Continental Aktiengesellschaft (CON) Earnings Call Transcript

Ladies and gentlemen, welcome to the Continental AG Analyst and Investor Call Q3 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.

Thank you very much, operator. And welcome, everyone, to our Q3 2026 results presentation. Today's call is hosted by our CEO, Christian Kotz; and CFO, Roland Welzbacher. Press release and presentation for today's call are available on our Investor Relations website, as you are used to. Before we begin, please note that this call is for investors and analysts only. If you do not belong to either of these groups, please disconnect now. The presentation will be followed by a Q&A session for sell-side analysts. To give everyone the opportunity to ask questions, we kindly ask you to limit yourself to no more than 3 questions. And now, Christian, over to you for the Q3 key messages.

Yes. Thank you, Max, and welcome to everyone online. Before diving into the quarterly results, let me begin with 2 examples that demonstrate what Continental stands for: innovation, premium technology and measurable customer value. First, as you can see on the left-hand side of the chart, we are continuing to strengthen our position in ultra high-performance tires. By the end of 2027, we plan to add more than 650 UHP tire sizes to our portfolio. Demand is supported by larger and more powerful vehicles, including SUVs and electric vehicles. Our commercial progress is already visible. UHP tires represented 64% of year-to-date 2026 passenger car tire sales under the Continental brand, an improvement of 2 percentage points compared to 2025. One of our most important products in this field, the SportContact 7, achieved 27 podium finishes in 29 independent international tire tests. And second, as you can see on the right-hand side of the chart, we are very proud of what we achieved together with Volkswagen. Continental supported Volkswagen's mission efficiency concept vehicle in setting a new world efficiency record. The concept tire, based on our production EcoContact 7, achieved a rolling resistance performance around 25% below the threshold for the Class A rating under the EU tire label, the strong illustration of how advanced tire technology can extend electric vehicle range without requiring a larger battery. Together, these developments reinforce our confidence in the strength of our brand, technology and product mix. So turning to the third quarter overview on Slide 4. We delivered another strong operational performance despite continued weakness in several tire markets. The sales from continuing operations amounted to EUR 3.5 billion in the third quarter. The reported year-on-year decline primarily reflects the sale of OESL. Adjusted for consolidation effects, the underlying business was broadly stable year-on-year, highlighting the resilience of our core operations. The main reason for the resilient sales performance is our replacement business for Continental branded tires. In fact, we managed to improve our premium volumes in the replacement business in the first 9 months of 2026 by 3.5% compared with the first 9 months of 2025. And of course, this also contributed to the strong mix we have seen throughout the last quarters. Adjusted EBIT increased to EUR 514 million, corresponding to a margin of 14.9%. LT price mix, particularly from UHP tires and the improving truck business, continued to offset lower volumes in the quarter. In addition, material costs still provided slight support on a net basis for the quarter. Adjusted free cash flow came in at EUR 31 million. Our strong operational performance is contributing to cash flow in Q4 right now. As usual, we are still seeing the seasonal buildup in working capital. The strong business performance is also the basis for our updated full year guidance, which Roland will explain later. And also on the balance sheet side, we are making the expected progress. Our equity ratio increased by 4.3 percentage points year-over-year, and we brought our net debt down by more than EUR 500 million during the last 12 months. Finally, on this slide, let me use the opportunity and give you a short update on the additional milestones that we have achieved on the ContiTech sales process. You may have seen on the financial figures that the acquisition financing was finalized a couple of weeks ago on the buyer side. In addition, the majority of the required regulatory approvals are already in place. So progress is being made also on our end, but also on the loan staff fund side. Therefore, we continue to expect closing around the turn of the year. We are doing everything within our control to support the process and facilitate timely approvals while obviously, ultimately, the timing of those approvals is in the hands of the relevant authorities. Nevertheless, right now, it looks very positive. So turning to Slide 5. As already announced at the beginning of September and starting with the third quarter, Continental now reports its operating business by region: EMEA, the Americas and APAC. ContiTech, as long as it is still part of Continental, is presented as a discontinued operation. From our point of view, the regional breakdown provides greater transparency on market dynamics and business performance. And it reflects the way we are driving our business, therefore, just a logical next step in our transformation. And looking at the regions on Page 6. The results underline that effective price/mix management, operational execution and portfolio measures are very important factors to support profitability in a difficult volume environment, clearly highlighting the resilience of our tire business. EMEA, in particular, has performed very strong in Q3, delivering organic growth of 2.2% and an adjusted EBIT margin of 18.7%. APAC maintained a similarly strong margin despite slightly negative organic growth, which was driven by our portfolio measures, among other effects. And while organic sales in the Americas declined noticeably also because of proactive rightsizing of our OE business as well as very weak South American markets, we managed to keep the adjusted EBIT margin broadly stable at 8.7%. ContiTech, which you can see in the discontinued perimeter on this slide, continues to navigate a very challenging market environment, too, which has left its mark on the operating result. However, the order books look healthy, and we are confident that it will materialize over the coming quarters. With that, over to you, Roland, for the entire market development and a closer look at the regions.

