Continental AG

XETRA:CON

Earnings Call Transcript 2023-Q1

[Anna Fischer, Chief Executive Officer]

…and welcome, everyone, to our Q1 2023 results presentation. Today’s call is hosted by our CFO, Katja Durrfeld. Small reminder that both 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. [Operator Instructions]

With this, let me now hand you over to Katja.

[Katja Durrfeld, Chief Financial Officer]

Thank you very much, Anna, and a warm welcome from my side also. Despite a continued challenging environment carried over from 2022, we have set a good pace for our Q1 results, and we are confident that we will deliver as guided for 2023.

Let’s look together at the details starting on Slide 3 with the most important KPIs of quarter 1 2023 and group highlights. Group level Q1 2023 sales came in at €10.3 billion, 11.1% above the last year’s comparable quarter, and organic growth was 10.1%. Adjusted EBIT margin was 5.6%, 100 basis points higher than Q1 2022 with all sectors positively contributing.

Adjusted free cash flow came in strongly negative at negative €949 million. Inventories continue to remain high, and receivables weigh on working capital. March being the strongest sales month in the quarter is reflected in the receivables as well as the latest price agreements, which are not cashed in yet. With our action from working capital, we are confident to achieve our guidance here also on adjusted free cash flow.

Let’s take a look at our highlights in Q1. In Automotive, ongoing price negotiations are progressing. And at the end of the first quarter, we’ve already first sustainable agreements in place, while improvement measures show also good effects. We see also those benefits from supply chain stabilization, less premium freight and efficiencies from R&D. Building on our strong Automotive order intake in 2022, Q1 2023 continues the strength at €6.6 billion lifetime sales. We reinforcing that we bring the right solutions to meet our customers’ future needs. In Tires, an adjusted EBIT margin of 13.5% just above our margin corridor has set a good pace for the year with strong margins overcompensating decreasing volumes and inflation. Despite this positive start, we do expect market dynamics to become even more challenging.

In ContiTech the combination of actions undertaken last year to improve operational efficiency and a favorable price portfolio have contributed to the improved adjusted EBIT margin of 6.4%. Overall, I’m pleased the measures we are running to improve our planned operational performance are already sequentially impacting the bottom line. Additionally, now the strategic side, we have news from 2 of our sectors. Firstly, in Automotive, where we have entered a strategic partnership with Aurora, which I will highlight on the next slide. And in ContiTech, we have achieved the next milestone in the acquisition of Trelleborg’s printing technology business with the closing on May 2, further strengthening our industry focus and supporting our midterm targets.

On personal note, firstly, we have the great news that our Supervisory Board has extended the appointment of our CEO, Niko Setzer, by a further 5 years. And secondly, Niko and I are handing over the Automotive management to the new CEO for Automotive, Philipp von Hirschheydt; and sector CFO, Claudia Holtkemper. This will free up time for Niko and I to focus even more on the group.

On Slide 4, I would like to highlight in more details this exciting partnership with Aurora. We combine our Continental systems expertise with Aurora’s industry-leading autonomous technology for our common goal to jointly realize the first commercially scalable autonomous trucking systems. Continental will deliver the entire hardware set as well as a new fallback system. The partnership is based on a completely new business model for Continental, Hardware-as-a-Service. Different to traditional supplier business, we will generate revenue for every truck mile driven.

With Aurora, our planned start of production will be in the United States in 2027. Here, we will bring increased safety, reduced fuel consumption at faster delivery times to this important industry with the total U.S. addressable market of approximately $700 billion. Together, we will realize the first commercially scalable autonomous trucking system, paving the way for broad adoption of Autonomous Mobility in the commercial traffic sector. As another Autonomous Mobility partnership update, I am also pleased to announce that we have now confirmed a first delivery for our jointly developed stack with Ambarella as a complete Level 4 fallback system.

Let me now move on to the Q1 performance by group sector on Slide 5. In Automotive, we see a strong increase of 17.1% in the year-on-year organic sales growth, and margins improved by 490 basis points to positive 0.8%. Both effects were supported by the first signed price contracts, and focused operational efficiency actions also supported the EBIT margin improvements. In Tires, organic sales growth of 4.9% as mentioned underscored by price/mix overcompensating volume reduction, the adjusted EBIT margin decreased by 360 basis points to 13.5%. At ContiTech, organic sales growth of 7.8% and adjusted EBIT of 6.4% show that our actions deliver results.

