Conference Transcript - AMVOY 2026-11-05

Speaker 5

Yeah, good morning, everybody. This is Lutz Ackermann speaking. On behalf of Amovio SE, I wish you a very warm welcome to today's conference call on the Q3 result. All the documents for this call you can find on the IR section of our homepage, and they are there since 7 a.m. this morning. With me on the call today is our CEO, Philipp von Hirscheid, and for the very first time, Klaus Bauer, our head of finance. Klaus joined us literally this Monday, so very happy to have him here. And before we go into the overview of the Q3 and the nine-month period, I want to hand over to Klaus for a very short introduction.

Klaus Bauer, CFO

Yeah, Lutz, thank you very much, and a warm welcome also from my side. I think we can save some time. You have a nice light here with a nice photograph. I'm looking a little older now than on the photo, but other than that, most of you should still remember and know me from my time as Schaeffler CFO. The only change in my resume is the headline. I ended my CFO career. I thought I ended my CFO career at Scheffler one year ago.

Speaker 6

I'm at the Almovio supervisory board.

Klaus Bauer, CFO

Now I'm sitting here as the interim CFO. I'm excited. It's not according to my life planning, I have to be honest, but I'm still very excited from the supervisory board. I know the company, obviously, to some extent, and I am very aware of the challenges of the automotive industry, also from my prior career, but especially also Amovio from my supervisory board activity. And I'm very excited to tackle the challenges together with Philip and our colleagues. And I'm absolutely convinced that we are in a position that can make us a winner in the segments that we are competing. And again, thank you for having me. And I'm looking forward to the discussions with all of you.

