Full Year 2016 Continental AG Earnings Press Conference
Hanover Jun 12, 2019 (Thomson StreetEvents) — Edited Transcript of Continental AG earnings conference call or presentation Thursday, March 2, 2017 at 8:30:00am GMT
TEXT version of Transcript
================================================================================
Corporate Participants
================================================================================
* Elmar Degenhart
Continental Aktiengesellschaft – Chairman of the Executive Board & CEO
* Wolfgang Schäfer
Continental Aktiengesellschaft – CFO & Member of the Executive Board
================================================================================
Conference Call Participants
================================================================================
* Christiaan Hetzner
================================================================================
Presentation
——————————————————————————–
Operator [1]
——————————————————————————–
Good morning, and a very hearty welcome to the Continental webcast for the business — for fiscal year 2016. It’s nice to see you here. First, in particular, I would like to welcome our guests who are tuned in from Peking and Shanghai. This is the first time that this has been the case.
Here in the studio, you have our Executive Board Chairman, Elmar Degenhart; and our CFO, Wolfgang Schafer. Schafer will explain to you how business has been in 2016, and give you an outlook of the current business year — current fiscal year. Dr. Degenhart will then explain the strong transformation that the automotive industry is going through. He will present our strategy with which we are approaching this transformation process with great resolution. And after that, you’ll have the opportunity to put questions to our 2 Executive Board Members for about 45 minutes. Your questions can be entered into your browser in the window provided.
We have optimized the procedure from the previous years. You can put your questions into the browser immediately in the window provided, and all the questions which are sent in will be visible to you as usual. And at the same time, as usual, no question will remain unanswered. If the time available should not be enough to answer all your questions immediately, then you will get an answer by telephone or in writing after the webcast. And we do this — we do this either in writing or by telephone.
If you would like to put your questions to Mr. Degenhart or Mr. Schafer personally, then please use our call facility. Log in, in advance by clicking in your browser and then, we will call you back under the telephone number that you gave when you registered. We assume that you will be reachable under that number. This webcast will then be available as a recording in our media video portal after the conference. And so we start, Mr. Schafer, how do you assess the past fiscal year? And what you expect for 2017?
——————————————————————————–
Wolfgang Schäfer, Continental Aktiengesellschaft – CFO & Member of the Executive Board [2]
——————————————————————————–
Ladies and gentlemen, we have once again continued our growth in 2016. We have definitely reached all our targets for the year. We have increased our sales by 5% in organic terms, that is adjusted for exchange rate effects and changes of the scope of consolidation. This means that we have once again grown faster than the markets in which we operate.
Nominally, there was an increase of more than 3% to EUR 40.5 billion. Our EBIT was EUR 4.1 billion almost the previous year’s level, and we achieved an EBIT margin of 10.1%. In comparison, the 2015 figure was 10.5%. The adjusted EBIT of EUR 4.3 billion is only slightly lower than it was in 2015. The adjusted EBIT margin is thus once again at a very high level of 10.8%.
As you are aware, provisions for warranty cases and pending antitrust proceedings, expenses resulting from supply bottlenecks at a major supplier and increased development expenses have negatively impacted our profitability over the past year. Altogether, we’re talking about negative effects of approximately EUR 480 million. Ladies and gentlemen, please let me repeat what we already said on another occasion in October. Most of the causes of these impacts may have happened a long time ago, but they are still unacceptable to us. Meeting the highest quality standards and acting with integrity are not negotiable for us. We punish violations of these principles with absolute rigor. Our compliance mechanisms worked very well and took effect at an early stage in the most recent cases.
Story continues
Despite these detrimental effects, automotive business developed well in 2016. This was due mainly to market growth in Europe, the U.S. and China. Production of passenger cars and light commercial vehicles increased by more than 3% to around 93 million units worldwide in 2016. This means that we once again grew faster than the market, because with sales of 24.5 million, our automotive divisions recorded organic growth of 5%. We will continue to achieve above average growth in the years ahead. This is evidenced by our incoming orders. Automobile manufacturers worldwide have placed orders worth over EUR 35 billion with us, representing a year-over-year increase of more than 15%. Particularly strong growth was recorded by advanced driver assistance systems with orders rising to more than EUR 3 billion.
Orders for products and systems for hybrid and electric vehicles also increased. They were up 17% to more than EUR 1.2 billion. Greater automation, electrification and digitalization of mobility require more software. This has to affect higher R&D costs on one hand, but also generally low investment in property, plant and equipment on the other. However, higher R&D expenses for software are not a cause for concern as they hold value for the customer and the customer pays for this. This can be seen in the relationship between the gross earnings and expenses, which developed in parallel.