Now let’s look into the Automotive on Slide 6. Automotive sales have started strongly with a total of €5.0 billion and as mentioned, a strong 17.1% organic growth. The effects of the first new price agreements in place and increasing volumes were the key drivers for the solid organic growth as well as the adjusted EBIT margin of 0.8%. Although we are not without challenges, especially in inflation where headwinds total drop approximately €250 million.

For further insight into our results, let’s look at the organic sales performance of Automotive versus regional vehicle products in Q1 on Slide 7. Segmented by region, Automotive organic growth significantly outperform vehicle production again prominently in our important European market, which was supported by our pricing activities as well as in China. Our development in North America in Q1 was below the market mainly driven by lower customer call offs, which we anticipate will recover during the year. Overall, in Q1, Automotive outperformed is regionally weighted average by around 7 percentage points, again, a very solid start.

On Slide 8, we confirm our competitive market position by finishing the first quarter with another strong order intake at Automotive of €6.6 billion lifetime sales. Major contributions came from Autonomous Mobility valued at €1.7 billion, including awards for 360-degree radar coverage consisting of front, rear, side and long-range radars may ensure a holistic environmental perception of vehicles and thus, greater safety and road traffic. Further, our user experience team continued their success, achieving €1.6 billion lifetime sales, of which almost all was attributed to new awards in innovative display solutions. Furthermore, the first augmented reality head-up display was awarded. Both acquisitions will strengthen our leadership position in delivering solutions to meet our customers’ future [indiscernible]. Another strong result was also achieved by our safety and motion team, who locked in new business totaling €1.9 billion lifetime sales mainly deriving from awards for integrated safety, sensors as well as hydraulic brake systems. In addition, we achieved business in air supply systems, which will increase our stable market leader position.

Moving from Automotive to Tires on Slide 9. The start to the year confirmed our expectations that 2023 would be challenging. And although volumes declined by 8.6% our Tires sector was still able to achieve €3.5 billion in sales and an adjusted EBIT margin of 13.5%. Our sales performance was underscored by our strong price/mix with more than half of the increase attributed to mix, which overcompensated for the volume reductions and the inflation of labor, logistics and energy costs of approximately €85 million. Raw materials remained a headwind in Q1. However, for the entire year, we expect these headwinds to reverse. Tires has had a good starting place. However, as I mentioned before, we do expect market dynamics to become even more challenging during the year.

And now let’s review our final sector, ContiTech, on Slide 10. As we have seen in the other sectors, volume volatility also played a role in our ContiTech business. However, for ContiTech overall, we saw positive effects from pricing that compensated volume changes and inflation impacts of approximately €75 million. Our price improvements were mainly from carryover of 2022 agreements while we continue on new price agreements for 2023, which we expect to see the effects from Q2 onwards. On this basis, ContiTech delivered an organic growth of 7.8%, leading to €1.7 billion sales and adjusted EBIT of €109 million or 6.4%, a 110 basis point increase from Q1 2022. Our targeted measures, including our key focus on improved plant performances, begin to deliver results as seen here in Q1, highlighting our ability to deliver in this sector on our commitment.

Now let me continue with the overview of adjusted free cash flow for Q1 2023 on Slide 11. Our adjusted free cash flow came in at negative €949 million. This reflected the higher inventory levels needed to secure our supply chain and a higher level of account receivables mostly due to stronger sales in the final month of the quarter as well as price agreements concluded in the last minute of the quarter, both of which could not yet be cashed in and therefore, still weighed on working capital. The investing cash flow of €355 million in property, plant and equipment supports our product mix needs and capacity expansions, for example, to meet new business volume demand. We are confident that through our key focus programs in 2023, we will achieve our guidance.

Looking now to our market expectations for 2023 on Slide 12, our expectations are based on current foreseeable effects. Given these assumptions, we confirm our guidance across all industries and regions. For our final topic today, let’s review together our outlook on Slide 13. We can keep this short as we confirm our guidance without changes. That is not to say the road will be easy. But the combination of our strong team and our deliverables to date, we are confident that we will achieve our guidance for this year. This was my part of the presentation. Now it’s your turn. Operator, would you please the line for the question and answers?

[Operator]

The first question comes from Sanjay Bhagwani from Citi. Please go ahead with your question.

