile Fluid Systems and Surface Solutions. The demand for Advanced Dynamic Solutions remains strong. Regionally, the strongest growth came from China followed by Europe. Volume growth, strong pricing and the effect of the cost-reduction program started in 2018 supported the margin increase year-on-year by 280 basis points to 10.5%. Like for tires, raw material headwinds will increase in the coming quarters. Compensation with strict fixed cost control as well as continued progress on restructuring and strong pricing should be possible. Finally, Powertrain Technologies on Slide 12. Sales of roughly EUR 2 billion were up organically by 12.8%. Electrification Technology sales of EUR 157 million were up by 65% mainly driven by high-voltage extra drives and power electronics, especially in Europe. In addition, Sensing & Actuation business also contributed to growth. The adjusted EBIT margin achieved 3.8% or 2.9%, excluding IFRS 5, benefiting from higher volumes and strict fixed cost discipline. Additional logistic costs were a headwind of about EUR 20 million. Excluding the Electrification Technology, the adjusted EBIT margin for powertrain would have been 6.9%. The order intake of EUR 1.9 billion was aided by the silicon carbide inverter win from Hyundai, which I discussed earlier. Slide 13 provides an overview of the cash flow. Consistent with the cash conversion target we gave at our Capital Market Day in December, we have adapted our definition of free cash flow to exclude effects related to divestitures. And last year's divestiture of the SAS joint venture is excluded in the comparison shown here. Overall, free cash flow of EUR 670 million was driven by higher EBIT, a low inventory level, in-time payments of our customers and lower CapEx. The figure also includes cash outflows for restructuring of EUR 55 million. CapEx was only 2.8% of sales in Q1. We expect this to normalize in the coming quarters. For the full year, we still expect unchanged CapEx to sales to be around 7%. This leads to the liquidity update on Slide 14. Total available liquidity remains high at almost EUR 11 billion at the end of Q1, clearly above the required level for a company of our size and structure. We therefore will not extend our any way unused and never used credit line of EUR 3 billion, which we arranged as a COVID risk cushion last May. As a reminder, neither the credit lines nor other financial indebtedness are subject to any financial covenants or rating triggers. Slide 15 is showing our market overview. We have not adjusted our forecast for the year 2021. Nevertheless, we expect the shortage of semiconductors to further worsen versus Q1 and reach its peak, as mentioned in this quarter, with a strong volume impact on Q2 versus Q1. However, we do assume that the situation will improve in the second half of the year. And with the next slide, Slide 16, let me conclude today's presentation. Our outlook, with the Vitesco Technologies spin-off now formally decided, we have adapted our outlook to reflect Powertrain Technologies as discontinued operations. Thus, all the parameters shown here are only for continuing operations and are basically in line with our previous guidance. There are only 3 changes to note. First, as mentioned, we now expect raw material headwinds for rubber to be around EUR 350 million versus around EUR 200 million previously. Second, special effect is now around minus EUR 300 million, it was EUR 600 million before, reflecting powertrain as discontinued operations. So actually as well is only an adjustment due to the exclusion of Powertrain of this guidance. And lastly, the expanded bandwidth for free cash flow has now been increased to EUR 1.1 billion to EUR 1.5 billion. This was previously EUR 200 million less in the bandwidth, so EUR 0.9 billion to EUR 1.3 billion. The increase is due to a reduction in expected cash outflow for restructuring to about EUR 500 million. This was previously EUR 700 million. And this decline reflects the timing shift in cash outflows due to the recent restructuring agreements. With this, I would like to end today's presentation, and I open the line to your questions.

[Operator]

[Operator Instructions] The first question is from Gabriel Adler, Citi.

[Gabriel M. Adler, Assistant VP & Senior Associate]

It's Gabriel from Citi. My first question is on the guidance. Can I ask whether you view the 1% to 2% margin guidance in auto as cautious following these results? I understand you have these cost headwinds coming through from R&D and also logistic costs. You've just generated 70% of your full year auto EBIT target at the midpoint in this first quarter. So your views on whether you're more confident now on reaching the top end of the 1% to 2% range would be appreciated. That's my first question.

