Vitesco Technologies Group AG

XETRA:VTSC

Earnings Call Transcript 2023-Q2

[Unknown Executive]

Ladies and gentlemen, I'm very happy to welcome you to our call on the financial results on the second quarter 2023. The press release, the following presentation, and our half year report have been published today at 7 a.m. CEST on our Investor Relations website in the Reports and Presentations section.Furthermore, you can find a document with an overview of the most important KPIs on a quarterly basis available for your convenience on our website. We will, of course, also provide a recording of this webcast after this event.Now before we have a look on today's agenda, I'm sure that you've all taken notice of our disclaimer.Andreas Wolf, our CEO; and Werner Volz, our CFO, have joined the meeting today to guide you through our presentation of the financial results of the last quarter. As always, they will report on the most important developments at group and divisional level in the last quarter, including our current order intake level as well as our cash flow and balance sheet. Afterwards, both gentlemen will be available for a Q&A session.And now let me hand over to our CEO, Andreas Wolf.

[Andreas Wolf, executive]

Yes. Thank you, [ Jens ]. Ladies and gentlemen, welcome to our quarterly earnings call for the second quarter. Thank you for joining us today. We are very pleased to share our quarter 2 2023 results and provide an overall company update. Before we get started with the financial KPIs on this slide, let me express my gratitude to all our employees at Vitesco Technologies, who made a recent event possible. Our company is now listed in the German midcap index, MDAX. After the positive share price development of the last months, we see confirmation that we are pursuing the right strategy and will continue to implement it consistently.Our second quarter was, again, dominated by delivering on 2 major items, almost finalizing the negotiations on higher prices with our customers based on continuously increasing input costs as well as growing our electrification business. Here, I can now tell you that we have made significant progress. Regarding the cost transfers, we now have agreements with nearly all major customers in our pocket. The success of these negotiations was partly visible in quarter 1 and 2. However, this effect will manifest throughout the remainder of the year. This was hard work, and I'm happy that we have reached an almost complete status with our customers.On the second item, our electrification progress continues on multiple levels. As you can see on the right-hand side, once more, our order intake proved our very attractive portfolio. During the second quarter, we could win about EUR 5 billion new orders in total thereof, the share of electrified order intake amounts to about 90%, which is really impressive. Please keep in mind that we will continue to push for sustainable order intake, but we won't see this pace quarter-over-quarter as those orders do not come in on a steady basis.It is very important to note that our current order intake for 2023 is profitable and will positively contribute to our mid and long-term profitability targets. An additional proof point showing our progress in e-mobility, our electrification sales, which have increased to EUR 354 million. This is a very good step up of about 50% compared to last year. But now let us go through the other key figures displayed on this slide step by step.With EUR 2.4 billion sales, we delivered double-digit organic growth in the second quarter. This was mainly driven by our strong sales in division electrification solutions, especially in Asia. Our adjusted EBIT margin came in at 3.1%, which is very solid, within our full year range.Given the delay in payments for cost increases by our customers, the negative free cash flow in the second quarter was in line with our expectations. Even though we managed to invoice on these customer agreements still in June, based on existing payment terms, we see respective cash inflows during the second half of the year. To sum up, it was again a positive and eventful quarter.Speaking of recent events, let us now talk about news and announcements which occurred especially in the second quarter. Our strategic initiatives accelerate our transformation and at the same time, secure further growth potential. We have achieved this by focusing on 2 directions: strengthening on our supplier partnerships for critical components; and further divesting our ICE business.Talking about partnerships. As we have seen during the last years, it is very important to ensure availability of our parts. If we don't receive components, no parts will be produced. Therefore, we did our homework to ensure availability and competitiveness going forward when we speak about SIC components. We secured an almost EUR 3 billion supply capacity to safeguard the anticipated growth in electrification.Here, we decided to take 2 major steps. First, we signed a long-term supply agreement with Onsemi by investing in production capacity and consequently gaining access to key semiconductor technology. Second, we further intensified our existing development partnership with ROHM by entering into an additional supply agreement.Coming to the right-hand side, we further accelerated our progress in ramping down our ICE technologies. This enables us to strengthen our focus on electrification and Core ICE technologies. Since our spin-off, we have made more than 10 transactions, including divestitures in the field of ICE technologies. This affects about 2,000 employees, but it is very important to us that they found a new home with a better strategic fit outside our company.These transactions also drive our transformation towards e-mobility powerhouse even further and faster as the divested businesses amount to EUR 500 million yearly sales. This will come into full effect by beginning of next year. Our phaseout of the Non-Core ICE sales, including contract manufacturing, will thus further accelerate.Let us now dive a little bit deeper into the financial KPIs. The EUR 2.44 billion sales, which I mentioned earlier, corresponds to an increase of 12.8% compared to the second quarter 2022. The sales development is in line with our expectations, taking into account the planned ramp down of noncore business, which also includes, as already said, our contract manufacturing activities before.Supported by the negotiations of compensation agreements, we managed to achieve an adjusted EBIT margin of 3.1%. Our CapEx remained at quarter 1 levels. However, when compared to previous years, we see our CapEx ratio trending to the anticipated 5% to 6% level. Our free cash flow was burdened by an increase in working capital, which results in a negative value of around minus EUR 21 million.One important note, the compensation agreement with our customers will largely become cash effective during the second half of the year, as I already mentioned. That's why we are still confident to achieve our full year guidance of around EUR 50 million free cash flow. And our equity ratio remains at a very solid level as already in the quarters before.Let's move on to the market view before I hand over to Werner for a deeper financial look on our quarter. The worldwide light vehicle production picked up during the second quarter in 2023. China saw by far the strongest recovery in the second quarter, followed by North America and Europe. However, the Chinese commercial vehicle market continues to be challenging.Overall, we see an improved availability in raw materials, which also contributed to an increase in light vehicle production volumes. As we can see in the bar chart, in quarter 2 of 2023, our reported group level sales increased by 12.8%, which looks rather weak at first glance, if you compare it to the global light vehicle product However, please keep in mind that our declining sales of the Non-Core ICE business and contract manufacturing is included in this figure. Organically, our electrification and Core ICE sales outgrew global light vehicle production by 8.4 percentage points. This number is more meaningful when comparing ourselves to the overall market environment.And now, as always, let me hand over to our CFO, Werner Volz, who will give you more insights into our financial development. Werner, please?