Hello, everyone. Thank you, Christian, and welcome from my side. Let me directly start with passenger car tire markets on Page 7. So light vehicle production developed broadly in line with our expectations and remained weak overall. North America was particularly challenging for us as a company. Also in China, production declined from a very high, which still benefited from subsidies. For our own business, however, the well-established position for export volumes helped us and smoothened the trend. In replacement tires and according to most recent data, Europe was down year-on-year. However, with the current low visibility on import volumes, this trend may also change with the next update even though driven by market volumes, which are less relevant for us. China and North America were broadly stable in the quarter, with latter showing a continuously positive trend over the last 2 quarters. Turning to Slide 8. In commercial vehicles North American [ OE ] production recovered strongly, although from a very low comparison base. And also European production remained positive, our growth moderated from previous quarters. The replacement picture continues to differ. We've been [ tracking ] our replacement demand remained robust. North America was still below the prior year level and continue to be influenced by import activity. Nevertheless, the sequential trajectory has improved slightly, which gives us some reason to hope for a further gradual recovery. Turning to the sales bridge on Slide 9. Reported sales decline is largely due to consolidation effects from the sale of OESL, just like Christian has said in the beginning of the call. On the underlying tires business, volumes declined by 4.5%, as expected. Passenger car tire volumes were weaker in both OE and replacement, mainly due to the Americas. Truck tires, however, developed more positively, with a solid growth in EMEA and a strong North American OE growth, while the North American replacement market remained weak, as you saw on the previous page. The main offset to this was price mix, again, which contributed a positive 2.9%. The main drivers are product and channel mix, stronger truck tire business and a pronounced UHP contribution, particularly in EMEA and APAC. And also foreign exchange provided a positive contribution of around [ 1.3% ], leaving the overall tariff sales on a like-for-like scope, basically on the level of the comparison period. Summing this up, our business again demonstrated that strong mix management can cushion a significant part of the volume pressure. And the adjusted EBIT bridge on Page 10 tells a similar story. In fact, the negative volume offsets were more than offset by our healthy price/mix. On the material side, gross raw material costs increased by a mid-double-digit million euro amount year-on-year. However, this was more than compensated by a positive inventory valuation effects. Production-related costs, which include both variable and fixed costs directly related to production, are mainly reflecting the overall inflation in wages and salaries. This is also true for the nonproduction fixed costs, which include R&D, SFG&A as well as holding costs, among others. Summing these effects up, we've generated an adjusted EBIT of EUR 540 million in Q3 '26 for our continued operations, which we consider to be a strong result. Let's now look at EMEA on Slide 11, which was the main contributor. Sales stood at EUR 1.9 billion, organically growing by 2.2%. Adjusted EBIT increased to EUR 351 million, resulting in a margin of 18.7%. The performance was supported by another healthy price/mix contribution, especially since UHP volumes increased also in winter tires. This supported mix strongly despite lower overall passenger car tire volumes and a demanding comparison base from last year's Q3. Truck tires also contributed, with solid growth in both OE and replacement. The recent portfolio measures we announced in EMEA had a low double-digit million euro negative impact on sales, but made a positive contribution to profitability. The result demonstrates the value of our premium positioning and continued effective cost management. At the same time, we cannot extrapolate this particularly strong quarter, especially given the volatile market environment and the expected continuous increase in raw material costs, which will come with a significant sequential headwind in the upcoming quarters. Over to Page 12. In the Americas, sales amounted to EUR 1.1 billion and an adjusted EBIT of EUR 97 million, which means that we managed to keep earnings broadly stable despite the organic sales decline. Reduction in sales primarily reflects significantly lower passenger car OE volumes in general, however, this was even more pronounced for us due to active portfolio measures to rebalance ROE exposure in the region. And in effect, that we will certainly also see throughout 2027. In addition, replacement volumes came in below the prior year, in which we benefited from some extraordinary volume pool from one of our larger customers. Truck tire OE recovered strongly, while replacement remained below prior year. In both PLT and truck tire replacement, regional market trends remain diluted. While demand in the U.S. and Canada is rather stable, South America remains particularly good. Despite the decline in sales, profitability was broadly stable. Lower tariff costs provided a year-on-year tailwind in the low to mid double-digit million euro weight. This included further IEEPA refunds, which amounted to a low double-digit million euro amount in the quarter and the prior year comparison which still reflected a higher tariff rate of 29% in July and less mature mitigation measures. Commercial measures and effective cost management as well as a continued slight increase in our UHP share also supported the results. Nevertheless, lower volumes and weaker fixed cost absorption remained a burden. We're therefore focused on market recovery, operational discipline and further