[Wolfgang Schafer, CFO & Member of the Executive Board]

A little bit hard to understand, but I understood that you basically asked if the Automotive Technologies guidance is too careful, specifically looking probably at the first quarter result. There are some factors which make us more careful there. One is not easy to predict the forecast of the top line. We are in a very volatile environment, I think, discussed in many other occasions. No surprise to you. And secondly, we have the announced EUR 200 million to EUR 250 million of additional costs in our advanced driver assistance systems business is only with EUR 50 million in Q1. So there will be, if you do the math, probably about EUR 60 million to EUR 70 million now in the following quarters, significant increase versus Q1. Unfortunately, thirdly, we do see a continuation of this extra freight cost, which we have seen in Q1, in Q2 and then a little bit less but still significant in Q3 and Q4. And fourthly, we do see price increase demand and partly already agreed upon with semiconductor suppliers, which will be another burden for the left 3 quarters of the year. So this is included in our guidance. Therefore, we should be okay with that guidance, I think, on the lower side. But we don't feel in a position at the moment to move it up on the upper side, which probably was a little bit to your question.

[Gabriel M. Adler, Assistant VP & Senior Associate]

Yes. Okay. Understood. My second question's on cost control because you mentioned cost discipline in AMS and VNI. Can you elaborate on how much of this cost discipline continue to come from temporary measures? And how much of it is a result of the restructuring the company has been doing?

[Wolfgang Schafer, CFO & Member of the Executive Board]

The majority of it is from -- now from the restructuring. The cost reductions which we see now are only at ContiTech to a very low effect. There is still some short-term work in Germany, and it's only in Germany regional mix. Everything else of the costs which we are showing now are basically run rate costs. If I mentioned specifically in tires that some of these run rate costs still might decrease over the rest of the year, this is not related to personnel costs, but this is more marketing, sales and cost in this area. We're still -- tires is very careful at the moment. We don't see -- we need so much business running very well. But you cannot be careful on that for a longer period, then it has a long-term negative effect on your brand, on your perception in the market. So this in the entire business will partly increase and -- but this is included in our guidance over time.

[Gabriel M. Adler, Assistant VP & Senior Associate]

Okay. And then my last question is on the tire business on the price/mix. Could you maybe elaborate on how you expect price/mix to develop given that you still have price increases to come through on replacement and or the reversal of the OE indexation in Q2? So is it possible that we see price/mix above the very impressive 6.7% that we just saw in the first quarter through the rest of the year?

[Wolfgang Schafer, CFO & Member of the Executive Board]

Well, I don't want to give a guidance on price/mix for the total year, but we still see in the market a good pricing environment. I heard from our U.S. colleagues that even there, to get a day to change your tire in a store, you have 2 weeks to wait, which is unheard of, I think, in the U.S. So it's just showing that there is high demand. And this is always a good possibility to be strong on pricing. We do as well see that the mix development, in principle, there's nothing which was very much bound to Q1. I would be optimistic that the mix, at least in Q2 and I think following as well, is on a positive trend. We are -- and though some of you might remember we gave in the years before. We always talked about this high-performance tire share in our business. And only 2 years ago, we stopped talking about 16-inch tires plus plus winter tires. We, at the time, switched this to 18-inch tires plus plus winter tires. And the 16-inch tires 3 years ago was a little bit above 40%, and we are now with the 18-inch plus in winter tires above 40%. So it shows it's really a positive development over time. Did not show up so much last year with this volatile business and the other negative impact we had on the result, but this trend was already there last year and is now continuing.

[Operator]

The next question is from Sascha Gommel, Jefferies.

[Sascha Sebastian Gommel, Equity Analyst]

The first one would actually be a direct follow-up on the price/mix component in European -- in the tire business. When we think about -- so pricing is going up for the rest of the year. And then I was wondering, in the second half of the year, winter tire sales, it's my understanding, were pretty low last year from you to your dealers because of the inventory situation. Shouldn't that be an incremental positive on the mix?

[Wolfgang Schafer, CFO & Member of the Executive Board]

I would like to answer in December when we see how the season was running. If it stayed as cold as we have had it in Europe up to now, probably it gets a very good season. So it could be potentially positive, though I think we have discussed that before. And we now see that the all-season tire volume is stronger and stronger increasing. And part of that will clearly, I mean, replace the winter tire sales. And by that, we believe that probably in the midterm, we will not reach the 20 million-plus winter tires, which we have sold in the Goodyear's 2018 and before. So yes, there is a chance that would not exclude that, but don't overestimate it.