[Werner Volz, executive]

Thank you, Andreas, and hello, and welcome, of course, also from my side. Let us take a closer look now at our top and bottom-line development at group level.Our organic sales growth was at 14.3%. That excludes currency-related headwinds of 1.4 percentage points as well as further consolidation effects.To put this into a better context, as Andreas mentioned in the previous slide, please keep in mind the outperformance of electrification and Core ICE technologies of 8.4 percentage points compared to the market. As seen before, we increased our profitability to 3.1%, which is straight in line with our full year guidance.In this context, I need to mention again that we finalized our negotiations with almost all major customers regarding the cost transfer agreements on higher input costs. We already see positive effects in this quarter on both top and bottom line. And I expect this to continue during the remainder of the year. To sum up, this result is very much in line with our full year target.Now on Slide 9, let's have a look at the results by each division. We start with our Powertrain Solutions Division. The main reason for a slower growth as the planned ramp-down of our noncore activities, which also contains contract manufacturing of around EUR 224 million, down about 20% year-over-year. Here, we will see a further acceleration of this decline in the remaining 2 quarters.Overall, Q2 sales came in at around EUR 1.6 billion with an adjusted EBIT margin of 6.7% in Division P. This was mainly driven by strong regional sales in Europe. One aspect I would like to highlight, our Core ICE business continued to achieve double-digit adjusted EBIT margins. And to put this into figures, we achieved an adjusted EBIT margin of 11.1%.Now let us shift over to our Division Electrification Solutions. Here, of course, we experienced the strongest growth. We enjoyed a very strong top line development, which was especially driven by our performance in the Chinese and German markets. Our sales growth of 34.5% equates to an outperformance of 19 percentage points comparing to global light vehicle production. And with regards to profitability, we managed to cut our losses by half.This results in a positive adjusted EBIT margin for the Core ICE part of this division, and you might remember, this figure has been negative in the first quarter and quarter 2 now benefited in particular from further stabilized supply chains.Before we close this financial reporting section of top and bottom-line development, I wanted to provide more transparency on the categories, electrification, Core ICE and noncore. Let's start with the electrification part on the left side.As you can see, we further increased our electrification sales by around 50% due to further ramp-ups of new products and a better availability of critical components. And we will continue, of course, to grow. I also would like to mention the improved adjusted EBIT margin by almost 8 percentage points, even though we had to bear higher upfront costs for new orders. This was driven, amongst others, by a further improvement of our gross margin to about 7% in Q2, and we foresee gradual step-ups until the year-end in total.Overall, I want to highlight once more, we are well on track to achieve our targeted profitability goal for the next year, which means breakeven. Our second category, Core ICE, excluding electrification, improved sales to EUR 1.4 billion. As said, the Core ICE business slightly outgrew the global light vehicle production also driven by the positive outcome of price negotiations. Consequently, we saw an increase in our adjusted EBIT margin by 300 basis points.Another aspect here is the incremental margin, which stands out at 27%. As you can see on the right-hand side, our noncore business is ramping down as flat. It also includes our contract manufacturing business. You may have noticed the EBIT margin being slightly under 1%. But I would like to emphasize here the figure of last year included a positive onetime effect. However, as we have always stated, our adjusted EBIT in noncore is more or less black zero.So if I have to sum up our Q2 results, there are 3 topics to remember today. First, we will grow in the electrification area and further improve profitability. Second, our very resilient Core ICE business will see gradual