All in all, we do not expect the higher R&D cost to have a negative impact on the EBIT margin in the medium and long term. They are the result of a move away from mechanical elements and towards more electronics and software in vehicles.
Now let’s move on to our business with technology products made of rubber. In 2016, as in the previous year, we benefited from the weak development in some parts of the raw material markets. The positive impact from lower costs of raw materials totaled approximately EUR 150 million in the past fiscal year. However, this trend has now turned around. For the current year, we anticipate a negative impact of EUR 500 million. In the tire division, we sold a record volume of 150 million passengers car and truck tires. We thus increased our market share further worldwide.
Sales in the tire division recorded organic growth of 4.7% to EUR 10.7 billion. The adjusted EBIT margin rose once again to 21.7%. Thanks to this record result, the tire division contributes more than half of adjusted consolidated EBIT. This is an outstanding achievement.
It is also worth mentioning the acquisitions of the British company Bandvulc and of Hoosier Racing Tire in The United States with which we have enhanced our expertise in the field of ultra high-performance tires.
Sales in the ContiTech division recorded organic growth of 2.5% to EUR 5.5 billion. The adjusted return on sales of 9.7% was considerably higher than in the previous year. This is particularly pleasing in view of the persistently weak demand in the oil and mining sectors. We have also been pleased to receive the Antitrust Authority’s approval for the purchase of the Hornschuch group. This was granted just a few days ago. In line with our strategy, we are, therefore, strengthening ContiTech’s business outside the automotive industry too. More than half of Hornschuch’s sales are attributable to industrial applications such as synthetic leather for the furniture industry.
Overall, Continental has a very solid financial business. We further reduced net indebtedness by more than EUR 700 million to EUR 2.8 billion. Equity increased to EUR 14.7 billion. This is euros. This is a new record high. And it corresponds to an equity ratio of 40.7%. The same applies to consolidated net income. With a profit after taxes of EUR 2.8 billion and earnings per shares of EUR 14.01 per share, we have generated a new record high for our shareholders.
The Executive Board is, therefore, proposing to increase the dividend for the fifth time in a row. The dividend per share is to amount to EUR 4.25. This corresponds to a total payout of EUR 850 million or a dividend payout ratio of 30.3%.
Now to move on to the outlook. We intend to continue our profitable growth in 2017, of course. Although the environment is becoming more challenging in political and economic terms, the start to the year has confirmed our expectations. We currently anticipate a moderate rise in global vehicle production of 1% to just under 94 million passenger cars and light commercial vehicles. China and Europe, in particular, as well as stabilizing markets in Brazil and Russia, will more than compensate for the slight decline in growth on the American market.
For fiscal 2017, we expect an increase in sales of 6% to more than EUR 43 billion. We also expect to achieve an adjusted EBIT margin of over 10.5% once again.
Ladies and gentlemen, in summary, this all means nothing else than that we are aiming to achieve new record figures in a challenging environment.
And with that, I hand over to Elmar Degenhart.
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [3]
——————————————————————————–
Thank you, Wolfgang. In top shape financially and a technical pioneer, this is how Continental is presenting itself to you today. And we need to be in such a top condition as we are observing the developments around us with concern. Protectionism, populism and the United Kingdom’s exit from the EU, political and economic uncertainty is growing.
We have to expect major turbulences without full warning on our markets. As a result, one thing above all counts for us and that is speed. Accelerating fast and braking hard and safely when necessary. This is our response to volatility and uncertainty. At the same time, the automotive industry is undergoing a fundamental transformation, which is no longer leaving even mature technologies and proven business models unaffected. The inner workings of the car as we know it will be made up completely differently in 10 to 15 years’ time. Electrification, automation and digitalization are bringing about the biggest transformation process in the more than 130-year history of the automobile.
We are tackling this radical change vigorously and purposefully, creating value sustainably with pioneering technologies and new business models. In the future, cars will, of course, be purely electrically powered, fully connected and autonomously driven, but that is not the only change that is currently taking place. The internal combustion engine actually still has its peak ahead of it. Until then, we can make it even more efficient by means of partial electrification, for example, with our 48-volt system.
We do not expect to see a gradual decrease in direct injection and diesel engines until after 2025. Our persistence will pay off. We strongly believe in fully electric driving. For this reason, we have invested a total of more than EUR 1 billion over the past years and are currently working on more than 50 production projects worldwide.
With our components and systems for electric cars, we will generate higher value than with solutions for internal combustion engine drive systems. We all know what is currently holding the car — the electric car back from a breakthrough, low range and high acquisition cost along with a lack of convenience. I’m convinced that a leap forward in battery cell technology is required to help electric mobility achieve a breakthrough.
We intend to make systematic use of the new growth prospects for electric mobility. For this reason, in October last year, we announced a strategic review of our Powertrain division. This should also result amongst other things and our business here being more firmly focused on the new opportunities.