Speaker 5

Yeah, Klaus, thank you very much for introducing yourself. I can only say, although he's literally very short with us, I mean, we have already exchanged a lot in the supervisory board, and we are, as an executive board team, are very happy to have such an industry veteran with us who knows the business, who knows the challenges, who actually Yeah, needed just a few seconds to immediately dive into our challenges and opportunities which are lying ahead of us. And we had already the last days very fruitful discussions which are going to help our Movio and its entire team to move forward as fast as we have been working on acceleration over the last years and is going to help us to accelerate even these accelerations. Yeah, you have seen the presentation already, which has been uploaded. We have recorded in the first nine months now 12.6 billion euro sales. Which is a consequence of a challenging market environment. We do see volume and price pressure in the market we are needing to deal with, which we have been managing so far quite okay. We have seen that the European market, the local Chinese market, is down compared to last year, and as we are quite strong there, we have suffered, and they are a bit specifically also in the third quarter, but we are quite confident that this will change within the next years to come, because what we do is we focus on value creation. You will see during the course of today's presentation what we did and how much we live that, meanwhile. And you can see that also in our results. With close to 300 million adjusted EBIT, you should always remember in all our figures, specifically for the nine-month results, we do have the BMW settlement in. And although going down, we have normalized by BMW made again, I think so quite significant step forward. The BMW settlement has also had its impacts on the normalized free cash flow after nine months, as well as we have, and that's something which we discussed already for quite some time. We do have a challenging situation in the overall semiconductor market, specifically on the semiconductor side, and where we have decided to selectively... They built up some inventory, and that has, of course, a drag on our free cash flow, but we are confident, and you will see at the end, that we reiterate our free cash flow guidance for normalized free cash flow for year-end, and that, as always, the fourth quarter of our company is the strongest in terms of overall EBIT and of overall cash flow generation. Talking about For value creation, one thing we need to say that self-help works. We have, again, made significant steps forward to become a more efficient company. We have executed on the R&D program. We have executed on our divestment program of our production footprint. We have completed the sale of the Michelin plant in Belgium. We have also announced that we are going to sell. Our business in Czech, which is dealing with washer and cleaning systems. We have closed a divestment of a share in supply on, and we have then also reviewed our business area user experience, where, and I will come to that in much more detail, we decided to maintain user experience within the Ormovio family because we are convinced. That UX is creating most value while being kept by us, while adding it and even more integrating it into our overall system offer, and that through our technology leadership and the job the team already did while significantly improving the overall result, we are going to have a very Value-creating asset going forward. What we also have seen, we have always discussing our auto intake. You will see that we have made a significant step forward. We have also, again, managed to get a new partnership for the localization of Chinese OEMs in Europe with Cherry during the Paris Motor Show. And we have, in our safety and motion area, not only gotten awards for new products, new technologies, we have also supported VW in its world's record attempt, finally, and successful attempt with the Mission Efficiency Concept car. So you see, we do make a lot of progress in all our... There are different strategic ankles. Talking about strategic angles, you all know that we are together with Aurora developing the future of commercial trucking and preparing Aurora and us for making trucking autonomously driven by end of next year. And Aurora had this Capital Market Day where we supported and where new KPIs have been launched and also independent assessment rank Aurora, meanwhile, as the leading level four trucking player, which you can see. And that's, I think, the important part for a technology company and for AI-driven is that the validation time for new routes have been significantly reducing. No, I mean, the first one took basically six years, and now the 12, 14 they're currently working on has been validated within six weeks. And the next step is to go down now to six days. I'm not there yet, but I mean, you see the constant improvement in this. And that shows the availability of scaling these services throughout the entire United States, but then also maybe later throughout the globe. So the target for this year is to, and this year is only six weeks left, is to have 1,000 driverless trucks been assembled and on the road. And then in 2030, more than 30,000 trucks should drive driverless around in the United States. This has also convinced another customer. Charter Logistics has been named as a new potential customer, or not potential, a new customer of Aurora on top of the Hirschbach order they've gotten already in the beginning of the year. So all this is working very fine and according to our plan. We are also advancing. We have our validation center in Ingolstadt ready. We are already validating the major part of all our hardware, which we produce. We have, meanwhile, Our production significantly increased, and we do as well our testing, and we are currently working with the OEMs, providing then the truck of how to integrate our systems into their serial production. So all IP, which we are generating here, I mean, it's creating barriers to entry from our point of view. They're not easy to copy our hardware solutions. We have the redundant fallback system. So we do create a very distinct business model, which we are safeguarding for future. I have already mentioned safety in motion, a second business area where we have, again, three proof points showing that we win traction there. We have with the Chinese OEM, and you see there as well, that the first series award for distributed brake systems we do in China shows on the one hand side our strengths in China, shows on the other hand the technology ability and willingness to adopt in China with the Chinese OEMs. We won the first project. We have extended our long-standing relationship with Cherry, where we worked for more than 25 years with Cherry already in China, also extended into Europe, where we have gotten the first nomination, and we expect to have significant more products. To be nominated by Cherry for the first local produced car in Europe. And we are still working, of course, with our very strong European and German customers here. In this case, we wanted to highlight one, what we did with VW for the mission efficiency, which shows we are well prepared for automated driving in also in the PESCA side from a braking point of view. As well as for electrical cars, so something where we are very proud of being at the forefront of technology development. You might remember that we always said, why do we review our partnership or our stakes in user experience? You always said, this is not so much software integrated, not so much software heavy. We always said, we earn our money with the combination of software and hardware. And we said in 2023, there's a lot of capex in front of us on user experience. And that's why we review of whether we want to keep user experience. Then we went into our spin-off, and we stopped the sales process. And the last year, we reviewed up and down, back and forth. What do we do with user experience? And one thing is and remains very clear. We are here as a management team to create value for our stakeholders. And we do see that value creation has best been done while keeping user experience within our group of companies. You can on the one hand side see that the turnaround has stabilized. On the other hand, you see that we have a company which is fully invested now, end of this year, so in six weeks, we have 100% best cost country production share. We do see that the return on capital employed is going to go significantly up. So, we do see from a financial point of view a very, very valuable part which we want to keep. And if we look into the synergies, we meanwhile win business out of the combination of user experience and, for example, architecture network solutions in China, because we are capable of building systems. You can also think about, I mean, what do we do? We do, in our ACM area, we have near-field and long-field radars. We have cameras. We have sensors, which all need to be displayed in the car. Information needs to be given to the driver or, in the future, to the one sitting in the car. And that is best been displayed by displays which we produce. And out of that combination, we do see a lot of chances to move forward. And from a technology point of view, we are the ones driving innovation in that area and in that industry. So we are very much convinced that we are well positioned in this area. And if we think about the potential investor that the Investor Accelerator Act might come into play in Europe, we also do have a great chance to profit here on that side. And that we are profiting from what we do technology-wise, you can see also in our order. I mean, of course, we have managed to get BMW, but you see here specifically the architecture network solutions, where we not only do have a very profitable business unit already, and where you've seen we are expanding. Absolute and relative profitability in the ongoing business, you also see we are very successful in gaining new orders. We are, and that's what we always said, we are a powerhouse for the global automotive market in terms of architectures, of electronic architectures. And that's where we have seen a significant increase. In orders. And where we also do see, also upcoming, a lot of interest of our customers to work with us in that area. And all the rest did also very, very nice, very fine. So we do see that what we always said, the first half was mainly due to the fact that companies are still waiting for handing out awards. This is not going to come. We expect something similar then in Q4. And what's also nice, what you see on the right-hand side, the regional split. We get a much more diversified portfolio. You know, we are today 50% basically European sales, and we are over-indexed in China, which also shows in a very competitive market we are able to win business. And the rest of the world is mainly the rest of Asia, actually. And you see that we are basically having... 35% in Asia, meanwhile, 40% in Europe, and then the rest in North America, so a much more balanced portfolio. That's where we're building up the resilience of our portfolio, I think, the right steps toward the right direction. From what we said, we first focus on capacity reduction, focus on self-help measures, and now it's time to grow again. And with this, I hand over to...