[Sanjay Bhagwani, Citi]

Hi, thank you very much for taking my question. I’ve got two questions. My first one is on pricing pass-throughs. Hello? Yes.

[Katja Durrfeld, Chief Financial Officer]

We can hear you.

[Sanjay Bhagwani, Citi]

Okay. Okay. So first one is on pricing pass-throughs. Could you maybe explain a little bit on the mechanics of these peak price increases? So all I’m trying to understand is, let’s say, when will the majority of these peak price increases will be effective from? And when do we see these will came in for the Q1 under recovery? That is my first question. So if you can provide some color on these mechanics around the timing.

[Katja Durrfeld, Chief Financial Officer]

Okay. So I’m sorry, but I have some breakups in the line, but maybe let’s – I think I understood that you would like to understand a little bit about the mechanics on our price pass-through and how much the effect was in the first quarter. I think that kind of was it. Maybe first of all, with regards to the mechanics, so just to make that clear, there is no real mechanic, yes. So it’s not that we have, especially for the electronic components, some price adjustment clauses in the contract. Yes, that is not the case. We do have some contracts more on the metal piece where this happens. But in general, on the Automotive side, we do not have any pass-through mechanisms, which means we do negotiate with our customers. And to do these negotiations, we create the necessary transparency on the price developments that we are facing or the cost developments that we are facing here in Continental, which comprise more than pure material prices, by the way. We also have effect from wages and salary. We have logistics and energy costs, for example. So, all that is part of the negotiation which we have with our customers. So no price-through mechanics. And we have – deviating from last year, we already were able to conclude some of the negotiations during the first quarter, yes, which is great. And in general, what we try to achieve with each and every negotiation that we have is to achieve a sustainable and also retroactive price adaptation, yes? So we are not running for one-time payments. What we are looking for are real sustainable price adjustments that we negotiate with our customers, which means if we would enter into new agreements in the second quarter, our target is to have them retroactively applied to January 1, 2023.

[Sanjay Bhagwani, Citi]

Thank you. That’s very clear. So that, coming on to the second question that is, if I extrapolate that to understand the sequential improvement in the Automotive margins into the coming quarter, so quarter two could have additional pricing and some retrospective payments for under recoveries in Q1. And then in H2, you also see a step-up in the margin not only from the pricing but also from the product launches and from R&D. Is that correct interpretation?

[Katja Durrfeld, Chief Financial Officer]

That is perfectly correct interpretation. So we are looking for a sequential improvement on Automotive quarter-by-quarter during the course of this year to also be able to meet the guidance that we have laid out. And this does not only include the improvements to not rely purely on price negotiations, but we also have initiated most of the matters in-house like our R&D excellence program, the transformation 2019-2029 program. And we are also, as I said, saw more stable supply chain, which means we have less disruption in the plants and therefore, better operational performance.

[Sanjay Bhagwani, Citi]

Thank you. That’s very helpful. And I just have one follow-up on the outperformance if I may.

[Katja Durrfeld, Chief Financial Officer]

Yes, sure.

[Sanjay Bhagwani, Citi]

Yes. So when you look at the outperformance of 7 percentage points over and about regionally weighted, is it fair to say maybe somewhere around 500 basis points comes from the product and mix given that you have all these new launches and SOPs coming into ‘23? So if you could provide some more color on that would be very helpful.

[Katja Durrfeld, Chief Financial Officer]

So in general, the outperformance is, a, on different products on the product mix, which is clear. And it’s not necessarily linked to start of production, but also due to the change in the product portfolio that is required and requested by our customers. And another part of the outperformance comes from the regional mixes, yes. I think that’s also a very important part of it is also pricing, yes.

[Sanjay Bhagwani, Citi]

Okay. Thank you, that’s very helpful.

[Operator]

The next question comes from Giulio Pescatore, BNP Paribas Exane. Please go ahead with your question.

[Giulio Pescatore, BNP Paribas Exane]

Hi, thanks for taking my questions. The first one on the trajectory for margins in Automotive, some carmakers are suggesting that they want to pay as late as possible this year when it comes to pricing negotiations, and they want to pay in one-off payments. You clearly said that you’re asking for sustainable prices. But if you think about the margin trajectory for the coming quarter, should we expect a similar margin for the first three quarters and then a big step up in Q4 or do you think more of a gradual improvement quarter after quarter? Thank you.