We hope you will understand that we do not wish to make any further comments or statements on this at present. We will provide more details in connection with the announcement of our figures for the first quarter.
We are already growing rapidly with products and systems for assisted and automated driving. In the past fiscal year, our sales with advanced driver assistance systems amounted to EUR 1.2 billion. We anticipate sales of well over EUR 2 billion in the year 2020. In this way, we are helping to make accidents a thing of the past. This is no longer just a utopian vision. And for this reason, we have already invested more than EUR 1 billion in research and development for assisted and automated driving. And over the years to come, we will further increase our expenditure on this.
Sensor technology is one good example of our rapid growth. We want to bring automated driving onto the road safely. To achieve this, vehicles must be able to detect the surroundings reliably. This is done using systems that complement and corroborate one another.
Sharpening the senses of vehicles in this way is an important element in automated driving. Flash LIDAR is a pioneering laser technology in this area. It works in a similar way to a series of flash photos, this is a highly efficient method. We use it to construct an extremely accurate and distortion-free map of the surroundings. This particularly applies to situations that were previously challenging for sensors, such as driving in fog or snow or going through tunnels. Our laser technology will be ready for production by 2020.
Alongside electrification and automation, digitalization is the third key technology that will define the car of the future. The car of the future will be a computer on wheels. Because it will have to cope with the huge amount of unprocessed data. The volume corresponds to more than 4 full length feature films in high resolution, and the car of the future will have to process this volume every second. This includes important road data that will be picked up by our tire sensors.
Reduced to the essentials, we will be making data packages available to third parties. To do so, we’re extending our eHorizon to cloud service, a highly precise map of the vehicle surroundings, enabling exact navigation.
Our eHorizon is already successful in standard production. Today, it is not yet connected to the internet. Yet, even in this current form, it makes a significant contribution to saving fuel. 200,000 trucks equipped with this technology have reduced their diesel consumption by more than 390 million liters since 2012. This corresponds to a saving of almost EUR 500 million. CO2 emissions from trucks could thus be reduced by over 1 million metric ton.
In the future, more and more sensor data from vehicles will be available in the cloud. This way, our eHorizon becomes dynamic. Important features of the route will be updated virtually in realtime. Furthermore, our growing road database supplies information pertaining to the current traffic infrastructure. For instance, information on new road signs, changed traffic light phases or road closures. With current data from eHorizon and the road database, we support anticipatory driving. The result will be added safety and even better fuel economy.
Vehicles are thus becoming part of the internet. This gives rise to new growth potential for us, which go beyond the traditional business with components. We’re already using services to increase the impact of our products and functions. Take tachographs for example, a key component of modern truck safety. We have now created a whole ecosystem of electronic services in this area. In this way, we keep millions of vehicles worldwide constantly on the move. Fleet managers thus save time and money. Furthermore, optimized fleets reduce emissions.
With the acquisition of Zonar, our ecosystem has grown by another 600,000 vehicles in the United States. This includes school buses as well as transportation of hazardous goods. For example, parents can use our services to track whether their children have arrived safely at school by bus.
Increasing digitalization allows for completely new mobility services. This includes keyless access systems for rental vehicles. A new multibillion market is emerging that we are tapping systematically with our intelligent transportation systems business unit in Silicon Valley.
It is clear that we still earn most of our money with tangible products today. However, we will increasingly earn it with helpful intangible functions. By 2020, we will generate sales of more than EUR 50 billion with our successful business with tires, industrial products and automotive electronics. In the time up to then, this will increasingly be supplemented by income from services. We once grew with a single horsepower. Now we are growing with billions of bits and bytes. Continental is a mobility company that is currently transforming into one of the leading technology and service companies. We’re looking forward to this just as we are now looking forward to taking your questions.
================================================================================
Questions and Answers
——————————————————————————–
Unidentified Company Representative, [1]
——————————————————————————–
Thank you, Mr. Degenhart. We’ve now reached the question-and-answer round. We’ve already got a few questions. I suggest we start with financial questions, and we have Mr. Schwartz of Reuters on the line.
——————————————————————————–
Unidentified Analyst, [2]
——————————————————————————–
With many questions have already been asked online, there are a lot of things on the channel, and so I would have liked, of course, to be able to be with you directly and sitting opposite you, but this is the way you do it now. Now 2 questions if you would allow me. About Hornschuch, we’ve heard that the acquisition was completed yesterday. Can you explain how this affects the sales forecast? Or how you’ve included in the sales forecasts? And whether that makes more — whether you can make a clear formulation of the sales forecasts?
