Continental Aktiengesellschaft (CON) Earnings Call Transcript

Ladies and gentlemen, and welcome to the Continental AG Analyst and Investor Call Q2 Results 2026. The conference will be recorded. [Operator Instructions] . Let me now turn the floor over to your host, Max Westmeyer, Head of Investor Relations.

Yes. Thank you very much, and welcome, everyone, to our Q2 2026 results presentation. Today's call is hosted by our CEO, Christian Kotz, and our CFO, Roland Welzbacher. A quick reminder that both the press release and the presentation of today's call are available for download on our Investor Relations website. Before we start, I'd like to remind everyone that this conference call is for investors and analysts only. If you do not belong to either of these groups, please disconnect now. Following the presentation, we will conduct a Q&A session for the sell-side analysts in this call as usual. To give everyone the opportunity to ask questions, we kindly ask you to limit yourselves to no more than 3 questions. And with that, over to you, Christian, for the Q2 key messages.

Thank you, Max, and welcome, everyone, online also from my side. Thank you for joining us. Today, let me start with the strategic milestone we announced in July. As you know, Continental has signed the sale of its ContiTech group sector to Lonestar on July 4, which is fully in line with the timing that we have always indicated to the capital market -- and we could still close the transaction by the end of 2026, of course, subject to regulatory approvals and other closing conditions. That does also mean that we cannot rule out that this -- that the process lasts into 2027, but please rest assured that we are working hard towards closing the deal as soon as possible. As you have probably seen, the agreed enterprise value amounts to EUR 4 billion plus a potential performance-based component of up to EUR 250 million. I think this is a clear testament to the attractiveness of ContiTech as an industrial pure play -- based on the current transaction structure, expected net cash proceeds at closing are expected to be around EUR 3.1 billion. Also here, the exact amount will, of course, and obviously depend on multiple sectors at the time of closing. When it comes to the use of the proceeds, we intend to combine attractive shareholder returns with deleveraging, as we always communicated and announced -- in line with that, we plan to use around EUR 2.5 billion for shareholder returns. Our options include special dividend or a special dividend and share buyback, as we also always explained and communicated, but these are details that we are now working on. The remaining around EUR 600 million are planned to be used for deleveraging and this supports our path towards a leverage target of below 1 by 2029, again, fully in line with our midterm targets. We've communicated and explained in various locations. So Q2 certainly kept us busy, not least with the sale of the explained and mentioned sale of ContiTech, but when we did find the spare moment, the tutors offered an excellent alternative to be honest, to spend that extra time, and here, my warmest congratulations to [ Tanovea ] on an extraordinary fifth to victory delivered with exceptional skills but, of course, also supported by continental tires a great demonstration of what talent, teamwork and outstanding technology can deliver. With that positive and winning momentum, let us move on to our quarterly performance in Q2. So overall, we delivered a solid quarter with earnings and cash flow improving despite a still challenging market environment. Group sales came in at EUR 4.4 billion compared with around EUR 4.9 billion in Q2 of last year. The reported sales decline was mainly driven by the sale of OSL, so the ContiTech OE-related or the majority of the ContiTech-related business, which we have sold at the beginning of last year. Organically, our sales development was broadly stable at minus 0.3% and even slightly positive on the tire side, more details to come. Our adjusted EBIT for the group increased year-over-year, reaching EUR 570 million, translating into an adjusted EBIT margin of 12.9%. That improvement was mainly supported by our tires group sector, where we saw continuous strong price/mix, still lower raw material costs and a better operational performance. ContiTech continued to operate in a subdued market environment, which weighed on profitability. However, the impact was largely mitigated by portfolio measures, still favorable raw material costs and the ongoing execution of cost-saving measures, the sales help measures we have explained also earlier. Adjusted free cash flow improved significantly to EUR 216 million, roughly EUR 250 million up year-on-year. The strong increase was, of course, driven by the solid profitability improvement, but also included some kind of date related items such as favorable working capital development and the timing of CapEx, which remains weighted towards the second half of the year. The positive cash flow also supported further organic debt reduction. However, -- and as always, in Q2, our net debt increased sequentially versus Q1, mainly and due to the dividend payment we have done in May. With the sale of ContiTech that I have mentioned earlier, we have also reached a significant milestone towards becoming a tires pure play. As a result, we have already now adjusted the guidance to reflect ContiTech as a discontinued business, but Roland will touch on that later on in more details. As a next step, we will also start disclosing more details on the Tires business in the next quarters. That means we will change our segment disclosure moving forward. You will receive a call invite in the upcoming weeks for an update call on our future structure since we want to make the transition into a tires pure play as smooth as possible also for you. So looking at the group sectors on Slide 6. The improvement in margin was mainly driven by the strong performance at tires. As I mentioned already, our organic sales were broadly stable, while the group adjusted EBIT margin improved from 9.6% to the before already mentioned, 12.9%. This includes a positive contribution from the diesel settlement as well. Tires delivered organic growth of 0.3% and increased its adjusted EBIT margin to 15.3%, so even slightly outside our full year guidance corridor in the quarter. With that, over to you, Roland, for more details on tires, starting, I think, with insights into the markets.