[Katja Durrfeld, Chief Financial Officer]

Thank you for the question, Giulio. So we are looking for sequential price increases. When you remember our, I’ll call it, journey during the course of last year, yes, we had nothing in Q1 last year, then we had something in Q2, the majority in Q3 and a smaller amount in Q4. So for this year, we’ve started stronger compared to last year. So we already have some price agreements now in Q1. And we do expect that to continue to improve during the course of the year. Our Q4 usually is quite strong just due to the fact that we do have R&D reimbursements mostly in the fourth quarter. That was not driven by price increases.

[Giulio Pescatore, BNP Paribas Exane]

Perfect. That’s clear. Now...

[Katja Durrfeld, Chief Financial Officer]

Concluded.

[Giulio Pescatore, BNP Paribas Exane]

Okay.

[Katja Durrfeld, Chief Financial Officer]

Sorry.

[Giulio Pescatore, BNP Paribas Exane]

Perfect. Now just moving to Tires briefly. Very good results. I’m just wondering, are you seeing any pricing pressure in the market? Because the pricing mix was very strong, but the pricing was a bit softer than I had expected. I’m just wondering are you taking advantage of some of the relief on the raw material side already? Are you seeing pressure in the market that would suggest that you will have to do more of price taking in the coming quarters? And then maybe just a breakdown of the components of mix will be very helpful because mix was obviously very, very important. Thank you.

[Katja Durrfeld, Chief Financial Officer]

So in general, on the pricing side, I mean, for sure, we are observing the markets at the moment quite closely. We currently do not see any price wars that have started, especially on the premium side so far. But maybe some selective price adjustments are included during the course of the year. Europe and North America were quite low in demand in the first quarter on the replacement side or lower in demand on the replacement side. There are multiple reasons for that. Pricing is not necessarily the main driver here, but it’s because we still have some stocks at the dealers. And we have some of the dealers expecting some movement on the pricing. So this is why they are not pre-buying or stocking up early this year, yes. But we will have to see how this goes with regard to pricing, but we currently don’t feel a lot of pressure on that side, especially on the high performance piece now. So – and with regards to the mix, I think it’s fair to say that we still feel very strong on the UHP tire side. So that’s what also helps us a lot. We had last year our value-over-volume strategy. So we’re looking for the high-value tires instead of this high-volume budget tires, yes? And this is where we still feel quite comfortable with on the UHP side.

[Giulio Pescatore, BNP Paribas Exane]

Okay, thank you.

[Operator]

The next question comes from Horst Schneider, Bank of America. Please go ahead with your question.

[Horst Schneider, Bank of America]

Yes. Good afternoon, Katja and Anna and thanks for taking also. The first question that I have is, number one, on these price increases again and how sticky they are. So is the assumption right that when you now, I mean, agree new prices, they refer then to the rest of the contract lifetime? So they also for 2024, basically, they are going to be a setback again in ‘24, and you have to renegotiate everything. I think my suspicion is when we talk about semiconductor, it should be sticky price increases, but correct me if I’m wrong. Then the other question is related to the order intake because we see that now for some quarters that you report actually a pretty strong order intake. So therefore, a question from an analysis perspective, how should we look at that? So it’s lifetime sales. That means we divide the number x7 and start of production something like 3 years and then now basically agree on these new contract, is there a high level of competition or have you got a general return hurdle that is higher than the contracts that you have got at the moment in place? Thank you.

[Katja Durrfeld, Chief Financial Officer]

Okay. Let me start with the price increases and the question on the sustainability or stickiness as you call it, Horst, on the prices. So as we said, we were also last year looking for sustainable price increase, which also means that we have some carryover effects from 2022 to 2023. Nevertheless, we are facing new price increases, especially on the electronics part. And those we address again the same understanding that we are looking for sustainable price increases. In case prices for electronic components will someday go down again, yes, this will probably then trigger new negotiations. But for the time being, as long as pricing stays solid on the procurement side, also prices on the sales side should stay sustainable. On the order intake, in general, your assumptions are right just as you described them. So on an average, probably 7 years of lifetime, probably start of production around 3 years, yes, that can different – can be different from product to product, from product group to product group. But on the average, I think that’s kind of a fair assumption to take. And your third question was...

[Horst Schneider, Bank of America]

Return hurdle.

[Katja Durrfeld, Chief Financial Officer]

About the competition, right? So you asked if our – if the competition is more aggressive on the new order intakes, right?