And then the second is the question of electromobility, which you’ve talked about the transformation of mobility several times. The high investments do not burden the margin, you have explained once again, but what does it mean as far as staffing is concerned? Human resources, is there any concrete expressions of this that you have to think about new staffing, new human resources? Do you need more — have you got enough specialists, enough trained people? Or do you need to get any more?
——————————————————————————–
Unidentified Company Representative, [3]
——————————————————————————–
Of course, I would have liked to greet you personally as well. The financial questions, I’d pass over to Mr. Schafer and then Hornschuch, and Mr. Degenhart will talk about electromobility.
——————————————————————————–
Wolfgang Schäfer, Continental Aktiengesellschaft – CFO & Member of the Executive Board [4]
——————————————————————————–
Yes, Hornschuch very briefly has been taken account of in our sales forecast because we assume that the closing — we have assumed that the closing would take place this month — closing of the acquisition.
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [5]
——————————————————————————–
As far as electromobility is concerned, first of all, we are expecting the internal combustion technology will remain increasing moderately in volume until after 2025. After 2030, probably, there will be a flattening off of the curve with new technologies as far as the volume is concerned. It means that an established industry has enough time to adapt itself to this transformation process of electromobility.
And as far as capacity for development is concerned, the shifts are taking place already today, and we are focusing with our resources increasingly on the topic of electromobility. On the development side, we see no employment risk for our staff. In production, you are quite right. There is a tendency now to have less added value created in the form of production processes, less staff will be required. And we believe that — we can only speak for ourselves in this case, that this transformation process will also — we can also carry it out in such a way that no hard cases, no dismissals occur among our employees. What will be the case certainly is that for the future, more highly qualified staff will be required also in production than is the case for internal combustion technology at the moment. And that means for a company like Continental, but also for the whole of the industry, that we have to invest in training and in further training of our staff including in our factories — in our own factories, so we have to do this in good time.
——————————————————————————–
Unidentified Company Representative, [6]
——————————————————————————–
Question from Mr. Cotsen [ph] from India Radio ph . I’ll go on with him and then with Mr. Song Fi ph . Electromobility is the question that Mr. Cotsen ph has also asked.
You are expecting a breakthrough in electromobility not before 2025, how high will the investments be? And how will this be shown positively in the balance sheet?
——————————————————————————–
Unidentified Company Representative, [7]
——————————————————————————–
In the last 5 years, we have had more than 1 — invested more than EUR 1 billion in the whole complex of electromobility. And as the volumes are increasing, the number of products is increasing, also the expense — the cost of investments in electromobility will also increase in the next 5 years. Over the next 5 years, the focus will be on the hybrid side. And after 2020, this will shift more on to the side of purely electrically driven cars. The whole scenario stands to pose with a question as to when a drive will be available, which meets not only the technological requirements, but also the commercial and economic requirements? And those are then where around, I think, the time 2025, I see this as a realistic forecast. By then, we will probably have the technology leap from the present technology probably for so-called tripcapit [ph] technology, that is the use of electrolytes from liquid to solid.
——————————————————————————–
Unidentified Company Representative, [8]
——————————————————————————–
Mr. Song Fi [ph] asked about the automated and assistance systems. Where will they be installed first? In commercial vehicles or in passenger cars?
——————————————————————————–
Unidentified Company Representative, [9]
——————————————————————————–
We think that the development of car truck will be more or less in parallel with each other. The whole thing that depends upon the legal situation, the legal framework, which both for — which will be created at the same time for both commercial vehicles and for passenger cars. In view of the complexity of driving scenarios, we see 2 applications. First of all, on the roads, with high probability, first in the low-speed area. So parking maneuvers with speeds of under 15 kilometers per hour and which can therefore be dealt with relatively easily. And the other question on the motorway driving, the American freeways for example, where there are no crossroads and no traffic lights to be dealt with. And we think that up to 2020, in this area, we will reach scenarios in which longer journeys also on the motorways on the highways can be carried out on — in a highly automated manner.
——————————————————————————–
Unidentified Company Representative, [10]
——————————————————————————–
So question out from Alfton Romania [ph] from Tier Madea ph . We know how Continental is putting its effort into automatic driving or electromobility. Is there a division of areas here?
——————————————————————————–
Unidentified Company Representative, [11]
——————————————————————————–
I can’t answer this really directly very sharply. Automated driving — to realize automated driving, we need developers from various areas to bring them together comprehensively. For example, the question of electronics and of software functioning. What we are putting into automated driving and into digitalization, will require high investments than electromobility because there we have about 1,000 developers. I would say that in the automated driving area and in the area of digitalization, we will soon be the area having 5,000 to 8,000 developers working on it.
——————————————————————————–
Unidentified Company Representative, [12]
——————————————————————————–
Then let’s next have Mr. Cook. He is on the phone. Good morning, Mr. Cook. What’s your question?