improvements. And third, the ramp down of noncore will be progressing according to plan.On Slide 12 now, let me give you some insights into our cash development. As you can see, our operating cash flow came in slightly lower. To a large extent, this was driven by a higher net working capital intensity, mainly in accounts receivables. With regards to our net working capital, please keep in mind that the positive effects from the favorable payment terms with Continental in contract manufacturing in the past will decrease as the business is ramping down, and we already see some negative effects year-to-date.Our investments increased slightly, resulting in an investing cash flow of minus EUR 115 million. As stated on the slide, this is mainly due to lower cash in from divestments when we compare it to the prior year. As a result, our free cash flow for the second quarter came in at minus EUR 21 million. This was in line with our internal planning as we are increasing our capital spending, which is necessary, of course, to support the ramp-up in electrification. We are both confident to reach our guided EUR 50 million for the fiscal year 2023, and Andreas already confirmed that before.Talking about financing cash flow, it came in slightly negative, resulting in minus EUR 25 million. Compared to our previous year's figure, the financing cash flow improved due to significant less negative settlement impacts from financial derivatives. However, I want to highlight that we continue to have a very healthy balance sheet and sufficient funding to drive our transformation.Let us take a quick look at our balance sheet structure on Slide 30. This might be the least exciting slide in my presentation. And it has not changed much compared to the previous quarters, which means we maintain a rock-solid structure. Our net working capital ratio slightly increased to 5.9% in Q2 this year, mainly driven by accounts receivables. The net working capital intensity is therefore in line with our anticipated midterm range of 5% to 6% of sales.The net debt to adjusted EBITDA ratio decreased slightly from minus 0.5 to minus 0.3. However, our net liquidity position of EUR 213 million underlines our still very comfortable liquidity situation. On top of that, we still have our existing RCF. So our available liquidity cross is at EUR 1.7 billion. And last but not least, our equity ratio, it remains at very solid levels of around 39%.Now I wanted to touch on my last slide of this presentation before I hand back to Jens for the Q&A session. I guess, our guidance is very familiar to you as we have shown it in the last 2 presentations. On the market outlook, we saw minor changes in the regional development as the year progressed. This does not affect, however, our estimates on the overall production significantly, and therefore, doesn't change our view on the development for the global light vehicle production.There are minor changes in the regional distribution, especially the European and North American markets are seen as the main drivers for the anticipated increase in light vehicle production. Europe is expected to see higher growth of around 7% to 9%, previously, 5% to 7%. North America is also expected to perform better with an increase of around 6% to 8%, previously 5% to 7%. And China, on the other hand, is predicted to grow slightly lower by around 0% to 2%. That was 1% to 3% previously. Since our view on the global light vehicle production remains at 3% to 5%, the left side, our guidance remains unchanged. This means we are very confident to reach our targets for fiscal year 2023.And with that, I have reached the end of my presentation and before we enter the Q&A session, let me say a few words on my behalf.As you may know, this will be my last quarterly presentation before I hand over to my successor, Sabine Nitzsche in November this year. However, of course, I will continue to give my utmost best until the end of my term to ensure that we will achieve our full year targets.And already now, I want to thank all of you very much for this very constructive cooperation, for your trust, and for the great exchange we had, especially the very honest and lively discussions about Vitesco, our strategy and, of course, our financial figures. It was a pleasure and an honor. All the best to all of you. Thank you. And now back to Jens.