mitigation of material cost effects. Let's turn to Slide 13. APAC generated sales of EUR 476 million and an adjusted EBIT of EUR 89 million, corresponding to a margin of 18.6%. Organic growth was minus 1%, while reported sales benefited from a substantial positive currency effect, mainly driven by Chinese RMB and Australian dollar. The underlying mix remains healthy. UHP volumes grew solidly, and our exposure to Chinese OEM export business supported OE volumes. At the same time, the higher OE share resulted in some mix dilution. Profitability was further supported by the portfolio measures with already implemented in the region last year. Due to the closure of our plant in Malaysia, however, we also temporarily had to reduce volumes, particularly in the secondary brands, while ramping up our plant in Thailand. Over to Slide 14. Turning to ContiTech. Organic sales were slightly down year-on-year. This has also left its mark on the adjusted EBIT, which before the IFRS 5 effect, declined to EUR 47 million. Market recovery was lower and also less pronounced than we initially expected. At the same time, the encouraging order intake did not yet translate fully into sales and earnings. The main issue was realization of the order backlog. Following capacity adjustments made during the period of underutilization, the ramp-up created temporary production inefficiencies. The teams are implementing the necessary measures to bring production back to the required level, however, and we're confident that the situation can improve in a timely manner as execution stabilizes. At the same time, this has led to additional costs in the third quarter, which was one of the main reasons for the EBIT decline. Margins were also affected by an unfavorable product mix and raw material inflation that was not yet fully covered by the commercial measures we've implemented in the market. Over to Slide 15. Looking at the continued operations, again, we can clearly say that our strong operational business has also resulted in a decent cash generation for a third quarter, which you can see on Page 15 now, our adjusted free cash flow amounted to EUR 31 million in the quarter. EBITDA improved substantially. In addition, CapEx was slightly lower due to investment phasing as we have also seen in the first half of the year. Also, seasonal working capital buildup was slightly less pronounced than last year. These positive effects were largely offset by other cash effects, which were mainly impacted by the Aumovio spin-off in the year-on-year comparison. Overall, the cash flow development is consistent with the seasonal pattern of the business and the improved operational performance. You can see on Page 16, working capital increased sequentially to EUR 4 billion. This primarily reflects the typical seasonal buildup ahead of the winter season. In addition, the value of inventories increased because raw material costs rose. Nevertheless, we managed to bring the net debt down by around EUR 500 million compared with the third quarter 2025. We expect the normal year-end working capital release and stronger operational cash generation in the fourth quarter to further support the deleveraging process. Turning to the market outlook on Page 17. We continue to expect the market development to remain unfavorable, with challenging and uncertain conditions in the market we operate. We have slightly adjusted our replacement market expectations in Europe. This primarily reflects an updated assessment of import trends rather than a change in the underlying demand. Given the continued volatility in import patterns, estimating underlying market development remains challenging. For passenger car OE, North America and China remain weak. Commercial production is more supportive, especially in North America, while truck tire replacement demand remains mixed. Overall, our guidance does not assume a product-based market recovery, and is pretty in line with our H1 assumptions. Finally, let me turn to our updated full year guidance on Slide 18. With just some months left in '26, we've now narrowed the sales range for continuing operations to around EUR 13.5 billion to EUR 13.9 billion. We've also raised the adjusted EBIT margin guidance to around 13.4% to 14%, reflecting another strong quarter in tires and a greater visibility for the remainder of the year. The same strong operational performance is the principal reason for raising the adjusted free cash flow guidance to around EUR 1.0 billion to EUR 1.3 billion. CapEx assumptions remain broadly unchanged, and we continue to apply strict working capital and cash discipline. For the first time, we're also providing guidance for the tires regions. We expect EMEA sales around the previous year level and margin slightly above the prior year. America sales are expected slightly below prior year, with margins around the range of the previous year. APAC sales and margin are expected to be slightly above the prior year comparison base. The definitions of around, slightly above and slightly below are provided in the backup section of this presentation. But essentially, we're looking to a 4% to 5% sales corridor and a margin corridor of 1 percentage points for the respective definitions. The key element for us, however, will certainly be the group guidance moving forward. For ContiTech, we have narrowed the sales outlook to around EUR 4.2 billion to EUR 4.4 billion and now expect an adjusted EBIT margin of around 6.5% to 7.5% before IFRS 5 implications. Important to mention, the overall guidance upgrade reflects proven execution and greater visibility, not an assumption of stronger end markets. For Q4, we still expect volume pressure and sequentially higher raw material costs with a significantly higher drop on EBIT. Positive price/mix, commercial measures and operational efficiencies should provide support, but we do not expect that Q4 can repeat the strong margins we have seen in Q3. And with that, I hand back to the operator for the Q&A.