——————————————————————————–
Unidentified Analyst, [13]
——————————————————————————–
Mr. Degenhart, we are living in a time of uncertainty worldwide and you are managing an international group. What do you see is the major impact from the environment and surrounding conditions? You spoke about the volatility of raw material prices and the weakness in the oil sector. Or is it rather the new President in the United States or is it the topic of digitalization in other segments? Is there one single source of uncertainty, which you perceive to be the most important one and the most crucial one?
And on alternative drives, which are gaining importance, electricity, plug-in as a supplier, the suppliers are well positioned, well based, but what happens if the fuel cell takes over at the end of the day?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [14]
——————————————————————————–
Well, let’s have the final question first. You inquired into the fuel cell. Our experts as well as manufacturers and experts are of a single opinion, of a single mind in that there is a future to the fuel cell, but it’s very unlikely to happen before the year 2030. With view to technology and also with view to commercial requirements, it will not likely be put to its purpose before the year 2030. When it will likely stop playing role? No less. Of course, we are looking into this in a rather moderate scope, and we are studying to what extent current competencies could also be deployed later. In that time, I just mentioned when the fuel cell comes in to play a role. We are working with sensors, electronic systems, compressors, valves, components, et cetera, which will also continue to play a role — can continue to play a role in case of a fuel cell drive system. And we are foresighted enough to adapt them even to date at least the prototypes. The most pivotal point, however, is not so much technology side of things, but the economic side of things, the commercial aspect, fuel cell technology, that limit is simply far too expensive.
Your second question regarding the current risks and how we weigh them? Technology development is our playing field, that’s our pitch, that’s what we can influence. However, other things cannot be influenced by us such as the political development and the framework conditions as they are defined by our politicians. And if you look at the situation in Europe this year, there are elections coming up this month in the Netherlands, then April and May, there are the elections in France, probably in Italy in summer. Then, we are having elections — general elections in Germany in late summer. Whatever may be the outcome of all those elections — in France, for example, we have not — we don’t know who is going to take over government? And who will redefine the rules of the games for — not only for France, but also for Europe and for industry in Europe? We consider that to be the major risk for the economic situation in Europe and worldwide.
As to forward conditions in America, that is far from clear. We have heard intentions being voiced, but so far, no concrete resolutions have been passed. It remains to be seen what concrete resolutions may be introduced and then, we will find a way of how to best deal with them and what — how to make something of that, but we have to remain flexible and grow even more flexible. Flexibility is really the beginning and the end of it all. Being flexible, being agile, being responsive is a necessity. We need to respond to changing circumstances quickly. That’s crucial for the future success of a company such as Continental.
Before we have Mr. Miskin’s question, we’ll give you a short break and we have something that perhaps Mr. Schafer can answer. Ms. (inaudible). What’s the proportion of sales and profit between rubber and automotive.
——————————————————————————–
Unidentified Company Representative, [15]
——————————————————————————–
In sales, EUR 24.5 million sales in automotive, EUR 16.1 million in rubber, adjusted EBIT 6.7% return in automotive, say 17.8% [ph] in rubber, but you have to bear in mind, that EUR 480 million, which I mentioned earlier as one-time effect of third quarter last year because of the warranty cases and the antitrust proceedings are completely to be allocated to the automotive segment.
——————————————————————————–
Unidentified Company Representative, [16]
——————————————————————————–
Mr. Bradley from Bloomberg [ph] who will like to know what the development of margins is going to be, especially with view to raw material prices? And then we have another question on Powertrain and whether you are pondering sales? Or whether you can exclude sales of that division? Let’s hear something about the margins first.
——————————————————————————–
Wolfgang Schäfer, Continental Aktiengesellschaft – CFO & Member of the Executive Board [17]
——————————————————————————–
Tire margins are suffering in 2017, impacted by increasing raw material costs. As I said, we had a tailwind of EUR 150 million last year. We’ll likely to have headwind in the order of magnitude of EUR 500 million in 2017. Of course, we have included those pricing — those increased costs reflected by increased prices, and we will continue to do that, but it takes some time, so margin in the tire division will see a dip.
And Powertrain, Mr. Degenhart?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [18]
——————————————————————————–
We ask you for a little patience regarding our announcement. We would not feel free to make a statement or an announcement on this as yet. But all our endeavors are focused on an even better identification of market opportunities and potentials.