[Unknown Executive]

Thank you very much, gentlemen. Ladies and gentlemen, as announced, we will now answer the Q&A part of today's session. We would like to offer all participants the opportunity to ask questions. Therefore, we kindly ask you to limit yourselves to 2 questions. If time allows, you can, of course, ask additional questions by going back into the queue. And operator, we are now ready to take on the first question.

[Operator]

First one is Sanjay Bhagwani from Citi.

[Sanjay Bhagwani, analyst]

Sanjay Bhagwani from Citi. First of all, congratulations on executing the pricing negotiations and delivering on the margin expansion and into the Q2? And Werner, thanks to you too for all these honest and lively discussions and all the best. So yes, I've got 2 questions. I'll just club them in 2 buckets.The first one will be electrification, so maybe just on the order intake. Can you please confirm your yearly annual order intake on the electrification targets of something around EUR 10 billion? And on that, can you also please confirm the sales growth target for the full year, some around 35% to 40%, I think growth is what you had indicated. And on the same bucket, the gross margins of electrification, could you maybe provide some color on how this has developed in Q3 and are you still able to achieve high single digit, that is around 8% to 9% for the full year? That's my first set of questions.

[Andreas Wolf, executive]

I mean, Sanjay, there is a short and the longer version. The short version is yes. Yes, yes. You like it because not me going back to the order intake. Yes, we are on the electrification side at EUR 5.3 billion year-to-date, I expect major orders maybe even days. And that's a little bit why I said it doesn't come exactly to the earnings call, but in 1 day, 2 days or couple of days later or 2 weeks later, but there are some very hot acquisitions in the pipeline so that I can, without hesitating confirm something around EUR 10 billion.As you know, we are also very picky looking through the -- to the type of orders. That's why I mentioned in my short speech, the profitability side to it. We want to make sure that the orders which are coming in are profitable and support our mid- and long-term targets. So on the growth side, yes, there are couple of launches in the second half of the year so that for the full year, I can confirm the growth target. And maybe you want to elaborate shortly on the margin, Volz?

[Werner Volz, executive]

Yes. And, yes the question, of course, an important question relates to profitability development for the future. We also will confirm and can confirm our gross margin development continuing. But right now, we are at 7%. We should continue to see further improvement. So 8% to 9%, which you mentioned should be in our range that we are going to achieve by the year-end.

[Sanjay Bhagwani, analyst]

That's very encouraging. So on this, I think a follow-up to the gross margin is, so let's say, for first half is, I think, 6.5% or something, right? And if you want to get to 8% to 9%, then for H2, we are aiming for like for Q4, we are probably aiming for more like 12% or something.And then on the top of that, you also have the R&D reimbursement. So do you expect there's a possibility that this electrification can actually break even in Q4 itself? Or there are some moving variables around the R&D that we should be aware of?