Klaus Bauer, CFO

Thank you very much, Philip. Let's let the numbers talk here. In the package, you saw there's a few nine-month slides. I will, however, mainly focus on the Q3 numbers going forward. I also think that will be the focus. We will be reporting much more on the single quarter than on a year-to-date basis. The year-to-date obviously can be seen in the attachments and also our official reporting, and we are happy to answer any questions in that regard. But I think since we are meeting quarterly anyway, we should focus on what happened in the quarter. Philip already alluded to our three main And KPIs that you're also aware here, and the most... Yeah, the most interesting one might be adjusted sales here because many of you already gave us the feedback that the reduction is much more than expected and definitely more than the market and definitely more than most of our competitors. But to some extent, it's the consequence of what Philip just said. We are coming out of a period of lower-order intake. The lower-order intake is also driven by our strategy of profitable growth. We were not so much interested in order intake, but we were much more interested in profitable order intake. And I think, as Philip also just explained. We are at a turning point here. We are at a turning point in regard to customer split, which is beneficial going forward, and also the order intake quantity, which meets our profitability expectations. But when I look at the adjusted sales, there's a significant volume portion in there, eight to nine percentage points of the 11.6% sales decrease is the volume and price, which I actually just explained. I think over the longer period, that will help and support our profitability, as you already see, even in a sales week quarter in our adjusted EBIT performance. But we are still also actively managing our portfolio, not just like going with the market, but also divesting in lower margin business. That's around two percentage points of the sales decrease. And then there's a negative foreign exchange impact translational of around one percentage point. So that explains it. I don't want to take it away that we have to work on our volume and the promising order intake, as I alluded to, will correct that going forward. Now, a trusted EBIT. That's definitely something that I, as the responsible finance head, really like. We are able to improve, even slightly improve our profitability despite the market-driven headwinds and despite the headwinds that we have in restructuring and setting up our business towards more profitability. That really is testimony that our approaches are working, and I will come to that in my next slide. We are working on our R&D efficiency. We are working on our cost management, not just rigorous cost discipline, but also structural cost improvements that will have a long-term impact. And so that we are able to increase our profitability and definitely also be within our guidance range here. Now, last but not least, normalized free cash flow. I have to be honest with you, I have my difficulties with normalizing free cash flow. For me, EBIT is already normalized enough and adjusted enough. And for me, free cash flow has to be then the real proof point of what we are doing. So I like to be our free cash flow focus as close as possible to what cash is really coming in and going out. So I will focus, and we will have this discussion a little bit more, even when we provide our KPIs for next year and our guidance for next year. So that's to come, but it's maybe already a little teaser in that regard. So adjusted free cash flow, that's the number that is close to our real cash performance. The adjustment, unfortunately, adjusted already sounds dubious, so I don't like that either, but it's really the free cash flow before M&A activity. So it's a real cash flow number, and that's minus 120. That cannot be satisfactory. But as you have read in the documentation already, the main portion of that is tactical inventory build that will not continue to the same extent. We will still have pockets and we will talk about material and semis a lot in the Q&A, I'm pretty sure. So we will continue to be smart about technical inventory pools, but also see the potential to offset in the fourth quarter any increases in that area with decreases in other areas. So I think the inventory increase of 140 million that you have seen in Q3 will not repeat itself, at least from a total working capital position in Q4. And then you have the much discussed and talked about BMW settlement where the first hundred million came to a cash out now in Q3. And now I'm contradicting myself a little bit because now I'm normalizing if I take out these effects, then really we are in a healthy basis. For a stellar free cash flow Q4 that will be driven by these effects that I said on top of or additionally with the recovery with our customers, which you know from the past is always very backloaded in Q4. So, therefore, the jump in Q4 to then be within our guidance range will, or we are confident about that it will come. So, the next slide is a nine-month slide, which I will skip. Really, everything that's on there is not so much different for the Q3 isolated. The price volume decrease for the nine-month period is a little bit more muted versus now Q3, but that might be the only difference. So, coming to the next slide, we talk about profitability, and there's really two points that I want to make besides everything else that is really self-explanatory. The one is the cross-profit margin that you see from Q3 of prior year to this year. And again, that is a significant drop. You have, of course, the fixed cost absorption effect of the lower production volumes here. That's around two percentage points. But we also see in Q3 the first quarter where we have a significant material price escalation, especially in the semi-area, which cannot and could not be offset anymore with normal purchasing initiatives and non-production material in other areas. So there is about a one percentage point negative impact in the gross margin now already in this quarter. And as I said, or indicated, and also Philip already alluded to, I mean, that escalation will just go much, much further than the one percent that we are talking here. I mean, you saw in our messaging already that we, especially for next year, we are expecting a minimum impact, gross impact of one billion in that area. And I'm pretty sure we will talk about that. But again, the escalation started with a moderate impact for the quarter. And, of course, as you know, some of the recovery of that will also come in the discussions with our customers then in Q4. However... If you now look at these impacts, there is the portfolio management on the sales towards more profitable sales mix and also the cost discipline that we have also in the cost of goods sold area that are countering these effects. And I can only say, and that's maybe also from my supervisory activity, supervisory board activity, the timeliness of proactive self-help measures at Amovio are here really helping us now significantly to weather the storm where we are in the middle of. The second point I want to make on this slide, and you will not be surprised, is R&D. R&D was in our focus since our inception, I would say. And again, here you see the monetary effect. I mean, we are at 10.4% R&D net quota, which is a big step in the direction that we indicated we think is sustainable. If our sales would have been stable versus prior year, we would actually be even closer to our long-term target, but that indicates that we are on the right track here and again. The art is not to reduce R&D cost. The art is to maintain your capabilities with reduced costs, so increased efficiency. And I think as our order intake indicates that in that area, we are successful. The next slide is, again, a nine-month slide, which I would skip. Here you see, let me just make one quick comment here. You see the adjusted EBIT margin is lower than prior year. But again, remember, that is the BMW impact. If I would take out the BMW impact, we would have the same development with 10 basis points, This is better development than last year. And so now the last two slides are indeed nine months, year-to-date slides. I think they are valuable in that regard because it's about our business area profitability, and I think we have to look at that in a longer period just to also prove. That our transformation efforts are successful. And the next slide is then a free cash flow slide, where I will only add a few more comments. But let's look at the EBIT development for our business areas. And I'll start from the bottom of the slide, where the adjusted EBIT stands at around 100 million lower than in prior year. And again, it's the BMW settlement, which is included still in adjusted EBIT with around 100 million. And therefore, if I would put that back, then really on a comparable level, we are absolutely, and not just from a margin standpoint, in the same range as last year. And that, with the very difficult sales environment, I think is a huge accomplishment. If I now look at the business areas, then you have three business areas, ACM, ANS, and UX, which from an absolute standpoint, And therefore, also, of course, from a margin relative standpoint, made significant improvements. And I cannot emphasize that enough with the significant sales drop to accomplish that is really important. This is a good proof point for the transformation process and progress working. The reasons are clearly in all lines of the P&L, except sales. I'd say their operating performance is improving. Cost discipline and self-help measures, as we discussed also in the past, are taking effect in Q3 and are also, from my standpoint, sustainable into the future. The one bar that is obvious to be talked about is the development in SAM. And again, you might be tired to hear that that's the BMW settlement with 100 million that is hitting this business area. And there we have the same volume impact as in the other areas around 1.5 percentage points. So that explains the drop from 4.6 to 1.6%. Excluding BMW, we would be closer to the 4%. So still a slight margin drop. And again, with also the lucrative orders that we have taken in, and also the attractive customer mix in that regard that Philip already talked about, that is, in my view, a rather temporary situation. And last but not least, the free cash flow. Don't be afraid. I'm not leading you through the entire slide, and I only will focus on the very right side of that. And as I said, a trusted free cash flow for me is the important number, important proof point that is with close to minus 300 million, including 100 million for BMW. Of course, a number that we have to deal with and attack. However, there's still a restructuring and spin-off payouts in there that will not repeat itself or phase out over some time and get smaller so that our cash generation power, which the normalized free cash flow really is an indication for, is positive. And again, the nine months is a little bit distorted in that regard because we have the strong Q4 not in there yet where we will. Yeah, rectify some of the cash flow impacts in the first nine months with the recoveries with our customers in the fourth quarter, so that we are confident, as I already said, that we will have a strong Q4 performance, which drives us into the guidance range. Talking about guidance, back to you, Philipp, to guide us through our outlook.