——————————————————————————–
Unidentified Company Representative, [19]
——————————————————————————–
So with that, we come to Mr. Miskin’s question from the FAZ, Frankfurter Allgemeine. You talk about mobility services for tomorrow, can you — the thing of tomorrow. Can you give us some concrete examples of what Continental is working on or intending to work on?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [20]
——————————————————————————–
As we are already using our mobile telephone to open and to close our cars — to lock our cars, in that area, we have many projects. For car rental companies for example, this is a big thing and they can use update software without having to touch the car. Here, for this too, we have some orders already in our portfolio, which we will realize — want to realize in the next 2 years. We want to help fleet operators to manage their fleets and to optimize the management of the fleets relate — in regard to the cost situation. We will in the future use our tire pressure sensors not only to sell hardware, but also to offer the whole service — whole range of services concerning with vehicle services, repair cycles, maintenance cycles to define these cycles and inform the customer about them. These are all done with the end of — with the help of software at the end of the day. Further example, (inaudible) lorry tires — truck tires, today, we are already in the position, and we do also to sell the truck tire not only merely as hardware, but to make it into a service package. We are then paid for the number of kilometers that the tires are able to cover when we — rather than simply selling the tire. Now we have tachograph, which ensure the safety of the vehicle as well not only the measuring instrument, but also solutions that allow supervision and a kind of electronic log — journey logbook on the use of the vehicle. We also have the theme of tires and databases — road databases. In the future, we will have the topography of the street, of the road and walls of the vehicle made available electronically. There is another basic subject is that the street furniture, the road signs, the traffic lights, and so on, the roadwork sites, we will have these available online up to date. This is also a service that we were going to make available. Just to give us some examples of these services. I could go on and on. The universe is much greater though. This fits to the question from (inaudible) and then I would like to go on after that with automotive — automatic services.
We have a question on safety. I think this fits very well to the safety that you’ve just said about the services, the solutions that you’re able to offer. Data security is the question.
Only if the user or the driver of the vehicle has confidence that the data are transmitted by secure routes and they can’t be stolen from the car, will he or she use services at all.
In Europe, we have an initiative with the vehicle manufacturers and suppliers. And we have agreed that the last mile to the vehicle is the responsibility of — has to be the responsibility of the vehicle manufacturer, otherwise the vehicle manufacturer would not be in a position to assure the security of data access. This is a development that we support from the component suppliers in the industry. We will, of course, use the best technologies that are available in the application field nowadays in order to ensure safe access or secure access to the car.
——————————————————————————–
Unidentified Company Representative, [21]
——————————————————————————–
Go on with tires, Mr. Schafer. The question of Mr. Stevens and Mr. Feng Li [ph] and Mr. Madea ph , all 3 want to know how about the burden on the results from tires and possible price increases. And also about products of summer and winter. Competitors have announced price increases, what is your situation?
——————————————————————————–
Wolfgang Schäfer, Continental Aktiengesellschaft – CFO & Member of the Executive Board [22]
——————————————————————————–
Last year, as I said before, we had the wind behind us in the raw material market, but we now see that raw material prices are rising. And so in the fourth quarter, in some markets, we increased our prices of last services [ph]. And we have now also decided in further markets, in the near future, we will also introduce price increases. The EUR 500 million burden on — of extra cost that we have, we as a company, of course, have to pass on and it will be — it will represent the price increase. This is independent of we have summer and winter. This applies both to summer and to winter tires.
So now Mr. Hetzner of Automotive News, Europe.
——————————————————————————–
Christiaan Hetzner, [23]
——————————————————————————–
I have a question about roads and about marketing and consolidation as we have seen that takeover — sorry, I didn’t get the name of the company. The question of Peugeot taking over Opel. Can you tell us something about the effects that this has on your business? Because ultimately, this reorganization will be brought about, this new constellation with not only with Opel, but PSA? What — are there any negative effects? Or does this worry you at all?
My second question about — as far as Continental is supplying industry, component industry is concerned, do you see further opportunities for you to be active? In this year EUR 23 million sales, you are so well positioned that you don’t think any further expansion is necessary?
And another question relating to Brexit. The question is that whether that the industry doesn’t have a comp future as far as component suppliers from the island are concerned, from the British Isles? What about further investments in order to help the British-rich [ph] government to see a stronger future for the automotive industry outside the European union.
And then what I’m not quite clear about as far as mobility service is concerned, are you working together with the manufacturers — the car manufacturers? The examples that you have mentioned seemed to be very diverse. Sometimes with the manufacturers, sometimes with the component suppliers, sometimes with the end-user, it’s not quite clear to who is responsible for these things?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [24]
——————————————————————————–
So effects of the Opel takeover. To be honest, we don’t see any great impact on us. There are opportunities or maybe opportunities from the platforms — technology platforms, product platforms can be standardized. And through that, higher and more interesting volumes can be created for suppliers, particularly PSA and Opel, there is — a procurement cooperation between them already for some years has existed. And so the synergy effects from the procurement will be relatively small. Renault Nissan is a cooperation that’s been going on for years already, and we have positive events experienced with that. Mitsubishi is now coming to it as well, a Japanese company, which is very dependent on Japanese component suppliers. Here too, we’re seeing the relationship to Renault more opportunities than risks.