Thank you, Christian, and also welcome from my side to everyone on the call. Let me begin on Chart 7 with the market environment for tires in the second quarter. In OE passenger car tires, the trend of declining volumes continued both in Europe and China, which also resulted in a year-on-year decrease in worldwide vehicles produced. In the replacement business, we saw imports going up year-on-year in our largest region, EMEA, resulting in higher volumes in lower-tier tires. And also, Chinese tire volumes showed a year-on-year increase, while the North American market continues to trend below last year's level. Let's turn to Page 8. and turn to drug tires. The picture remains mixed across regions. In Europe, commercial vehicle production growth has moderated following strong prior quarters, while North America looks like it has turned the corner. Silver lining here, showing signs of recovery from a low base, however. In the replacement business, demand in Europe remains supportive with year-over-year growth. Whereas replacement volumes in North America continue to trend below prior year levels, driven by lower transportation in man. Let's turn to Slide 9. Despite the continued softer volume environment, we delivered the expected margin improvement against a very weak Q2 2025, as you can see on Slide 9. This happened on the back of favorable raw material developments and once more healthy operational performance. Sales were broadly stable at EUR 3.3 billion. One of the reasons FX this time had no material impact in a while after being a drag for many quarters in a row. Volumes, however, were down minus 2.3%. This was mainly driven by subdued PLT OE demand in EMEA and soft markets in the Americas, while we continue to perform well in the weak Chinese OE market. As in the first quarter, price/mix was positive though. At 2.6, it's more than compensated for the lower volumes, both on the sales and the EBIT side. This continues positive development was mainly driven by product and channel mix. And despite lower overall volumes, we managed to increase UHP volumes, especially in EMEA and in APAC. Consequently, our adjusted EBIT increased to EUR 510 million, a margin of 15.3%, which will presumably be a peak margin for this year. Besides price/mix, there's still lower raw material costs provided a mid-double-digit million euro year-on-year tailwind. Furthermore, and in addition to that, recently increased raw material purchasing prices led to a reevaluation of our inventories, this resulted in an additional noncash tailwind in a similar amount. And as I mentioned already, the prior year comparison base was, of course, materially impacted by tariff and FX ads. p If we look at the regional breakdown on Slide 10, the underlying dynamics of our business become even clearer. In the Americas, organic growth was minus 3.4%. The passenger car OE volumes declined stronger than replacement in a softer market environment. Good news in terms of mix, U.S. American and Canadian replacement volumes declined only slightly, while South America clearly remained under pressure due to cheap imports. On the truck side, OE volumes have finally been stabilizing, but replacement volumes continue to trend below prior year. Nevertheless, we were able to increase price mix in North America, but it could only partly offset the negative volume effects. In EMEA, we saw a healthy organic growth of 2.4%, even though PLTOE and replacement volumes declined modestly. One of the reasons are the increased UHP volumes, while the sale of our French retail network has started to affect reported revenues in Q2. The impact was limited in Q2, but it should become more visible in the coming quarters. In truck tires, both OE and replacement volumes increased versus prior year, demonstrating outperformance against the market. Consequently, price/mix remained continuously positive. In APAC, we also achieved positive organic growth, driven especially by increased our dry performance volumes. In particular, our performance in China resulted in positive OE volumes despite decreasing light vehicle production figures and in a stable replacement volume environment. Our sales price mix remained positive, while portfolio adjustments such as the exit from our Asian truck business provided a low double-digit million euro headwind to sales year-on-year. Moving on to ContiTech on Page 11. In continued weak market conditions, ContiTech delivered a solid result. This was supported by the measures we've implemented to improve efficiency and strengthen profitability. The market environment ever remained difficult, and this continued to weigh on