[Sascha Sebastian Gommel, Equity Analyst]

Okay. Understood. My second question would be a bit on current trading and how you see kind of Q2 shaping up versus Q1 because IHS has been quite a laggard in terms of adjusting light vehicle production. How much do you think IHS kind of needs to come down versus Q1, let's say, to 20 million from Q1? How much do you think is a realistic level of light vehicle production in the second quarter? And what would that mean for you?

[Wolfgang Schafer, CFO & Member of the Executive Board]

I imagine it's a volatile environment. We really see a strong fluctuation in what our customers ask, understandably, as they are constantly adopting as well to make sure that they still have cars to sell, where they have the chips. And I think everybody does a great job in the supply chain at the moment. It is -- our estimation is it is a stronger decline versus Q1, if you look on a quarter-to-quarter development. And it could be 10% or even more. So this is not what I could say is a guaranteed number. Probably it is better, but I would not exclude that it gets in -- about that region.

[Sascha Sebastian Gommel, Equity Analyst]

Perfect. And then my last question, very quickly on the restructuring program. The total program is EUR 1.8 billion. How much of that is booked now? And when will you most likely book the remaining part of it?

[Wolfgang Schafer, CFO & Member of the Executive Board]

Majority is the EUR 1.6 billion up to now is booked. And the leftover EUR 200 million, while we foresee for this year, a part of it might even be last year. A stronger part of it, a bigger part of it, by the way, is at Vitesco and powertrain. And therefore, might not be booked anymore in the Conti [ family ] organization.

[Operator]

The next question is from Victoria Greer, Morgan Stanley.

[Victoria Anne Greer, Vice President]

A couple of things, please. Could you talk a bit about where you think sell-out trends are in tires? Obviously, it's a bit difficult to get a handle on that, but any thoughts there would be helpful. And connected to that, how much longer do you think the tire distribution chain will stay in a restock mode? So that's the first one. And then secondly, on the new Autonomous Mobility division, I guess I can track that to your midterm growth versus production expectations that you gave for that segment, about 10 percentage points at the Capital Markets Day in December. At the full year results, you talked about a high order intake potential for autonomous driving for the next few years. How could that affect your top line growth expectations in that division, i.e. do you need order intake to accelerate to meet your growth expectations for autonomous? Or could that business grow more quickly if the orders come in as you expect?

[Wolfgang Schafer, CFO & Member of the Executive Board]

Well, we see -- at the moment, we see that the tire sales distributers are on the same path as they were in the first quarter to take our tires. I think Q2, I mean, should be a good quarter again in tires. And Q3, Q4, probably too early to answer such a more short-term question on the tire dealers, but moving in the right direction. And probably, as mentioned already in the call for the last guidance, probably tire guidance [ has a chance of our other ] guidance to be even better than the upper end of the guidance. Outperformance in advanced driver assistance systems, I think there is no change to what we have said in December. But I don't see that the order intake at the moment would change our expectations to the better or to the worse side of our expected outperformance.

[Victoria Anne Greer, Vice President]

And anything around where you think sell-out is trending in tires maybe versus 2019 levels?

[Wolfgang Schafer, CFO & Member of the Executive Board]

What was it?

[Bernard Wang, Head of Investor Relations]

Could you repeat that again, please?

[Wolfgang Schafer, CFO & Member of the Executive Board]

Could you repeat that? A little bit hard to understand here.

[Victoria Anne Greer, Vice President]

So we can -- we obviously can get a good handle on what the sell-in to the distribution looks like for replacement tires, but sell-out to consumers is a bit harder to understand. Is there any insights you can give us around the sell-out rates to consumers, how that's trending now versus, say, 2019 levels?

[Wolfgang Schafer, CFO & Member of the Executive Board]

Very strong as well. Bernard, do you want to...

[Bernard Wang, Head of Investor Relations]

Yes. It's going quite well. And it's one of the areas where we actually have an advantage. If you remember from Capital Markets Day, we talked about how we have a very, very strong turn rate, 6x inventory turn rate, that's due to our very good logistics and localized manufacturing. And we're benefiting from that very strong pull-through from the market. Does that help?