[Andreas Wolf, executive]

Can I repeat your question in order to make sure that I understood it correct. So the first question was, on gross margin, how we are going to improve the gross margin towards the year-end. Is that right? The second question was breakeven in Q4? And the third question related or the second question, I'm not sure the sequence, one question relates to R&D investment.

[Sanjay Bhagwani, analyst]

I think it's just one question. That is there a possibility that electrification could be an EBIT breakeven already in Q4 given the gross margins expand and R&D reimbursements come in Q4?

[Andreas Wolf, executive]

Well, I would not confirm that right now. I have to know where your [Technical Difficulty] calculation, but I wouldn't shoot for that right now. So I think we're going for breakeven next year.And of course, the third, the fourth quarter would be an exceptional quarter. We linearized or annualized equally [Technical Difficulty] fourth quarter. Again, we received reimbursement, our reimbursement [Technical Difficulty] and we also impact coming from price negotiations, all positive effects hitting in the fourth quarter. But I would not be -- now, I wouldn't confirm that right now. Even if I would love to confirm that Sanjay, but in my last call, but I'm not going to do that. Sorry. Okay.

[Sanjay Bhagwani, analyst]

No problem not all. And just a final one on the margin progress. So maybe just to understand, and so now you -- I would -- it's fair to say that you already have a visibility on getting the full year guidance because you already have progressed in one of the biggest moving variable for the year, which was like passing through the inflationary headwinds. How should we think of the development for Q3 and Q4? That is basically, let's say, I think you already mentioned that it's all agreed, but some of them were actually on the books in Q2, but there will be more in Q3 and Q4. So if you could provide some color on, let's say, should we see the margins in Q3 than -- higher than Q2 and then Q4 higher than Q3. If you could provide some more color on that, please?

[Andreas Wolf, executive]

Well, yes, of course, we -- since we are confirming our full year guidance, again, we should see catch-up effects in the second half -- but also here, I would like to caution everybody a little bit, Q3. Typically, it's a weak quarter due to -- I would -- we call it summer haul or the summer breaks and then it is -- it will be lower months in July and August, September, then again should catch up.So in total, the third quarter typically is a lower and slower quarter. And -- but on the fourth quarter, then typically, sales is really catching up and then all the positive effects from the price negotiations eventually are going to hit. So I would rather expect Q3 maximum at the level as we have seen in Q2, but then having a strong Q4, and that was pretty much the pattern that we also have seen last year, as you remember. Does that help?

[Operator]

Next up is Giulio Pescatore from BNP Paribas.

[Giulio Pescatore, analyst]

So the first one on the divestments. Can you maybe shed some color on what assets you sold and any information on the proceeds when do you think you can -- you will get the proceeds and that can you maybe quantify those? The second question on the suppliers' partnerships you locked in.I think these are very important deals that they're closing. But I'm just curious on what type of pricing agreements are you striking? And is there -- will there be any room for adjusting prices down in case we start to see deflation in the semiconductor space? And then the last point on the order intake. Can you maybe share some color on a split of regional or customer mix within that order intake? And maybe also some information around product mix as well.

[Andreas Wolf, executive]

Maybe I'll start with the last 2 ones to warm up for -- on the order intake side. If I look to the full year because I said there are some very interesting orders in the pipeline. It is basically the same pattern like last year in all regions and across our whole product portfolio means from complete axles to inverters only to battery management systems, it's all in all high voltage. There are also 48-volt order intake, some volume increase, et cetera, but the majority is on high voltage. You know that we have a clear view of the market, which goes into at the end, the battery electric vehicle market. We see this portion significantly growing. Now on the partnerships, the pricing agreements. Yes, the pricing agreements are in a way that if the competitive environment would change that the parties would sit together and negotiate in good phase, reflecting that change in the market. The good thing on the other hand is that we have a ceiling, a cap, on those components in the sense of if the market prices would go up, what does that mean because we always have to think into both directions.But yes, there is a provision in the contracts we have signed that we are always in good faith to what does that mean for the outages because those contracts go up to 2035. They start in a couple of years, if I look through on Onsemi but it's a 10-year agreement. So we have -- we had to make our insert clause is what is on the market price side. Now, divestitures, do you want to comment on it?