volumes and profitability. Sales came in at EUR 1.1 billion, almost at the same level as last year if we exclude the OSL effect that is still down in the previous year's comparison base. The organic decrease was mainly driven by the continuously challenging volume environment. At the same time, we had a good finish to the quarter, especially in EMEA and the Americas, mainly driven by solid execution in the project-related business, which makes us confident moving forward. Adjusted EBIT came in at a margin of 6.9%. As already mentioned, our safeguarding measures defended profitability against a slightly unfavorable product mix and first negative impact from raw material price inflation. Commercial measures we've implemented are expected to increasingly take effect from Q3 onwards, partly covering the increasing material costs. And one more technicality, due to the signed sale of ContiTech, IFRS 5 is applied starting end of Q2. In Q2 itself, -- this had no tangible effect on the result, but it will come with the stop depreciation from Q3 onwards. You probably still know the trial from automotive last year. Turning now to our cash flow on Slide 12, where we moved from minus EUR 46 million in Q2 '25 to plus EUR 26 million in Q2 2026. The improvement was very openly driven by our improved operational performance by working capital and by CapEx. Working capital tailoring resulted from operational changes in receivables and payables, while seasonal inventories increased slightly stronger than in the comparison period, also due to valuation effects as mentioned. Lower CapEx reflects this year's planned H2 weighted phasing of investments. Thus, our solid operational performance contributed positively to our Q2 free cash flow, but timing effects also played a role. On working capital, which you can see on the next slide, the development was in line with the typical seasonality and sales development. Working capital stood at EUR 4.6 billion at the end of Q2, corresponding to 25% of sales. Net debt was at EUR 5.5 billion and the pro forma leverage ratio stood at 2.0x. That means our net debt was slightly up compared with Q1, which was driven, as mentioned by Christian, by the EUR 540 million dividend payment in May, while our positive free cash flow partially counted that effect. Let me now turn to our market outlook for 2026 on Slide 14. Looking at our full year market assumptions, we continue to expect volumes to remain unsupportive in challenging and uncertain market conditions. Within passenger cars and light trucks, we have become slightly more cautious on both vehicle production and replacement demand. Slightly lower outlook for vehicle production is largely driven by China. And when it comes to replacement demand, we now expect slightly negative developments in both Europe and North America, given the year-to-date market development. In commercial vehicles, the picture on the OE side is more encouraging. We continue to assume decent growth in European truck production and have also slightly increased our North American production outlook, reflecting the strong Class 8 order intake in recent months. We have, however, become more cautious on North American truck tire replacement demand. Finally, turning to our guidance. As Christian mentioned already, we have updated our guidance to reflect the planned sale of ContiTech. The underlying expectations for our operational business, however, are confirmed. The continued operations of Continental, we now expect consolidated sales of around EUR 13.2 billion to EUR 14.2 billion and an adjusted EBIT margin of around 12% to 13.5%, coming from unchanged assumption in our Tires business plus the holding costs on top. Looking at year-to-date performance. However, I think it is fair to state that we're currently assumed to achieve the upper half of the profitability range in tires, while sales will probably end up around or slightly below midpoint. Adjusted free cash flow expected at around EUR 0.7 billion to EUR 1.1 billion. Also here, no change in underlying assumptions. PPA amortization is no longer a material KPI for tires and special effects from continuing operations are now expected at around minus EUR 200 million on CapEx is expected at around 7% to 8% of sales, reflecting the higher investment profile of tires versus computing. The underlying spending assumptions for this year are unchanged though. On ContiTech, the outlook is unchanged and does not consider any IFRS implications such as [ stock triple flation]. So that being said, I would like to hand over now the rest of the time to you. Operator, can you please open the line for Q&A.