[Horst Schneider, Bank of America]

Correct.

[Katja Durrfeld, Chief Financial Officer]

Yes. I think as we tried to describe and also with setting up Automotive, the way that we have decided to set up Automotive, we are quite well positioned. We address the needs of our customers, also with the new technology that we have developed during the course of the last year. And we were always challenged a little bit because we invested quite some amount into the R&D side, yes. But I think we’ve done it at the right points and also at the right product levels. And this is why we are currently able to win in some of the new technologies quite nicely.

[Horst Schneider, Bank of America]

Can I sneak in just the last one, Katja, that is basically the Tech Day that you hold on the 30th of June. That has got now CMD correct, I presume. So is it going to be a second event, the kind of CMD that you’re going to host after the Tech Day?

[Katja Durrfeld, Chief Financial Officer]

I kind of expected someone to ask the question. So the Tech Day is a tech show, yes. So we will present our latest technology at the tech show. And it’s the first or a second event. So we started at the Consumer Electronics Show, our journey to bring our technologies closer to our investors and analysts, yes. It’s the second event in that row. And you can stay tuned for our Capital Markets Day, which has not been announced yet.

[Horst Schneider, Bank of America]

Okay, thank you.

[Operator]

The next question comes from José Asumendi, JPMorgan. Please go ahead with your question.

[José Asumendi, JPMorgan]

Thank you very much. Hi, Katja. A couple of questions. I think on the auto side, I would love to understand a bit better the level of outperformance to local production you are expecting through the year or you’ve seen through the year. That will be great. And also maybe a little bit your thinking in the light of the strong first quarter why did you not think about upgrading the Automotive margin guidance for the year in the light of the strong start? The second bucket will be on Tires, please. Do you think volumes can turn positive in Q2? And also, how do you think about pricing for the Tires revenue bridge for the second quarter? I believe you had about 7% in Q1. So should we expect a similar level of pricing in Q2 and Q3? Thank you.

[Katja Durrfeld, Chief Financial Officer]

Okay. So let’s start with the Automotive performance or the outperformance of the sales. You know that we have guided for 2% to 4% Automotive production increase for the year 2023. And you also know what we have laid out as a sale guidance, this implies – sales guidance. This implies an outperformance on the Automotive side, which we still definitely think that we will be able to deliver. This is why we have also confirmed our guidance, again, yes? I think that’s a fair point. The second part was about volumes and the difficulties on the Tires side, so to say. Volumes in Tires have been a headwind during the course of the first quarter. So as I said, replacement volumes in Europe and North America were weaker. But we did see, on the other side, were quite positive OE volume, yes, so on the Tires side.

We also do think that China should recover, which you can also see when you look at our guidance that we do see a strong improvement on replacement in China, which also is a quite relevant market for us on the replacement side. So overall there, we also do see that volumes will come back or should come back in the second half of the year, yes? And about pricing, as I tried to say, so, so far, we don’t feel the need to adjust pricing in general. We are looking at selective markets, and I do not exclude the one or the other price allocation in the understanding of the raw material price development.

[José Asumendi, JPMorgan]

Thank you very much.

[Operator]

[Operator Instructions] And the next question comes from Philipp Koenig, Goldman Sachs. Please go ahead with your question.

[Philipp Koenig, Goldman Sachs]

Hi, Katja. Thank you for taking my questions. First one is just a very basic one on the Automotive guidance. I guess when you said the 2% to 3% at the beginning of the year, you sort of had some cost recoveries in mind to reach that level. Now, that the first quarter is over and we are in May, have the recovery sort of tracked in line for you to reach that margin level, or are we better or are we slightly below where you aim to be? That’s my first question.

[Katja Durrfeld, Chief Financial Officer]

So in general, I would say that we are on track with our cost recoveries. So, you know that we are facing the €1 billion on the automotive side. So we have to work hard on the cost recovery side. We are again in positive negotiations with our customers. But so far, I am satisfied with what we have achieved so far.

[Philipp Koenig, Goldman Sachs]

Okay. And then my second question is on the R&D efficiency that you mentioned earlier. I guess is there any sort of absolute level of R&D spend we can expect for the automotive business at some point where you maybe – where we can see a leveling off of the investment, because clearly, in absolute terms, the R&D spending in automotive business continues to increase. Is there any sort of guidance you can give us for this year?