[Werner Volz, executive]

Yes, I can comment with it. But we sold our business in China, which was related to injection business, and we sold that to the Belgian Punch Group.

[Andreas Wolf, executive]

In Italy.

[Werner Volz, executive]

In Italy, yes, in Italy. And yes. Well, we -- our EBIT was hit by that due to certain impairments that we have to book according to the transaction and basically the transfer in itself for sale. This -- of course, these impairments are not cash are not impacting our free cash flow. And on the other side, in opposite, we will see some cash inflows on these transactions still probably to happen in this year, depending on the closing on that deal.We had now the signing, the closing, right now we're still expecting for this year. And depending on that, we potentially might see additional cash inflows to -- in the load to middle double-digit numbers. There might be further proceeds in the later years to come.So overall, we think this deal makes a lot of sense. #1, it brings us additional cash inflow. On the other side, I think also our employees, they find a new home, a new heaven with more strategic-oriented investors being able to utilize the competence and the skills in this plant. And that overall, I think it makes sense to everybody should be a win-win situation for everybody.Does this answer or help understand that still, okay.

[Giulio Pescatore, analyst]

Yes, that's perfect. And maybe just a follow-up on the order intake. One of your direct competitor has highlighted that some customers in Europe are cutting the BD volume forecast for this year? Are you seeing any similar impact or any similar trend?

[Andreas Wolf, executive]

Yes, that's hard to comment because I don't know what customers they are talking about. We see some shifts in the market, especially when we talk about plug-in hybrids. So everything which is battery electric vehicles, we are okay. But some of those, as you know, there were special incentives also related to plug-in hybrids in Europe, which have been cut this year, and we see the direct impact, but also the market. As I mentioned before, it's more going into the direction of battery electric vehicles. This is what we see.But on the other hand, the new cars, new electric vehicles produced worldwide is -- continues to increase significantly. There will always be also looking to the next years a little bit ups and downs depending on incentives, et cetera. But all in all, the trend is unbroken and very clear.

[Operator]

Next question comes from Marc-Rene Tonn from Warburg Research.

[Marc-Rene Tonn, analyst]

First 2 questions a bit outside of operating business. I see from the half year report that you booked some additional expenses for obligations in connection with the emission issues. Perhaps you could give us some update on where you are on the process and when you would expect this to be finally settled or whether there should be any additional burdens to be expected in the quarters ahead.And the second question would be a bit regarding the progress you made in the optimization of your tax expenditure structure. I think, yes, of course, second quarter with the one-offs and overall limited EBIT, probably not the best example, but to give us some confirmation that you are on track to significantly reduce your tax rate going forward from the level where it is at right now?

[Andreas Wolf, executive]

Yes. Thank you, Marc. Let me try to take your question and answer it. On the first question related to our emission situation, yes, we accrued additional amounts for potential own efforts in this investigation context, but it's not directly related to country, so -- or to anything that we would see the overall situation different than what we probably explained earlier and what we originally accrued for, but it is the fact that our own investigations that we started potentially would speed up this overall process. And for that, we accrued additional amounts. So that is on that.On the second question, the tax expenditure, yes, we are in the process to already now with -- well, with changed allocation schemes and with changed allocation specifically also to our foreign subsidiaries to see significant tax improvements. However, if you go for the tax quote, of course, measured at the group level results, that probably doesn't give you the right answer. But if we deduct these extraordinary impairments for our divestitures, then we see our tax rate right now in the range of 60% -- 70% to 80% at this point, and it will drop down to around 50% by the year-end.So coming from almost 100% last year, I think we should see a significant effort and a significant improvement already next year. And of course, that trend is expected also to continue on. And again, our midterm tax target, it's between 20% and 30%, and we're progressing there. So everything is in line. Is that helping?