[Operator Instructions]. So the first question comes from Jose Asumendi from JPMorgan.

A few questions, please, maybe regarding your margin assumptions for the second half within the tire business. Maybe just going through view pockets. Do you expect volume to be at some point a positive contributor to the business either in the third or the fourth quarter? Second, should we expect any impact of revaluation of inventories, the positive or negative impact, noncash impact on the P&L in Q3 or Q4? And then three, can you comment on your expansion plans in China and whether you're starting to see revenue acceleration in the region? Any update you could give us on the region, please?

Let me start. I think your question goes back to the guidance. And it's a fair question, looking at the good H1 results. Let me answer this first of all, a little bit broader, and then I will go into the specifics. First of all, we expect that the ongoing economic uncertainty will affect the market volumes also in H2 and will remain in total below prior year. And if you remember, we've had this good Q3 quarter last year, which was very strong also on the volume side and in price mix, tough comps to beat. Let's remind ourselves. Second of all, and this is the real difference. We benefited from substantial raw material with year-over-year in H1. We're talking about a triple-digit euro million amount. And this will fully go away, of course, in the second half. But in fact, it will reverse in the second half and turn into a headwind of similar magnitude. Yes, we put a mitigation plan in place. We discussed that in second -- in the first quarter already in May, but still, it's a completely different ball game than the first half. So this is why we said in terms of sales, will most probably come out slightly below the midpoint and profitability in the upper half of the guidance range. So we're talking volume because you have specifically first half now in total, volume effect on sales minus 3.3%, and we expect this negative effect to be slightly lower in the second half. So we expect some improvement on the passenger car tire to replacement side, but again, it will be in total below prior year. And in terms of revaluation, because it was mentioned that it was a noncash item in Q2, we will also have a positive revaluation effect in the second target. The magnitude still remains to be seen, but I would say, at least it's a mid double-digit euro million amount also in the second half. And on China, Christian, do you want to take this?

Yes. So, Jose before I talk about the situation in China and the status of our expansion plans, let me just add to what Roland said. Yes, we have consciously taken a conservative approach on our second year or half or H2 second half year assumptions why? And this goes in line with what you've asked for, basically, because of the very high continuous volatility and challenging market environment. This is why -- we have also reduced our market assumptions for the second half of the year, as explained. And even under these consciously conservative assumptions, we confirm our guidance with the let me say, additional details of assuming that under these conditions or assumptions, sales will come in at the midpoint or slightly below the midpoint of our sales guidance and profitability rather above the average towards the upper end of the corridor. As you know, for us, Q3 and Q4 are decisive quarters. And August and September are obviously already very important for us, and let's see how the business will develop. I mean it's definitely too early to tell, but at least the winter tire preorders are giving some hope that maybe the development is more positive than what we have assumed. But as I said to earlier to tell, and this is why we have consciously taken a conservative assumption. Now to your question on the expansion plans in China, we continue to execute our expansion plan. So we are ramping now our plant in [ FA ] from roughly EUR 15 million to EUR 18 million P&T tires per year. This goes very, very smoothly. We are utilizing fully our capacities. As Roland said earlier, we are clearly outperforming light vehicle production in OE. So we are rather increasing our volumes in a declining production volume environment and carefully balancing OE versus replacement volumes and are very confident that we will continue to be able to fill, let me say, the plant and execute our expansions, as indicated and planned.