[Katja Durrfeld, Chief Financial Officer]

What we always said is that you should not expect them to be – to go down on absolute levels. But what we also said is that the level and percent of sales will definitely decrease despite the fact that we are investing so strongly into the new areas there. And I think that is what you will also see during the course of the year.

[Philipp Koenig, Goldman Sachs]

Okay. Thanks. It’s very helpful. And then lastly, just on the free cash flow. Clearly, the big step-up in the receivables. Can you ever sort of describe the dynamics? Is that more driven by later payments from the OE? Is it tire dealers? Maybe sort of a bit more color on those dynamics and what makes you confident that you can sort of reach the guidance with the reversal of that by the end of the year? Thank you.

[Katja Durrfeld, Chief Financial Officer]

Yes. So, I think with regard to the receivables, I am sorry, there are three driving factors or there were three driving factors at the end of the first quarter. First, a positive one, we had really strong sales on the automotive side in March, which are not due for payments yet, but which have increased the receivables for sure. Second, we have concluded negotiations different from quarter one last year 2022 with – regarding the price adjustments, which are also not due yet, and both are not cashed in yet. So, that is a way on working capital. And last but not least is exactly what you said. So, what we are also experiencing are delayed payments from our OE customers, yes, so on the automotive side. And I know that we are not the only ones facing this development at the moment. And I think some others have also spoken about it before or talked about it before. That’s the second point. And what we have done and really is we have also set up a set of project team also during the late last year from the learnings of the last quarter that we are really tracking and following up much close on these sites. But we are definitely managing our over-dues, very strong and strictly trying to really get it down. And I am positive to see further effects there.

[Philipp Koenig, Goldman Sachs]

Okay. And maybe just a small follow-up on that. By the end of the year, do you generally expect an improvement in working capital compared to last year, or do you still expect an increase just given how the dynamics that you just laid out?

[Katja Durrfeld, Chief Financial Officer]

I would say an improvement in the working capital. Just look at the guidance, I would say. I mean we are guiding €0.8 billion to €1.2 billion positive cash flow for this year, which is better than what we have delivered during the course of last year.

[Philipp Koenig, Goldman Sachs]

Okay. Thank you very much.

[Operator]

The next question comes from Thomas Besson, Kepler Cheuvreux. Please go ahead with your question.

[Thomas Besson, Kepler Cheuvreux]

Thank you. Starting with your comments on tires and listening to what you have said, as I am not sure I understand. So, I think you said you expect market dynamics to be even more challenging during the rest of the year, what they have been in Q1. Can you elaborate on that because you had basically a high-single digit decline in volumes, which likely doesn’t repeat in the rest of the year. And you don’t seem to expect pricing to explode. So, it would be helpful if you could clarify what you mean here? Second, on automotive and just on R&D in absolute terms is not falling, but do you have a percentage of net R&D for automotive in mind for this year or number of bps of decline, or is that dependent on automotive revenues? And then thirdly, could you remind us your combined exposure to two automakers, which are Tesla and BYD? And I have just a side question because I am French, I never understand what German companies do. Could you explain why you did not prerelease this time because your adjusted EBIT was largely above expectations. Your free cash flow was worse. So, that would be interesting for me, just pure interest to understand why this time you didn’t prerelease. Thank you.

[Katja Durrfeld, Chief Financial Officer]

Okay. Those were four questions in total. I will try to help as much as I can, Thomas, okay. First question on the tires side, so you know that we said that we are in a challenging environment and that we also do see the challenge to continue to a certain extent. So far, we are still – on the sales side, we are still within our guidance. This is also what I have said. So, we feel still quite comfortable there with the assumptions that we have taken when we laid out the guidance at the beginning of the year. But the market is tight, and it’s difficult, why is that, as I just try to explain. So, we did see the dealer topic, and we do see more competition from the Asian cars coming back. And I would like to say coming back because it’s something that we are not really used to see. So, they are coming back. And they are putting more pressure, especially on the quality and the budget brands. So, that does not affect our major brand Continental, and it does not – also does not affect us on our ultra high performance tires, for example, or the EV tires for them, the quality and budget. That definitely is a topic. This is why we are observing the market and why maybe selective price adjustments during the course of the year might happen, yes. Still, when you look at last year, you saw that last year, we had a very stronger sales in the first half of the year and then weakening sales in the second half of the year. So, this year we expect that to turn a little bit around, yes, so just in general. On the R&D and percent of sales for automotive, I have to say, I am sorry, Thomas. You know that we don’t guide on the R&D in percent of sales, but – and I also will not give you a figure that I expect for the end of the year, but we expect the figure to look I call it better, yes, and clearly better than what we saw last year, yes. That is what I can say. With regards to our exposure to Tesla or to BYD, sorry, we don’t openly talk about specific sales with one of the other customers. Just let me say that we are doing business also with these new – I don’t even want to call them new anymore, with these new customers worldwide. And the question on the prerelease, I think that comes back to my visit in France, and we would try to explain why this is, yes. We received some feedback from the market that we were maybe this year or one of the other I talk too often, yes. And we are learning in general. And I think when you look at direction, usually you should say something when you expect a very strong reaction of your share price due to the release of your figures. And we thought that the release of our – would not overly drive the share price this time, and this is why we decided not to do it. And I think when you look at the share price development today, our assumptions were correct, yes. Positive surprise on automotive and tech, some negative on the free cash flow, and in total, we were okay.