——————————————————————————–
Christiaan Hetzner, [25]
——————————————————————————–
So acquisition in the component suppliers area, do you see opportunities there at Continental?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [26]
——————————————————————————–
Basically, we are — of course, from our financial position, we are in a such a good position that we are able to undertake acquisitions as we showed last year and the previous years as well. Of course, we are always looking any possible strategic developments, improvements if we can add to our group as we have done over the last 10 years and longer to round off our activities.
——————————————————————————–
Christiaan Hetzner, [27]
——————————————————————————–
Investments in Great Britain after Brexit and the consequences?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [28]
——————————————————————————–
Brexit all together and the United Kingdom, we’ve got less than 4% of our sales — of our consolidated sales, so the market is important. But no particularly great importance or significance in relation to other markets that we are active in. So to that extent, the Brexit is first of all for us whatever the decision maybe in the end will not have any enormous influence on our figures. It’s still too early for us to say whether what is negotiated afterwards and what results from it and the effect on exchange rates and possible costs and so on. Whether this will be so attractive that we may move production more to the United Kingdom than we have at the moment. We’re not discussing this at the moment. I don’t want to exclude it if such a situation then should arise.
——————————————————————————–
Christiaan Hetzner, [29]
——————————————————————————–
Mobility services, Mr. Degenhart, competitors and customers relationships, are you working more closely with other companies together or what?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [30]
——————————————————————————–
This is newly defined and here too, we see no very great problems. There are areas where we work separately from the interest of the car manufacturers. There are also areas where there may be overlapping, but we are very relaxed about this. That the best solutions will make their way through in the market in the end.
——————————————————————————–
Unidentified Company Representative, [31]
——————————————————————————–
Now we have a question by Mr. Miskin [ph] on mobility services. Can you give us a number in order of magnitude of what level the services could reach? Would that be a significant pillar of Continental?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [32]
——————————————————————————–
Yes. We can answer that question with a clear, yes. The question regarding figures — precise figures. We’ll probably be able to provide some more concrete figures on the — on the occasion of the AGM shortly. So I’ll have to ask you for some patience.
——————————————————————————–
Unidentified Company Representative, [33]
——————————————————————————–
Ms. Lee is asking on services and digitization. It will mean a shift of focus and she would like to know, could you give us examples where Continental will strengthen their technologies or where some will lose relevance?
——————————————————————————–
Unidentified Company Representative, [34]
——————————————————————————–
Well, first of all, it is true to make that distinction between servitization and mobility servitization means the services are provided, which accomplish and improve our existing portfolio, highlighting their functionalities and help us protect our current business model. For example, the conveyor belts are now enhanced by services. And with trucks, for example, we will not simply sell conveyor belt anymore, but transported tonnage on these belts, so the availability, the reliability of belt, including services, including maintenance, including replacement of parts of components, mobility services as a separate thing means that we are — does not mean that we are selling hardware with add-on service functions, but just services. So the product is no hardware, but just software. That’s why we call that software-based services. The trend towards the sales of software-based services or mobility services calls for a different business model other than the one that we have known for decades, which was always hardware based. So we are convinced that a separate team will have to look into this, which is why the business unit international transportation system is not located in Germany or in Detroit, but in the Silicon Valley. They are dealing with different development processes, different procedures. They have a different target group to deal with. And it will take us undoubtedly a while to get such a new business model established.
——————————————————————————–
Unidentified Company Representative, [35]
——————————————————————————–
This fits in with the question of Mr. (inaudible) from Shanghai. There is a strong focus on software development in the market these days and a balance of investments as it used to be the case with Continental in the past. Does that have to change?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [36]
——————————————————————————–
Well, there’s the technical side of things and the commercial side of things. Wolfgang, perhaps you could speak about the latter. I will speak about the former. Technically speaking, currently, we have approximately 14,000 engineers with a software development background employed in Continental. In total, about 31,000 engineers work for Continental. So roughly half of them have a software developers background. And that proportion, that share will grow in the years to come. And of course, it makes a difference whether you increasingly develop software functions and only software functions even in this segment of mobility services or whether most of what you do is linked to the development of new hardware. Expenditure for automated driving and for connecting a vehicle to a communication infrastructure via the internet via the cloud will be growing with combining different systems on the vehicle — in the vehicle, electronically speaking and link them to electronic platforms, thereby implementing third-party software either by the car manufacturer or by other third-party manufacturers as micro components on Continental platforms. And we ensure that the different software packages are interconnected smoothly, which means that there is an increased effort and expenditure for software. What does that mean in terms of money, maybe Wolfgang can explain this?