[Victoria Anne Greer, Vice President]

Okay. Okay.

[Operator]

The next question is from Giulio Pescatore, Exane.

[Giulio Arualdo Pescatore, Research Analyst]

I'd like to go back on the separation of the Autonomous Mobility segment. Could you maybe repeat the rationale for the separation? I know you mentioned better reporting, but could this 1 day perhaps lead to a complete separation or spin-off? And what would be the benefit of such a scenario?

[Wolfgang Schafer, CFO & Member of the Executive Board]

We did not decide on any further step besides a clear own organization unit now within Continental to increase the transparency, which we have promised at the Capital Markets Day because that's our CEO specifically promised and said this is what he definitely wants to create. And we want to create more ownership for an own business area culture to make sure that in this very fast and differently than other areas developing business that we can manage all these potential cooperations with others, potentially as well the one other joint venture, which is required to increase the business, and overall, to stay ahead of the technology.

[Giulio Arualdo Pescatore, Research Analyst]

Okay. And following up on that, given the capital requirements of this business in terms of keeping up with the competition and investing in innovation, should it be better to get perhaps the market value this business independently and give perhaps better access to capital to these operations?

[Wolfgang Schafer, CFO & Member of the Executive Board]

As I mentioned, we do not discuss this at the moment. But should we come to a point where we believe that this is the right solution for the business. If we have now on VA, this is -- a business area, this is obviously faster and easier to implement as if we were not doing this step. But don't see this in any way as any announcement for moving that. It is not discussed at the moment. But again, should we in 1 day in time in the future see this was required, at least we would be better prepared.

[Giulio Arualdo Pescatore, Research Analyst]

Okay. And would you perhaps consider a similar move for VNI, maybe separating the displays and digital cluster to the better growth and kind of more exciting areas of that business?

[Wolfgang Schafer, CFO & Member of the Executive Board]

No. At the moment, we did not announce anything in that direction.

[Giulio Arualdo Pescatore, Research Analyst]

Okay. And just another one on powertrain, if I may. Could you confirm maybe if the -- how much was the cash burn of Vitesco in the first quarter? Was it -- is it right, it was about EUR 300 million cash burn?

[Wolfgang Schafer, CFO & Member of the Executive Board]

Well, they had a positive free cash flow in the first quarter.

[Operator]

The next question is from Thomas Besson, Kepler Cheuvreux.

[Thomas Besson, Head of Automobile Sector]

I'd like to come back to tires and rubber first. Can you comment on what you expect for price/mix versus raw materials? I mean your earlier comments suggest that price/mix is going to remain strong. You raised the guidance for almost EUR 350 million. Is it reasonable to understand that you expect a positive gap between the 2? That's the first question.

[Wolfgang Schafer, CFO & Member of the Executive Board]

Is it the gap between price/mix, Thomas, and the raw material price increases...

[Thomas Besson, Head of Automobile Sector]

The difference between your positive price/mix and the negative impact of raw materials.

[Wolfgang Schafer, CFO & Member of the Executive Board]

Okay. Yes. When I said with the guidance might -- in this case, might be a guidance where we might even come out a little bit better than at the moment we are guiding for, which -- I mean, if we were sure, we would have changed the guidance. But this -- I think this would be then the effect which could lead to the situation: price/mix in the end being more positive than what we see as the headwinds from the raw material price increases. At the moment for tires, the EUR 280 million, which we are foreseeing, EUR 350 million for the Rubber Group overall.

[Thomas Besson, Head of Automobile Sector]

Okay. But in any case, when I look at the rubber performance in Q1, your full year guidance looks quite high. I don't know what you think, but you've mentioned some fixed cost benefits abating, but I'm not sure what would be the headwinds taking down the Rubber Group, almost 200 basis points from Q1 for the rest of the year. Maybe you can help me identify the headwind.

[Wolfgang Schafer, CFO & Member of the Executive Board]

This would be then the raw material factor, it cannot be passed over to the market at the moment. As you feel, I'm more optimistic as at the moment. Probably there's a good chance that we achieve that.

[Thomas Besson, Head of Automobile Sector]

Okay. It's very clear. I have one last stupid question. I apologize in advance. You've changed the guidance to the continued operations, which I think is fair because you have no choice. But at the same time, we are unable to perfectly reconcile what's away from powertrain what's your contract manufacturing between the different units. So shall we assume that the difference in revenues and EBIT between your continued operations and discontinued operations and the fact that you removed powertrain is going to [ stay only ] the same in each quarter?