[Thomas Besson, Kepler Cheuvreux]

Thank you very much. Good job.

[Operator]

The next question comes from Christoph Laskawi, Deutsche Bank. Please go ahead with your question.

[Christoph Laskawi, Deutsche Bank]

Hi. Thank you for taking my questions as well. Three quick ones, I would say. The first one, sorry to come back to that, on the pricing in Q1 in auto tech. Sorry, if I might have missed it, but are there any lump sum payments that you booked in Q1 and could you quantify that in case there were? And then second, on the momentum that you see in Q2, you already highlighted that you need better volumes, a bit better efficiency from better call-off of the OEMs. Is this already something that you see in Q2? And are you trending sequentially up with regards to utilization and on better call-offs and efficiency? And then lastly, on the underperformance in North America, could you just roughly outline what was driving that? And when do you expect that to improve in ‘23? Thank you.

[Katja Durrfeld, Chief Financial Officer]

Okay. First question was on the pricing for automotive, again, and it was if any of the effects included lump-sum payments. I am personally not aware of any bigger lump sum payments because this would also not fit to our strategy to really have the price increases sustainably into our systems, yes. So, I am not aware of any major lump sum payment in the first quarter. So, for the Q2 question, I have to admit that I did not really understand – get your Q2 question too well. I am kind of in between call-off, so if the call-offs are coming – are increasing or going down or if you asked about the efficiency of our operations.

[Christoph Laskawi, Deutsche Bank]

Yes. I can repeat and rephrase. Sorry, if I was unclear. So, essentially what I am trying to get to is, do you see that the customer call-offs are becoming more reliable, and that allows you to manage the operations more efficiently? And are you, in general, seeing the volumes trending up in a way that you described that you needed to meet the targets?

[Katja Durrfeld, Chief Financial Officer]

Okay. No, I have it. Thank you, Christoph. So, the challenge was not necessarily – also during the course of last year, the customer demand and the customer call-offs, it was more on the supply side that was really putting a lot of issues on us and on the operational performance. So, the availability of semiconductors, and therefore, the changes also our customers had to make in their purchasing behavior, yes, because it was not only Continental where there were some issues in the supply chain. But that was more or less a general industry topic. So, with the better, and I would just try to say really carefully better availability of semiconductors, we also do see there less interruptions in the supply chain. And this is across the entire supply chain from our suppliers to our customer side, yes. So, there we do see some improvements. But please do not think that we are already at a normal mode, yes, we are not. We still have impacts from semiconductor shortages. And personally, we do not expect that to be fully normalized all semiconductors until beginning of 2025, yes. We will still see some selective shortages in the one or the other chip family. But we do see a more stable possibility on the supply – on the production side, which is also due to the fact that we have built up inventories, yes, to stabilize our supply chain internally. And I think the last question that you had was on the North America’s performance. So, we saw selective customers where we saw some volume drops, but we think that these were just really on short-term. That was really an unhappy mixed event for us, yes, so to say, in North America. But we don’t expect that to be a sustainable topic and this will come back during the course of the year.

[Anna Fischer, Chief Executive Officer]

It seems Katja has answered all the questions. So, thank you so much everyone for participating in today’s call. As always, should any further questions be asked, please do address them to your Investor Relations team. And with that, we would like to conclude today’s call. Thank you everyone and goodbye.