Speaker 5

Thank you. Thank you. Thank you very much, Klaus, for the explanations. Let me make it very short. We confirm our corporate guidance. What we do see, and listening to what I've said in the beginning, and specifically to Klaus, On the sales side, we expect now that we are going to get more to the lower end of our range of 70 to 17.5 billion euro, based on current market expectations and what we have seen already in quarter three. However, we confirmed the 3% to 4%. You know that we have reduced that recently because of the settlement agreement with BMW, but we are still convinced that we are going to make the normalized free cash flow, and let's see how long we are going to keep that KPI. But what we also do see now is, and that's the change, actually, on that slide, is that we increased the cash out for restructuring from 600 to 650 million. And as you see also, I mean, I interpret that as a positive, because what we do see is that our measures are starting, are being executed even faster, which is in such an environment, only a good sign, and shows the execution capability and ability of our management dreams across the globe. If we go into the different business areas, the picture is a bit more mixed. Of course, the total sales of the group stem from sales of the different business areas. So if we say we are more cautious and going to get more to the lower end of our sales guidance, that stems from some changes specifically on the safety and motion side, where we do see that the strong business which we have in China, which is suffering from local market deterioration, has an impact on overall sales, which has then also an impact on the event margin, where we have needing to lower a bit the forecast. Same applies to user experience where we have been moderate increase or improvement. We are now stable, but it also shows that despite all that sales reduction, the user experience team is capable of maintaining all the fruits which they have been working on over the course of the last years. Leonard, I think that's quite positive to be seen. Our technological, most advanced business area where we are working on the future of autonomous driving has worked heavily on improving the overall results, and we increase now to moderate improvement of the EBIT margin. And previously, we said stable, but that means we want to be above the zero line in ACM as well. And I think that's a positive thing. After nine months, all business areas are positive. And that's something which we want to explain to you also in more detail in actually eight months' time. And we want to invite you for Capital Market Day next year here to Frankfurt to show you what are our plans for the future and what we are capable in terms of technological improvement. There has a lot of things happened since our last Capital Market Day, which we had one and a half years ago. And I think it's a good time to reconnect all together here in Frankfurt and show what automotive suppliers are capable of and how the future has been driven, and that mobility from us is going to be safe. Exciting, connected, and autonomous. And I'll hand over back to Lutz. Thank you so much, Philipp and Klaus. And now we come to the Q&A session.