Just a quick follow-up. The Chinese business, what's the split list between PLT and CVT OE and RT, if possible, just to give some broad indications? Is it mainly passenger car, and it's mainly OE at the moment? Or was the split between OE....

Which part of the business are you referring to? I didn't get that on the phone?

Within the entire business, your expansion of the plant or your Chinese plant? Is this mainly passenger car? Or is it mainly truck and was the split roughly of your Chinese revenues? Is it mainly original equipment? Or are we looking at more replacement.

Okay. So in China, we are purely focusing on PET business. We are basically not selling truck tires. And as we have indicated or communicated earlier with the closure of our truck tire production in our Multiporaminia plant, we are basically withdrawing or really reducing our truck tire APA activities to a bare minimum. But China only, it's pure PET, no truck volumes. Second, OE replacement. I mean, normally, our split is between 25 and 75. In China, we are a little bit more OE heavy without going in too much details why because we are still trying, obviously, to subset -- or let me say, to support potential future replacement growth by slightly over proportional OE exposure but we are also benefiting quite a lot from all the export volumes from China. As we discussed and communicated in the past, we are nicely represented at the Chinese OEMs, and we are heavily used also on the export vehicles, mainly to Europe, which is helping us, obviously, also to increase our volumes and is also part of the reasons why in China, we have this higher share of OE versus replacement business. But as everywhere in the world, replacement is by far above the 50% mark of our total volumes in China.

So the next question comes from Harry Martin from Bernstein.

The first one I had is on the high-value segment in Europe. We have seen some very strong selling data in Europe this year, up double digits year-to-date. So are you matching the market growth in Europe. Do you have any comments or anything else you can share on market share and the opportunity in the high-value segment specifically? Secondly, on U.S. trucks, I just wanted to think about the implications of increasing the original equipment outlook cutting the replacement. How different is the margin mix between original equipment and replacement for you in that segment? And then would it be correct to assume that relative market share would be higher in original equipment with a much lower input share? And then the final question, just a clarification one really on the raw material impact. So is the underlying assumption around a low to mid triple-digit million amount still consistent as it was in Q1. I think that's based on $85 oil. But if you could give any more color on the other assumptions around things like natural rubber that go into that guidance, that would be very helpful.

Harry, let me start with the first 2 questions and Roland will continue. So first, the high-value segment in Europe. I mean, overall, I would say we are broadly in line with market development. We have still some let me say, improvement potentials, which we are trying to utilize by extending our product portfolio offering. So especially on the summer side, but also on the oil season side, as you know, we have been rather a late entry into the all-season segment due to our history, let me say, of focusing very much on the entire segment. We are closing this gap very fast, which really helps now, I think, to outperform also in terms of sales development in terms of euro the market, and this is an area where with extended product portfolio, we definitely will have a chance to further grow or continuously grow our UHP share. But overall, we are in line with market development in the high-value segment. U.S. truck. So a little different than in the PET world. The difference between OE profitability and truck profitability, at least for us, is not that big. We have also a very profitable satisfying OE, truck stand-alone businesses. It really also on the replacement side, which customers you sell to which brands do you use, so the difference between OE and replacement for us in truck is, especially in the U.S. much smaller than what we used to see and what you are used to probably on the PET side. So with this, therefore, increasing amount of OE volumes compared to still, let me say, under pressure replacement market this will not lead to a margin deterioration for us as far as truck profitability in the U.S. is concerned. So this is what I would -- I hope this addresses your questions on the first two. And then maybe, Roland, you take the question on the raw material side?