[Operator Instructions] The first question is from Harry Martin from Bernstein.

The first one I had, just on pricing. From the EBIT bridge, it looks like a very high 94% drop-through on price mix. So that usually would mean a large amount of the 2.9% would be pricing rather than mix. Is that the right read? Or is there any other reason for that? And then I had a couple of questions on free cash flow and the guidance for the full year here. The first one, can I clarify if that includes the sale of the mycar business in Australia? Or if that would be an inflow on top of the free cash flow upgrade? And then more broadly, does higher 2026 free cash flow effectively reduce the amount needed from the ContiTech sales for deleveraging? And would that allow a larger cash return next year?

So Harry, first of all, thanks for the questions. Christian here. Let me go first with the price related question, and then I think Roland will comment on what is considered within the free cash flow and what does this mean for our potential utilization of the expected proceeds from ContiTech. So on the price/mix side, I mean, I hope you understand, I'm not going to comment on the individual price effect. As we always said, it's our responsibility to find the right balance between price/mix and volume. You've seen, we continue to see volumes being under pressure, partly due to market weaknesses, but also partly due to conscious decisions like rightsizing of OE in North America. Overall, the strong price/mix performance you see throughout this year, I mean, Q3 doesn't stand out. It's in line with what you're seeing throughout the course of the year, is mainly driven though by the positive mix effects.