Speaker 6

So operator, please take over for the moderation of the Q&A session.

Operator

Thank you. To ask a question, you will need to press star one and one on your telephone, or if you have joined via device audio, click the raised hand button on your screen and wait for your name to be announced. To withdraw your question, please press star one and one again, or click the lower hand button. Thank you. We will now go to our first question. One moment, please. And your first question today comes from the line of Christoph Naskabi from Deutsche Bank. Please go ahead.

Speaker 6

Good morning. Thank you for taking my questions. I'd like to start with inflation recoveries in 26. I was just wondering, when looking at the Q3 bridge and some of the moving items, was there already a decent amount of recoveries in Q3, or is it still mainly expected for Q4? And then looking ahead, you mentioned for 27, the gross headwind of at least 1 billion. Obviously, you will seek to pass this on to the largest extent. Could you comment on basically the phasing of the year that we should expect? Just thinking back to 24, when obviously Q1 was quite a disappointing start, in the end you still managed to get to your targets or where you wanted to be because the pass-throughs came through in the second half. And then the last question would be on the order intake that is nicely accelerating. Should we assume that this basically turns into revenue momentum in 28 and that underlying growth or like organic growth should accelerate with that in 28? Or could it be that some of that is already materializing slightly earlier towards the end of 27? Thank you.

Klaus Bauer, CFO

I mean, I start with your first question, Christoph. I mean, there's very little Q3 recovery already in there, so the overwhelming portion of the 2026 recovery is coming in Q4. But also in Q4, not spilling into Q1 of 2027. That is our goal, and that is also our assumption based on which we confirmed our guidance. I try to start with your second part, and then, Philip, you might take over, and then also take over the first question. I mean... Just so you know me from my Schaeffler time, and I always talked about steel, so I still consider myself a steel guy, but now I have to be an electronics guy, and the escalation and the dynamic of the pricing there is mind-boggling. And we see the escalation just softly started in Q3, will accelerate in Q4, and really explode next year. Therefore, also our estimate of a minimum of one billion. And that really is, at this point, a... Not a timing pattern within 27. We think all of 27 will be impacted by that. From the very first day, we have annual relationships with the chip suppliers, so therefore, there's always a cliff at the beginning of the year. But what is the reason for that situation? The reason are the data centers for mainly artificial intelligence. And we can tell you that there is no price sensitivity whatsoever in that area. And all of our suppliers in that regard could sell twice their capacity to this very lucrative, non-price-sensitive area, that at some point we will run out of energy for this data center and everything. We are absolutely sure that will come. And then some of our suppliers will feel sorry that they didn't serve us better. But right now we have to deal with the environment that it is. That will, in our view, continue throughout 2027. And we don't see any demand relaxation from the data center industry into that supply. So, what do we have to do? I mean, you have to look at our balance sheet. We are for sure one of the stronger, financially stronger players in the market. And we have our business otherwise under a strict cost control, but there's no question that we will not be able to wait until the fourth quarter of next year to recover one billion or more. And that is not just true for EBIT, that's also true for cash flow. So we will have fine. First of all, we will need to have the agreement with our customers that we need full recovery. Of that impact, and we need the recovery, not just from an EBIT standpoint, but also from a cashflow standpoint. What models we might come up with is obviously subject to the next few weeks of discussions, but these discussions have to start and have to come up with a result very quickly. And maybe I now explain more than the scope of the question, and maybe I also took away some of the momentum of Philippe, but Philippe, I don't know.

Speaker 5

Oh, fine. Very good. I think I couldn't have explained it better. You see how good it is to have such an experienced guy in our team who, within a very few hours, learns everything about semiconductor markets. But if you look into such a transforming industry like ours, you need to do two things in such a company. First of all, you need to become flexible and agile to be able to react to different situations. But you also need to build up a learning organization. And we have learned a lot out of 2024 and 2023, where we were dealing with our customers. We have built up an organization which is capable of dealing with exactly what Klaus just said. And that means, we will not and cannot wait to the end of the year. The discussions, I mean, we discussed that many of these things have been, will need to be recovered still in Q4, but you can imagine that we discussed already today what is going to happen in 2027, and there is a very clear guidance, I mean, as Klaus said. We need to recover that in full, and we need to recover that in full, in cash in 2027, and that clear target cannot be only quarter four next year. And if we talk about order intake. Some of the order intake might indeed come already next year or end in 2028, and that's the Chinese OEM part, where we do see some chances. But on the, let's say, more traditional part in Europe and with international OEMs, it will take most probably more than in 2029, where we are going to see that revenue getting into our house. So that's why I said the Chinese market is, on one hand side, the big challenge that it's going up and down, but you have also the chance to relatively fastly recover and change direction.