Yes, Harry. So when the crisis started in Q1, we started to analyze what that means for Contient we made an assumption on the raw material, energy and trans broadcast increase. And we said it would be a low to mid-triple-digit dual million amount based on the assumptions of the oil price averaging total would be around $85 per barrel. Now we have seen lately a lot of volatility on the oil price side. It came down pretty nicely in the last days. I think today is trading around 8 -- the base assumption of 85 average is still our assumption going forward. There's no change. We believe for this to happen, oil prices need to go further down slightly in Q4, which this is our expectation as hopefully, the grace is continue to ease a little bit. And that also means our mitigation plan we put in place with a high coverage ratio of the additional cost would hold for the second quarter, if this was the intention of the question.

So the next question comes from Thomas Besson from Kepler Cheuvreux.

It's Thomas at Kepler Cheuvreux. I have 3 questions as well, please. I'd like to start with a comment on your trading activities. Your French competitor talked about a very strong June versus relatively mediocre AP and May. Could you talk about your own experience about June and July versus April and May? And is that part of what you were mentioning as maybe being overly conservative -- the first question. The second, one of you guys has been on Bloomberg and talked about traction of M&A opportunities in the U.S. in the specialty tower business. Could you talk about whether Conti could effectively be eventually active on M&A before the deleveraging targets are achieved or what kind of targets you would consider acquiring in '27, '28. And lastly, I understand you want to do a call on that, it's great. But -- is it possible to have an idea of the additional disclosures you plan to give us the are you going to provide us with the margins by region? Are you going to break down your margins as well for trucks and specialty on top of passenger to? Or do you want to keep that for that quote.

Thomas, then let me get started. Talking first, I think, was your question. June July trading versus weak April, May trading, I think that was the question. And I believe that's probably more related to Europe. I didn't really got whether this was European-specific or global. I assume that was more a European related question. We do see, let me say, a slightly stabilization and improvement in June and July versus April, May, do we see step change improvements, no. And this is why, as Roland said earlier, we continue to assume that in the second half of the year, volumes will be negative year-over-year. but less negative, let me say, compared to last year compared to what we have seen in H1. So as I said, maybe we are a little bit too conservative -- on the other side, we have seen so much volatility and so much change, short notice that, as I said earlier, and I was trying to explain earlier, we have consciously have taken a conservative assumption. I think it's fair to say. And maybe one word on the M&A activity side. I mean, to be honest, there is no update compared to what we've always said. What did we say? We always said that M&A or inorganic growth is part of the tire industry. It has been part of Conti's history forever. And we will continue to evaluate if there are options, which do complement and fit to our portfolio, what would fit. Also no change to what I've always said, there's a regional and, let me say, a product perspective. On the regional side, as you all know, we are underrepresented in Asia. On the product side, we are specifically underrepresented on the commercial specialty tire side. So everything which would fit would be obviously an option. Is this now a changed priority compared to after the ContiTech sales or being in process of hopefully closing the ContiTech sales soon, no. This continues to be an option. It's not a priority for the time being. We will continue to work on our priorities first. This means closing and competing and completing the transformation, doing our operational necessities. But obviously, in the long run, it's always an option if the the news or the -- what you have heard indicates that this may have now triggered a change in terms of priorities and timing, then I would say that is not the case. Maybe a word then Roland from you on the changes in our disclosure policies and structures.

Yes. let me answer this, Thomas. So I got the question this morning on Bloomberg, and it was a rather channel question, I gave a rather channel answer. I probably should have said it's not the #1 priority. So there's no change in scope and focus and also not in terms of priority, of course. With regard to disclosure and reporting going forward, as we mentioned, we plan that starting in Q3, we'll provide more details on the regional development. In order to help the analyst community to prepare and build models and before we actually come with the Q3 figures, we most likely will invite for some sort of capital market update, bring down call pretty soon in order to give you the chance. And before we go into the quiet period to tell you a little bit more about the past and provide more details on the regions so you can actually start preparing for this way before.

And this would include margin breakdowns as well.

Yes.

On the regional view on the regional level, I think it's fair to say, I don't expect significant details on the product segment level?