——————————————————————————–
Wolfgang Schäfer, Continental Aktiengesellschaft – CFO & Member of the Executive Board [37]
——————————————————————————–
Well, if you think about software development because it means an added value for the customer, then the customer is also willing to pay for that. And that’s why additional software expenditure. It does exist? Yes, but it will also generate additional sales, thereby making a perfectly reasonable business model, that’s what we’re having at the moment with software expenditure and let’s not forget, that software, once it’s rolled out to the market, launched to the market, does not call for additional production units. If you ship software, you have the development costs, yes, but investments in factory and factory operation costs are reduced. And this will pay off eventually for the company so that you have a reasonable and well-balanced business model.
——————————————————————————–
Unidentified Analyst, [38]
——————————————————————————–
So the question, ultimately FAZ pass effects to this about the expense of increased cost for R&D? And the question will concretely about the service sales whether — about the rumors that Conti is applying to be the operator of toll collect?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [39]
——————————————————————————–
The question about expenses on development, were they relating to the automotive group or — which is the most important part. They were around 10% or rather less than 10% in 2016 and will be about the same level in 2017. Say, they are increasing in line with sales. So the farther purchases, acquisitions for 2017. And these rumors, now please I would like to — ask you to understand that we do not comment on rumors, and therefore, I think that’s something I don’t want to say anything about. The subject of acquisitions is that we are known for the fact that we strengthen our business by acquisitions more than 100 over the last 10 to 15 years. We — in 2016, we had several acquisitions that we mentioned, Zonar, Bandvulc, the fact that in 2017, we will stop doing this is unlikely. They have a lot of ideas. The question is are the background situation or the framework conditions positive or not?
——————————————————————————–
Unidentified Analyst, [40]
——————————————————————————–
(inaudible) question about the EUR 480 million negative that you mentioned in October. Can you explain the problems and the extent of these problems and how much is due to antitrust questions?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [41]
——————————————————————————–
I can’t really break down these figures. These are all subjects which are still being negotiated. And so I ask you to understand that we can’t give a real exact breakdown. The warranty subject of some products that we had which in the case of the third quarter, these became more concrete in the third quarter. So I can’t really say more concretely that we had to make a provision for these in the third quarter of last year.
——————————————————————————–
Unidentified Company Representative, [42]
——————————————————————————–
Question from Shanghai who wants to know whether you can give any particular information about China? Concrete figures.
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [43]
——————————————————————————–
We don’t report concrete figures by countries, but we see the Chinese market in 2017 after very strong in 2016, the car production will increase again in 2017, we think by 4% growth or perhaps even a bit more. And of course, we want to participate in this market growth, and our aim is also to grow — always to grow faster than the market. And so we can hope to gain a growth of 3% or more.
——————————————————————————–
Unidentified Company Representative, [44]
——————————————————————————–
So coming to you, Mr. Schafer, on (inaudible) question, how do you want to attain this EUR 43 billion turnover in sales in 2017?
——————————————————————————–
Wolfgang Schäfer, Continental Aktiengesellschaft – CFO & Member of the Executive Board [45]
——————————————————————————–
First of all, when you look at the sales of this year, we expect rather larger growth in automotive and rather less growth in the tire division this year. In 2017, we expect EUR 26 billion in automotive and EUR 17 billion in the tires.
——————————————————————————–
Unidentified Analyst, [46]
——————————————————————————–
This is Zhang [ph] from China from Automotive Review. We have just been talking about the American market, and we like to know whether we will plan to continue to expand tire production in the USA and the possible burdens or impact of import duties?
——————————————————————————–
Elmar Degenhart, Continental Aktiengesellschaft – Chairman of the Executive Board & CEO [47]
——————————————————————————–
Yes. So as it was — we mentioned, concrete decisions have not yet been made by the American government, so there is no reason as yet to take any decisions from our side for the USA or Mexico or to question decisions that have been made or to change than the entire whole of the industry is thinking — thinks and acts in the long term on the basis of platform cycles. And we are not in a position, especially investments — to change investment projects within a short time frame of 4 to 5 years. And therefore, we are remaining relaxed about this and we’ll wait to see what actually happens in concrete terms.
That’s all the questions we have at the moment. Thank you all for your interest and for the number of — numerous questions that you have brought, you have raised, particularly the colleagues in China, from other countries who are also switched in. The business report will be available on the 23rd of March and there you will find more questions and more details about the business development. We look forward to seeing each other, again, particularly on the occasion of our Annual General Meeting on 28th of April here in Hanover. So thank you very much for all the participants from Shanghai and Beijing. So we wish you all the best and every success. And hope to see and hear from you again soon. Thank you.