Quick adder to what Christian just said, because you were asking for the drop-through, Harry. I think price/mix, usually one of the bridge items with the highest drop-through. So it's not uncommon to see a very high drop-through within isolated periods as in Q3. So the positive EBIT mix exceeding sales mix in Q3, that means we're not shifting merely towards higher-priced products but toward this proportionately higher-margin business, driven by individual article mix, channel mix, customer and regional mix. So it's not just important how many more UHP tires we sell, but also which articles we sell, who we sell it to and where we sell it. And this, in addition, because it's a couple of mix effect, is then leading to the high drop-through. So that was on number one. Number two, free cash flow. I think the -- upping the free cash flow guidance was more driven by the guidance upgrade on the earnings side, plus more visibility on the CapEx year-end and also a slightly higher expectation on the working capital swing. mycar is not yet part of our free cash flow guidance because we're still waiting for the closing. The third part was now with the upgrade on the free cash flow guidance, does it mean now shareholder return on the proceeds coming from the ContiTech sale could also increase? No. Because we said from the EUR 3.1 billion we're expecting now, if we would return EUR 2.5 billion to the shareholders either as a share buyback or special dividend or a combination of both, and then EUR 600 million would be used for deleveraging. Then anything else than basically coming from a higher earnings outlook would then be subject to a decision on the regular dividend, right, and not so much on the specialty.

The next question is from Thomas Besson from Kepler Chevreux.

It's Thomas Besson with Kepler Cheuvreux. And I have 3 questions as well, please. I'd like to start with the 2 relatively unusual items that supported Q3, the tariff reimbursement and the valuation effect. Is it possible to get a precise number for Q3 and year-to-date for both, please? And does one of them repeat in Q4, more likely eventually tariff reimbursement because I think valuation effect will [indiscernible]? That is the first question. The second question, you've now had negative volumes for the last 5 or 6 quarters, should we anticipate volumes to stay negative? I think that's more or less what you're suggesting with your comments about volume pressure continuing in Q4. And do you believe that you could turn that in '27? So basically, just broad volume comments on the outlook. And lastly, I'm not sure I understood your comments about winter tires. I think you said the comparison base was high and there was a boost from PHP in winter tires. But I wanted to have your comment about your overall European winter tire volume and eventually North American winter tire volumes versus 2025, and whether you expect this to be a net contributor to both regions or at the opposite, is something that will be a detriment to your margins in '26 versus last year.

So Thomas, first of all, and once again, thank you. Roland, do you want to cover the tariff impact and the individual impact? I think there were 2 questions. One is the exact amount. Second was, is it onetime or is it repeating? So -- one question was 2 sub-categories.

So let me start with the first one, on the tariff side. So in Q3, what we have seen is 2 effects basically. First of all, a normal year-on-year effect on the tariffs were positive in the low to mid euro -- double-digit euro million amount. And on top of this, we got a second wave of IEEPA refunds, again, a low double-digit million euro amount, and helped us obviously in the region Americas in Q3. That's the end of the story basically on the IEEPA refunds. There's no additional posting now foreseen for Q4, and we don't see any legal change now helping us in this regard. On the raw material side, the gross headwind from raw materials was a double-digit million euro amount in the third quarter. And on a net basis, we still see minor support from raw materials providing a benefit in a low double-digit million euro range. We've seen EUR 15 million, we have seen -- we have shown in the EBIT bridge. This is the net effect. So gross effect, mid-double digit, but full offset by inventory valuation effects, which led to the EUR 15 million. Is this going to continue in the fourth quarter? No, it's not. What we see in the fourth quarter coming through now is the full effect from the increased raw material costs. And there is no offsetting effect now from the inventory valuation. What we expect for the fourth quarter on the material side is a mid- to high double-digit euro million amount hitting our P&L.