[Wolfgang Schafer, CFO & Member of the Executive Board]

What we did at the guidance and just -- there are obviously different developments of each of the units from quarter-to-quarter, as you know from the past. What we did, Thomas, though, is we did not change our guidance -- underlying guidance for the 2 remaining automotive business areas. So the only thing we did is we took our -- in this case, not disclosed, our train guidance away from it and the result was what we see there on the sales of EUR 16 billion to EUR 17 billion and the 1% to 2%. I'm not sure -- that's helping a little bit? Okay.

[Thomas Besson, Head of Automobile Sector]

No. I think we'll wait for the prospectus of this group.

[Wolfgang Schafer, CFO & Member of the Executive Board]

Yes, yes, yes.

[Operator]

The next question is from Edoardo Spina, HSBC.

[Edoardo Spina, Analyst of Automotive Research]

I have three quick questions. The first on the automotive for the second quarter, if you can help us to clarify. I think historically, the second quarter is similar level of revenue compared to the first. But I think earlier, you mentioned 10% maybe drop from quarter-on-quarter for light vehicle production. I just want to clarify in terms of revenue if we should apply the same [ monthly total ].

[Wolfgang Schafer, CFO & Member of the Executive Board]

Well, I think, yes, it's probably an assumption which -- if my 10% is the right number. And again, it's very volatile right now to predict. And I assume you'll get the same message from others. Then yes, it would be in line with our top line because we are affected of those, either because we cannot deliver or because others cannot deliver and the car isn't built.

[Edoardo Spina, Analyst of Automotive Research]

Okay. The second question is on the semiconductor price. Compared to one German competitor of yours, you mentioned the price inflation already for them in the first half and also second half. But they were also quite clear that in 2022, they do not expect to suffer a similar inflation and expect normalization. So I just wanted to ask if you have already a scenario for 2022 in the next few years for microcontrollers price.

[Wolfgang Schafer, CFO & Member of the Executive Board]

Well, at the moment, we are very much in the discussion about the year 2021. And our purchasing people are negotiating strongly against sometimes demands which we feel are very high. And these are not price negotiations, though, for 2022 at the moment. The majority is still concentrating on '21. But I mean there is a chance that part of this continues into '22 and is a new basis, which very normal as a result. But again, on these chips, we do see price variations in different demand periods. So it's a no -- it's an answer which is not giving too much clarity on that thing for you. But the negotiations what I was saying was first concentrating on '21. There is a good chance that part of this cost increase will carry through to '22.

[Edoardo Spina, Analyst of Automotive Research]

Okay. But sorry, just to follow up. So this is linked anyway to the emergency situation? So if the volume emergency goes in '22, then maybe also pricing? Maybe is that a good way to think about it? Or just structural pressure that you face regardless of the emergency, let's say?

[Wolfgang Schafer, CFO & Member of the Executive Board]

Sorry, I couldn't understand. I don't know if it's our system today, where we have a little bit bad understanding. Could you repeat that? I'm sorry for that.

[Edoardo Spina, Analyst of Automotive Research]

Yes. Sorry, I just wanted to ask if it's linked to the volume emergency. So if you think that the price inflation will fade away once the emergency fades away or if you can see other drivers of the price?

[Wolfgang Schafer, CFO & Member of the Executive Board]

No. No, it is purely related to the emergency situation. And obviously, our customer -- our suppliers understand their importance and make use of that fine. This is how business is. But it is not related to any other factor in the [ bill of ] material, which they have or in their overall worksheet which they have.

[Edoardo Spina, Analyst of Automotive Research]

Okay. And sorry, very finally, on the cost savings. You did a lot of restructuring now. I suppose that some cost savings will come in as well. Can you indicate if there is any sort of quarter where we can see a step up in the cost savings? Or it's more a gradual improvement when we think about the adjusted EBIT level?