Speaker 6

Thank you very much.

Operator

Thank you. We will now take the next question, and the question comes from the line of Russ McDonald from Citi. Please go ahead.

Russ McDonald, Analyst — Citi

Yes, thank you very much for taking my questions. I have three questions. The first one, just following up on the Q4 commentary, just be interested if you could maybe give us a little steer on Q4 profitability, given those, you know, it sounds like large price ups that are coming through in the fourth quarter. Specifically, you did 6.9% adjusted EBIT margins in the fourth quarter of last year. Could you maybe talk through the bridge components and whether that is a reasonable target to aim for? I know you can still hit the full year guidance with a lower margin than 6.9%, but be helpful to understand exactly where in the guidance range we may be tracking based on Q4. Second one, and sorry to come back to DRAM, but specifically I'm interested in what you're seeing today in terms of the DRAM pricing. If I look on Bloomberg, and I appreciate that's not a perfect tool, it looks like the pricing has at least come down a little bit or has certainly stopped going up. So I'd be interested if you see that at your end and then link to that on the 1 billion figure you quote. You know, what non-pricing mitigations can you put through quite quickly? Is there a reasonable assumption that we can decontent some of the vehicles and maybe bring that figure down just through content per vehicle? That would be my second question. And then the last question, just looking at the valuation of the shares and obviously, you know, the lack of follow through today. Do you think there's an argument for bringing forward the cash returns at Immovio, maybe specifically on buybacks? You know, it's probably more a question for the CMD, but, you know, it does feel like you have a very strong balance sheet. Shares are very cheap. I'd just be interested in pushing you, maybe Klaus, since you joined on, on how you think about cash returns in the short term.

Klaus Bauer, CFO

Yeah, I start maybe with your first question. Now, hard time to indicate more than confirming our guidance, but as you already said, the drivers are in place. That, structurally, the Q4 will be a strong profitability quarter, and, by the way, also a strong sales quarter, relative speaking, because the recovery goes into the sales line. And it's, therefore, besides the volume impact, a significant price impact. And both will then lead to a similar pattern than last year. And please understand that for the time being, I wouldn't like to be more concrete in that regard. But we are safely, here today, in the guidance range, and with a good Q4 in front of us, that should be directionally, as much as I want to say.

Speaker 5

Let me add one thing. What we historically always have, we have a major part of our research and development reimbursements in Q4. And that's not a one-time effect. That's a pattern which we have in our industry. And as we do have, and as we are a very technology-driven company, we do get also over proportionally compared to other competitors reimbursements for the research work we do. So that's something which is going to come in Q4, where the entire team is prepared and which is going to be there as we speak. And, yeah, I mean, we are used to get reimbursements or recoveries, as we say then, for prices, and that's what needs to come and will come in Q4. There's no doubt. With regards to pricing of our memories, yes, what we do see is that the huge increase in spot prices is now calming down a bit. But you can imagine that we don't buy for spot prices. We have longstanding relations with our suppliers and supply agreements. And what we do see is still that the prices, as Klaus said, is going to go up next year still on the memory side. That's what we expect. And what we also do see, and I guess you have also heard about it, that printed circuit boards, so-called PCBs. Also very much accelerating in price due to the severe competition of artificial intelligence and data center built up. So that's something which we need to bake into our assumptions for next year and the first of minimum one billion additional costs we have already discussed. But I fully agree. What we do is we work with our customers on decontenting. We work on how do we overcome from a product technology design into a less. a less heavy product, which should help to get the overall costs down. These are all things which we do, which we regularly do, where we have big research and development teams working on in order to improve that prices are not skyrocketing. And with regards to the valuation of the shares and the potential buyback, I think that's something which I understand we discuss also very regularly when we meet. We are needing the decision of the board, and you might imagine that this has also been discussed with the supervisory board when we went out in August. It's very clear into that direction. We want to use share buybacks for excess cash, but we need to get the approval of the annual shareholder meeting, which is going to happen in May. And then you are absolutely right. In June is then a perfect time to detail out what we are going to do.

Speaker 6

Thank you.

Operator

Thank you. Your next question today comes from the line of Jose Asomendi from JP Morgan. Please go ahead.

Jose Asomendi, Analyst — JP Morgan

Thank you very much. Good morning. A few questions, please. And Klaus, great to see you back again. I guess it's a bit going into 2027, as much as you can say, but I'm trying to get a bit of a steer off. The revenue projection to 27, 28. If you don't want to talk about 27, maybe we can talk a little bit about the longer term, or how much of the revenue deceleration we have seen in 26 is driven by product discontinuation and getting out some of the contracts, because hitting your full-year revenue number or guidance is going to be – it's achievable, but it's a bit of a challenge as well, from my perspective. That's question one, if possible, to get some steer on revenues and a bit of a sense. And then second, as much as you can probably say, please, for the fourth quarter, do you think autonomous mobility can print in the fourth quarter another return above zero? It's difficult to forecast this one, zero EBIT. And can you talk also a little bit around SAM? Whether we should expect also an improvement on a year-on-year basis. And obviously trying to get a bit of understanding as we think about 27, whether we can see some earnings momentum for the company. Thank you so much. Thank you.