[Operator]

Next up is Michael Jacks from Bank of America.

[Michael Jacks, analyst]

Werner, thank you for your very clear presentation of Vitesco's figures and performance over the past few years. It is appreciated. I have 3 questions, if I may. The first one is just around pricing. Can you comment on the level of cost recovery achieved from your customers and whether this aligns more with the upper or lower end of your guidance corridor.Second question also related to pricing. In terms of the dynamics that we're seeing in China, competition amongst OEMs seems to be intensifying even further in the second half of this year. Just curious as to how this isn't filtrating into your negotiations with customers?And then finally, just on R&D, your capitalization rate is still very low at around 12%, but has nearly doubled year-on-year. Just curious as to whether or not we should expect any further increases in capitalization rate going forward?

[Andreas Wolf, executive]

I would -- Michael, I will take the first 2 questions. And then on the capitalization side, Werner can give the answer.Pricing level. So I think I mentioned that before, but we achieved roughly again, the 80% and the 80% is synchronized with our guidance. We are not yet through. We are majorly through, I told you, but we will see that in the next weeks. Maybe there's a little bit of upside potential. But for the time being, I would just confirm being completely in line with the guidance.Now yes, China, the Chinese market, the Chinese price levels, the competition will intensify in future the pressure on the supply base on the Tier 1s like we are, but we had no impacts while negotiating for 2023. So that's still relatively fresh. Therefore, it was not something we had to cope with which was part of the negotiations. But we are prepared for the future. We understand the situation our customers are in. But for '23 for the negotiations this year, it was -- it didn't play a role.Now on the capitalization side, maybe Werner, you can briefly elaborate.

[Werner Volz, executive]

Yes. And yes, thank you for that question as well. Yes, we see an increase in capitalization and you correctly mentioned, it's currently around 11%. And of course, it is due to the recently or last year's book new orders. So the upfront effort, of course, in developing these new businesses, it is increasing. And of course, we're capitalizing according to IAS 38, and that requires us to recognize on intangible assets, as you are aware of. And of course, we're doing that in accordance with IAS 38.However, our approach is rather conservative, I would assume. So we're taking probably the most conservative judgments that we can choose here. However, we start to capitalize R&D costs after our technical and commercial feasibility and continue doing that until basically until we start with production. And now moving forward, of course, since the amount of new orders and new business is increasing, that effort in exactly that time spend is potentially also going to increase.So right now, as you mentioned correctly, I consider as to be also compared with our industries to be on a very rather conservative level. And again, we are going to keep a rather conservative level. But in total, since the amount overall is going to increase, this number might slightly increase over the next quarters and probably in the next 2 years. Is that fine?

[Michael Jacks, analyst]

Yes, that's absolutely clear. Maybe just a quick follow-up. I just want to make sure I understand on the pricing question, Andreas. The 80% cost recovery, which you've mentioned, so that aligns with the midpoint of your guidance. Is that a fair assumption to make?

[Andreas Wolf, executive]

That's a fair assumption, yes.

[Operator]

We have one more question in the line. [Operator Instructions] But next question for now comes from Jose Asumendi from JPMorgan.

[Jose Asumendi, analyst]

Jose from JPMorgan. I'll stick to 2 questions, please. First one, can you comment a little bit on electrification solutions, and I know it's a little bit early, but as we think about 2024, can we assume that the rate of revenue increase in '24 versus '23 can be similar to the trend we saw in the first half '23. So I think this is the key point for the investment case of Vitesco going to '24, '25.And second, Werner, maybe you can comment a little bit, please. Andreas, actually, please. If you can comment on the strategy in China on 2 topics; 1, what is your share of revenues between local Chinese and international OEMs? And second, do you think you have the right setup in terms of how you're positioned in China in order to be able to capture additional growth in the market? Or do you think you need to develop additional partnerships to increase the penetration with Chinese carmakers?