[Wolfgang Schafer, CFO & Member of the Executive Board]

No. It is more gradual. It won't be a stepwise function in 1 quarter. And actually, the negotiations, not to our surprise -- so the negotiations have led to the one or other in the bigger locations to a type of a shift. When we demanded like in Aachen, closed the tire factory at the end of '21, the negotiation outcome was it will be closed in '22, although we have already a significant reduction of employees in 2021. But therefore, the cost savings by these negotiations -- and this was similar like typical outcome of negotiations. Similarly, the compromise was not to close it but close it a little bit later, puts the cost savings probably a little bit more in '22 than in '21. '23, the EUR 1 billion plus is assured by the negotiations, which we finally have done. But this is all included in our guidance for 2021.

[Operator]

The next question is from Horst Schneider, Bank of America.

[Horst Schneider, Research Analyst]

I have got a question, first of all, on your customer exposure again in automotive. Since we got also from the OEMs quite mixed messages on the impact in Q2, so in that context, in general, I wanted to know what is your exposure to the premium OEMs, German OEMs and U.S. OEMs in total. That's number one. On the raw material price impact, I was surprised that you were raising the impact upwards. Can you maybe break that up, where now the negative impacts are coming from? And is there now a kind of worst-case guidance that you provide? Or you really just think there is no realistic guidance?

[Wolfgang Schafer, CFO & Member of the Executive Board]

Well, I think, Horst, for automotive, I'd say it's a realistic guidance, the 1% to 2%. And depending on the volatile volume finally materializing, I expect it to be in that range. And I mentioned already twice, I think, for the Rubber Technologies, I think it is more on the capital side. And I would not exclude that we can get better than what we are saying. And I think at the end Q2, we are in a better position to evaluate that. While we saw some stabilization, even further increase of the raw material prices versus what we expected when we gave the first guidance, this is why we have increased it. But at the same time, as I mentioned, we see probably a more stable pricing situation in the markets. Therefore, guidance not changed by raw material price increases were increased. I don't know, Bernard, if you want to give more detail.

[Bernard Wang, Head of Investor Relations]

Yes. I mean if you're looking at what the raw material prices actually do, where we expect the headwinds to come from, as Wolfgang mentioned, it's really through the next few quarters of the year. I mean the EUR 350 million we guided, the vast majority is coming through Q2, Q3 and Q4. Biggest impacts are from things like natural rubber, but synthetic rubber as well. Also on the chemical side, we're seeing that inflation, plus also here and there, some logistics costs. It's not a matter of supply. We can get our supply, but the logistics costs are extra higher this year than before.

[Horst Schneider, Research Analyst]

All right. customer exposure?

[Bernard Wang, Head of Investor Relations]

Yes. So we -- as you know, one of the biggest suppliers in the world, especially when it comes to automotive electronics, and we cover customers all around the world, every region. And I think we have a pretty good balanced mix out of that. Obviously, you know our geographic mix, right? We're heavier in Europe, then next will be North America, and then below that China and then Japan. And from that, I think you get a feel for how we are regionally exposed with the OEs and what they each do there. But it's not just our own exposure in the sense of where our revenues are, right? But if we are in -- designed into a vehicle that is not being produced because another supplier has constraints, we're also affected, yes, even if the content per vehicle, we supply to that OEs then, let's say, lower than the average vehicle from other OE.

[Horst Schneider, Research Analyst]

Okay. Your exposure to Ford maybe more specifically? You don't communicate on that, right, exposure by carmaker, right?

[Wolfgang Schafer, CFO & Member of the Executive Board]

No. No, we don't give the details on our exposure to customers.

[Horst Schneider, Research Analyst]

But they are [ no less in ] top 5 customers, right?

[Bernard Wang, Head of Investor Relations]

They are a top 5 customer. When we talk about top customers, we also include the rubber business as well. So we're also selling tires. We're also selling from ContiTech into such customers.

[Operator]

There are currently no further questions. [Operator Instructions] And we haven't taken any further questions at this point. I hand back to the speakers for closing remarks.

[Bernard Wang, Head of Investor Relations]

Great. Thank you, operator. And thank you, everyone, for participating in today's call and for your excellent questions, as always. So if you have any further questions, please reach out to the Continental IR team. We're available here for you. And with the spin-off now set, please also feel free to reach out to the Vitesco IR team. Heiko and his capable colleagues will be more than happy to assist with your Vitesco-related questions. And with that, let's conclude today's call. Please stay safe and healthy. Thank you and bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.