Klaus Bauer, CFO

Maybe, Philippe, I try to start with question one. And you can, obviously, with your knowledge, that's much deeper than mine in this company than Ed. But, but, uh, And maybe it's not so bad to start that question with a more outside view that I still have, but for me, from a longer-term perspective with sales, we are really at a crossroads. And more detail, obviously, is to come on June 22nd. That's why we also chose that date, because I think that has to be a point in time where the crossroads clearly, in our confidence, will look into the right direction. But with the portfolio management, with a spin-off, with being a standalone company, with the soft but managed order intake over the last two years, but now, again, a strong order intake going forward with the soft market environment, Which, by the way, we don't think that there's a lot of help from a market also in the midterm, and I think we are in line with many of the specialists in that regard, the forecasting markets and so on. But all that considered, we are approaching a point with a profitable... We have a reasonably profitable sales portfolio and mix. We still continue to adjust our cost structure to that mix and then have a very promising platform where we then can go back into a growth mode. And again, I think the auto intake right now and the customer split that we are seeing is indication, Philip said, 2028, 2029. We will see the benefits and effects of that. And again, I think we are really at that point where we have to set our starting point to be a growth story again. And I'm absolutely convinced that we will be able to convince you on June 22nd that that is the case.

Speaker 5

Yeah, maybe I add to that. Thanks for your question, Rosé. I mean, as Klaus always said, we do see that we are now working on moving top line up. 27 is going to be difficult here. We don't see that markets are going to help us. I mean, we are more conservative than maybe some of the research institutes, but we assume that somewhat 27 should be in the range of what we managed in 2026, so stable revenue projection, and then 2028 is going to go up, then Aurora also starting to kick in, and then we are going to see then progressively sales are going to grow again. Now, talking Aurora and your question with regards to ACM in the fourth quarter, I mean, we don't work on one hit wonder. I mean, the clear expectation towards the ACM management team is to maintain that result and be also in the fourth quarter. Break even. And I'm confident in that team that they're going to manage that. So that is, I mean, we always work on sustainable improvements. No, I mean, we don't do, how do you call it, accounting tricks? Focus, focus, exactly. We work on sustainable operational improvements. That's what we expect. Also then from the ACM team. Sam has indeed some challenges this year. That's what you have seen in the results. We have the BMW case. We have had a significant hit on the Chinese market. They are very much also FX affected. So, 2026 is going to be less than 2025, but then we expect also a strong recovery. I mean, we have taken out all the negative ones. We have, if you look into our major restructurings, which we have done, Rhein-Bölln, we saw it, Mechelin, we saw it, these are all safety and motion plants. We are now going to close next year's Gifhorn. So there is a lot of improvement on the cost side, and we expect now also the team to turn that invest, which we did into that business field, into a value creative improvement of the EBIT margin.

Jose Asomendi, Analyst — JP Morgan

Thank you. As a follow-up, is it possible to get a bit of an indication how you think about restructuring charges if you're going to give a chance for 27 and 28, at least whether they're going up or down, stable, and also missing a bit where the cost savings – you're restructuring a lot, so there must be some cost savings feeding to the business somewhere in terms of earnings improvement, which is what you're seeing on UX. There's not a one-time. Solution for everything, but you are showing some improvement there in user experience. But can you give us a bit of experience on restructuring, maybe, and some of the benefits where we could see them?

Speaker 5

Yeah, you're absolutely right, José. I mean, that's what's needing to come now next year. That's what I said on the... The safety and motion side, no. I mean, we have taken out a lot of costs. We now need to see the improvement next year. Same applies to user experience. They need to get better. Next year, we have significantly restructured the ACM on the R&D side, and then we need to see now next year the improvement. That's what needs to come. We expect also that... The one-offs, the restructuring cash out is going to reduce next year, but I mean, there are still elevated levels next year, but that still needs to be done. But on the EBIT side, there is actually no reason of why not to get better, no?

Klaus Bauer, CFO

Jose, do you see the improvements actually already today? And they're sustainable and going on. And if volume helps us, you will also see the jump in relative margin. But to keep the margin flat or improved by 10 basis points with over 10% sales drop, I mean, that is testimony that the actions are really working. And they're working exactly in the areas where we informed you about our plans and now execute it in a very disciplined and rigorous way. It's R&D efficiency, again, not sacrificing our capabilities in that regard, but having a clear focus on the right things and doing it in a very efficient way. And UX, I mean, it goes, especially in UX, it goes definitely beyond R&D there. The operational cost performance improved significantly this year, and I think we still have a significant potential in that regard.