[Andreas Wolf, executive]

Okay. I would start with the China topic. We don't disclose, I think, to the detail the numbers you are asking. What I can share is that we intensively look into the Chinese market and the competitive environment, including things you address like what is our share with Chinese OEMs, what are winner OEMs in that specific Chinese local market, the share between Chinese and international ones. And also, do we have the right setup in China?I mean from a portfolio side of you, we are okay. We have an extremely broad portfolio. We have since long in China. We mean, we have a couple of production sites. We have a couple of development sites, but still with the dynamics we see there, we are currently investigating how can we further optimize it. And what you mentioned even including partnerships will all be checked. I don't say that we go for partnerships, but I said we will check all options we have to make sure that we get a significant portion of the Chinese market independently from whatever dynamics we have there. I hope that answers your question.Now the other -- I think we didn't make any simulations for quarter 1, quarter 2, comparing 24%, 23%, but assuming that inside Electrification Solutions division, I'm talking now about the division, there's the electrification part in, knowing that we will have a breakeven in the full year, we will see step-ups for the whole division, step-by-step going up in the quarters. So there will be an improvement, obviously, for the whole division quarter-by-quarter. But I didn't make any simulation. That's a little bit shooting out of the hips now, but that's what I would assume.

[Jose Asumendi, analyst]

But you should be more like in the EUR 3.5 billion, EUR 3.8 billion revenue comp in 24. That's what I'm trying to get to at the end of the day. I mean you have a huge order backlog, revenues first half are already pointing towards EUR 3 billion for 23, so 24 million give or take with the order backlog you're generating, you should be more in that comp of EUR 3.5 billion or so.

[Werner Volz, executive]

As stated, I didn't -- I don't have that number now close to me. But yes, assuming that we continue to significantly grow, I would assume that your assumptions are not too bad.

[Unknown Executive]

So since there are no further questions on the call, I would like to hand over to Andreas Wolf once more before we then close the call.

[Andreas Wolf, executive]

Yes, very briefly, as you heard, that was the last earnings call from Werner Volz. Now I wanted to just reflect a little bit what that means because it means a lot to both of us because we started very early this journey of powertrain being still part of Continental and then being IPOed. That was the first idea and then landing into a clear cutoff, spin-off.And looking back, it's really interesting. We made a carve-out. That was my biggest carve-out I ever had in the past in only a couple of months. That was already beginning of 2019. And then we thought that we should stand on our own seat only a couple of months later, maybe year later then Corona came, if you remember. And it was not only for Corona, but then also the shortage came somehow linked to Corona and only then in 22, September 22, as you all know, we were standing on our own feet, so roughly 2 years ago, full independence.And I can only repeat, I like spin-offs because then you have the full rights and the full managerial power in the board running the business. And then I would say that's the dream on top of everything moving up into the MDAX due to the share price performance. There are so many stories and there's -- it's such an intensive -- it was such an intensive time that I can't share that here, but I'm just very thankful that we did that journey together.And I would say that we were relatively successful. Why is it so? Because what I really appreciated, Werner, is your deep and broad know-how that was kind of protecting us doing wrong things because as you can imagine, when separating 2 companies when going into a spin-off, you always have to think one step ahead. What does that mean? How do we best organize ourselves that once we sail away, we are rock solid?And I think that Werner helped a lot to do the right steps to be -- to always, as I said, think one step ahead so that all in all, now after 24 months, we are in a good shape. And to end with, I know that you're very humble and modest person, also now during the last weeks and months, making sure that we hit our full year guidance. Not only on the financial side, but also on the order intake side, I think that would be a surprise if that is not coming through. So thanks again for the time together and all the best.

[Werner Volz, executive]

Thanks all of you, and take care, stay healthy. Good luck. Bye-bye.

[Andreas Wolf, executive]

Handing back to Jens, to close the meeting for today.

[Unknown Executive]

Yes. Okay. Then yes, I would like to close today's session. And of course, if there are more questions afterwards, feel free to reach out to us. And thanks to everybody for preparing this call. And of course, a big thanks to all of you for your time and your interest. And yes, take care. Goodbye. Thank you.