Okay. Then let me talk about the volume-related questions. I mean I think first question was obviously, do we expect Q4 to be comparable in terms of negative volume impact versus Q3? So what we said and what we always said, we assume and put our guidance and predictions on expectation that markets would not recover quickly. I think we have proven to be right in Q3. We are also cautious in terms of our outlook, therefore, in Q4. So year-over-year, we still believe that volumes in Q4 will be down, but it's getting sequentially quarter-over-quarter, now a little bit better. So you see -- I mean, we talked about the truck tire effect. So truck OE in our 2 relevant regions is really up. Truck replacement in Europe is, let me say, stabilizing, slightly improving. In the Americas, it's still down, but the deterioration is getting less and less. So we should be really at a certain point in time then going into 2027, turning into a positive development year-over-year. On the OE side, we continue to be -- to estimate and believe that markets will continue to be weak. This is valid for Q4. And we also do not really see strong signs of recovery for 2027. So we continue to be cautious there. And on the PLT replacement side, I mean, we see a relatively stable environment in Europe. We continue to believe that this is -- that this will also be the case in 2027. We continue to see weak environment in South America. We don't really have any beliefs or reasons to assume that this is going to change quickly. In replacement North America, if you continue to follow sell-in versus sell-out, so sell-in is clearly on a lower basis for quite some time now versus sellout. So this suggests that at least on the PLT replacement North American side, we should see then also continuous stabilization and maybe also at a certain point in time, some improvement. So for your questions, Q4, year-over-year still down, but less down compared to Q3. So we see a positive trend. Nevertheless, we are cautious. For 2027, I mean, very early to tell. We continue to be cautious, but at a certain point in time, there should be a positive volume contribution. Specifically then on the winter tire side, I mean, winter tires in line with the overall situation, in absolute volume so far are slightly down year-over-year, but the mix is very, very healthy. So we have added UHP portfolio, especially on the winter tire side, we continue to see -- in Europe, very, very positive references and press test results for our tires, and this does really support the mix on the winter tire side, which looks very strong for 2026. And that should definitely continue to be a positive contributor to our results also in Q4. And maybe one additional word then in North America, we are adding, because it's not such a relevant winter tire market for us compared to Europe. We still -- we continue to be, nevertheless, a strong player there, but we're also adding here, products to our portfolio. So the secure contact or weather is now our real first -- or weather tire line for North America, which will only bring relevant positive volume impact in 2027, not really a subject for 2026, but definitely something we count on for 2027.

The next question is from Stephen Benhamou from Bank of America.

I have 2 questions. The first one is on raw mats. So you provided some indications regarding Q4. Based on the spot price, what's your first assumptions for H1 2027? And my second question is regarding the holding costs. So it's around EUR 20 million to EUR 30 million per quarter. Following the ContiTech disposals, what would be your solution for 2027?

Want to take this?

Yes. Let me start with the raw material assumption for '27. Stephen, you know, it's pretty early, right? So we're trying to come to a basic assumption about the oil price development, which has been the baseline for the rest to follow. So we expect the raw material headwind to be almost entirely concentrated in H1 '27 with a peak in Q1. By H2, we expect the impact to be broadly neutral to slightly positive. For the full year, the headwind is expected to be, again, in the low to [ mid-double-digit ] million euro range, even if prices fall in the second half, if they would, the relief would come with a delay. So that's on the raw mats side. Holding cost, I think the assumption still stands, EUR 30 million to EUR 35 million. We don't see this coming down quickly next year. Of course, there are always chances being a smaller company to reshape the organization, becoming more agile, taking cost out, but it's going to take some time. First of all, we also need to deal with the closing of the transaction of ContiTech and then we can look into this more closely.

Next question is from José Asumendi from JPMorgan.

A couple of questions, please. On the first one, in the U.S. or Americas margins, can you describe a bit what are the initiatives to improve the profitability in the region? And also whether you're seeing some signals of price increases coming through the market or not, maybe in comparison to what you're seeing in Europe? And the second question, please, on the profit bridge. If you could go through again a bit through the buckets of the headwinds we saw on production-related, nonproduction fixed costs and the other bucket? And how should we think about these 3 categories into the fourth quarter?