Jose Asomendi, Analyst — JP Morgan

Thank you. Thank you very much.

Operator

Thank you. We will now take our final question for today. And the final question comes from the line of Stephen Benamu from Bank of America. Please go ahead.

Stephen Benamu, Analyst — Bank of America

Steven, your line is open. Good morning. Thanks for taking my questions. I have three questions, please. Can you hear me?

Speaker 5

Yeah. Yeah. Hello. Yes, we can hear you. Not loud and clear, but we can hear you.

Stephen Benamu, Analyst — Bank of America

Hi. Can you hear me? Yes. Yeah.

Speaker 6

Okay. Thank you.

Stephen Benamu, Analyst — Bank of America

Go ahead. Yeah, so thanks for taking my question. I have four questions, please. The first one is regarding your sales guidance. I come back on that because the low end of your sales guidance implies revenues down about 4% year on year, which is a clear improvement versus Q3. So what gives you confidence in reaching at least the low end of the guidance? This is the first question. The second question is about the line odors in your Abit bridge. So the Q3 margin has been boosted by this line odors, which is mainly FX tailwind. What should we expect from this line in Q4? The third question is regarding your R&D savings. You've reached 240 million euros over the first nine months of 2026, ahead of your initial guidance of above 200 million euros. So what do you see for Q4 and for 2027? And the last question is about your free cash flow and your inventory build. So the free cash flow in Q3 was impacted by your inventory build. So how large was the impact in Q3 and how much do you expect to reverse in Q4? Thank you so much.

Klaus Bauer, CFO

So, Philip, I start again, and then you just, I mean, R&D, I will completely leave to you. But sales guidance, I mean, yeah, I think Philip said it clearly. The potential to be at the upper end of the guidance is... Statistically there, but not the most likely one, and we need the 100% recovery with our customers' cost recovery that we indicated to be safely in the guidance range. But that is really the driver. There is some volume impact also. I think Q4, and we have some indication with October that was according to expectations. So the volume will not deteriorate further, maybe sterilize or even increase a little bit. But the major driver to stay within the guidance will be the success in our cost recovery with our customers, and that obviously then helps all the other parameters like free cash flow. Okay, the cash flow will most likely come the next year, but especially EBIT margin accordingly. The line ADAS is indeed the biggest impact is foreign exchange. In fact, that's mainly the translation of balance sheet items, receivables and payables in foreign currencies that is helping us. And if I would now know how Q4 would develop in that regard, I think then I definitely wouldn't sit here. Then I would be a trader. But I... It's difficult. I mean, we have a good transparency and visibility of what our foreign exchange-related currency pools are, but how the currencies really develop, I mean, it's beyond my expertise to make any prognosis in that regard. And then free cash flow. What was the exact question about free cash flow?

Speaker 5

How much inventory in Q3?

Klaus Bauer, CFO

Oh, yeah, yeah, yeah. Inventory. Yeah. I think I said it in the presentation. It's around 140 billion of inventory built in Q3. And that is, by the way, also almost the entire inventory build for the year. So, that is, I think, a good point to what I said, because it's correlated with the significant semiconductor price increases. So it's really mainly tactically driven. Of course, when you have a negative sales development, then you always have with some time delay also to reduce and adjust your inventory. That is not always 100% synchronized. But as I said, at least from a working capital standpoint in total, not just inventories, I don't see any negative impact on Q4 free cash flow. So in other words, working capital will stay at least stable. The portion of inventory in an isolated way now to make a firm prognosis, and that is a little difficult because, as I said, we want to increase inventory in... or tactically increase inventory in specific areas, especially the PCBs and memories that Philip talked about, and how successful you will be in that regard. With the market demand that we are seeing, that remains to be seen. But actually, and maybe I shouldn't say that as a CFO, we would take on whatever we get in that regard. And therefore, but my promise here is also that we will counteract that with other working capital measures. And that includes reducing in more conventional inventory pools that we have.

Speaker 5

Good. And let me quickly answer the question. I mean, we made, as I said, we pulled forward quite some. There are savings, and that's why the restructuring cash out is a bit higher than we have foreseen in the last quarter. But we cannot now use a run rate of reduction also for the fourth quarter. The major parts have now been done. In the fourth quarter, there is not going to be a significant improvement in this. As we always said, we want to have over 200 million, and there will be a slight improvement also in the fourth quarter, but not at that same level like it has been in the nine months. For next year, we said last time it needs to be above 150 million, what we get on top. That might be now a bit better because we prepone some of the measures already, but that's something which we are working out and we are going to give you as a guidance then for next year. But, I mean, this is something you think, I mean, as we said, we are consequently executing our measures, and we are quite confident that we are reaching the ones for this year and that these ones for next year will be also increased a bit. Yeah, thank you very much. We've come to the end of today's conference call. Thank you for your participation. Next conference call will be in February next year when we have the full year release. And if there are any further questions, don't hesitate to reach out to us. We're happy to speak to you. And you may now disconnect.