Continental Aktiengesellschaft (CON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Continental AG Capital Markets Update. The conference will be recorded. [Operator Instructions] Let me now turn the floor over to your host, Max Westmeyer, Head of Investor Relations. Please go ahead.

Yes. Thank you very much, and welcome, everyone, to our Capital Market update. Today's call is hosted by our CEO, Christian Kotz; and also our CFO, Roland Welzbacher, is joining us for the Q&A session in the second part of today's call. As we have already indicated during the Q2 earnings call, we are going to make the next step in our company transformation that is visible to the outside, a change in the reporting structure. From Q3 onwards, we will shift to a regional reporting. That means you will not see a tire segment anymore starting with Q3. The continued operations for Continental will consist of 3 regions instead. And with those -- with this call, we want to explain those regions in a bit more detail and provide a platform for potential questions around this change. The presentation of today's call as well as the accompanying data sheet with 4 quarters of historical financials are now published on our website. You can also find a direct link to the data sheet in the backup of today's presentation. 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 kindly disconnect now. Following the presentation, we will conduct a Q&A session for the sell-side analysts in this call. To give everyone the opportunity to ask questions, we kindly ask you to limit yourself to no more than 3 questions. And with that, over to you, Christian.

Thank you, Max, and welcome to everyone on the line also from my side. Thanks for taking the time to dial in. As you all know, we have taken important steps to reshape our company. So following the successful sale of our Original Equipment Solution business, the so-called OESL business and the signing of the ContiTech transaction, we have set the strategic course toward becoming a focused tire pure-play company. The agreed enterprise value of EUR 4 billion for ContiTech supplemented by up to EUR 250 million of performance-based components from our view, reflects the quality of the business and creates value for our shareholders. This is an outcome we are certainly satisfied with. As we communicated earlier, the expected cash proceeds of approximately EUR 3.1 billion allow us to deliver attractive shareholder returns of around EUR 2.5 billion while strengthening the balance sheet through deleveraging at the same time. So this provides a solid starting point on our path towards achieving our leverage ratio target of around 1x by 2029, so all according to our plan and to our earlier communications. Most importantly, we will emerge as a simpler, more focused and more transparent company. While the major transformation of Continental is nearing completion, we will continue to optimize the business, as you can see on Slide 3. We remain committed to continuously optimize both our portfolio and our cost base. So on the chart, you see some recent examples. These recent examples include the sale of our French retail operations and the planned closure of our textile production facility at Aldora Mills in the United States. Talking about the French retail operation in France, we successfully preserved the West Drive network as a franchise platform and distribution channel for our tires. So while at the same time, removing the associated fixed costs and assets from our books. So this allows us -- or this allows the business to operate with greater agility while maintaining our market presence through the franchise network. And we are also working on some additional improvement projects in parallel, further solidifying our strong premium tires business. So these actions reflect our continued focus on profitability, returns and strategic fit. And this approach will continue also as a pure-play tire company. Therefore, our commitment remains unchanged. You can expect the same disciplined and pragmatic approach that has guided our transformation in recent years. So let me start with a closer look at the future Continental setup on Slide 4. What will change moving forward is that the Tires result will become the Continental result. However, we will also have to include the central line item that so far has not been part of the result. In 2025, these items amounted to EUR 151 million and reduce the pro forma margin by approximately 1 percentage point as a consequence. As indicated on the slide, a reasonable assumption for the upcoming quarters is a run rate of approximately EUR 30 million to EUR 35 million per quarter. However, just to make this clear, this is the status quo and not yet an optimized holding structure for the future Continental. The objective is straightforward to build an efficient SG&A structure and continuously improve our cost ratio. Becoming a pure-play company also increases transparency, as shown in the bottom half of the slide and as Max indicated and explained before. So starting today, we will provide additional information on the profitability of our business areas, which are our regional segments. As you can see, Europe is the key foundation of our success. Our strong positioning in EMEA reflects the effectiveness of our strategy, customer proximity, long-standing relationships and continuous investments in supply chain capabilities. We have created a moat that will allow us to also overcome future obstacles in the business. The numbers also highlight why the APAC region and China, in particular, remain important growth markets, while APAC, as you can see on the chart, contributes a smaller share of total sales, it makes a strong contribution to adjusted EBIT and therefore, to the group's overall profitability. In North America, our priority is clear. We want to return the business to its former strength by improving operational performance, digesting the impact of tariffs and currency effects and increasing profitability in what remains a challenging market environment, but more once I come to the America details. The key principle of our operating model is a globally local approach. Global steering of R&D, manufacturing and supply chain allows us to achieve high levels of efficiency while simultaneously supporting strong local customer relationships. Our regions are responsible for those customer relationships and the commercial execution of our business, while our global functions ensure that decisions are made based on overall value creation rather than regional optimization. This balance between global scale on the one side and local proximity on the other side is from our viewpoint, one of Continental's most important competitive advantages. Cutting-edge tires with benchmark availability are the result. So turning to Page 6. Our products have been, are and will be at the heart of our success. The global development and industrialization of top quality tires, technologies and materials for all regions and segments drive our exceptional product lineup and reinforce our premium brand position. On top of this continued success in the global industry, achieving technical approvals in all application fields at basically all major OEMs, our products continue to perform strong in independent tests around the world, while our brand remains among the leading tire brands globally. So this combination of technology leadership, product performance and brand strength creates a competitive advantage that is difficult to replicate. Our globally managed manufacturing footprint, and we talked about this again and again, which you can see on Page 7, is another key pillar of our success. Some details. Today, approximately 80% of our production is already concentrated in highly standardized mega plants. That means in just 8 of our 19 plants worldwide, which makes us one of the most efficient players in the industry. Our 13 largest plants even account for 95% of the output and around 75% of our tires are produced in best cost countries. Another benefit of this footprint, the standardized mega plant layout and technology allow us to manufacture virtually any tire in multiple locations around the world, maximizing flexibility and scaling benefits mainly in replacement. On the other hand, smaller specialized plants primarily serve local market requirements or targeted product segments, balancing required scale and customer proximity. So going to Slide 8. The success of our manufacturing system, however, is also built on standardization. Standardized plants create flexibility, as I mentioned before, improve productivity, lower costs and strengthen our supply chain resilience. At the same time, our global presence and our in the market for the market philosophy brings us closer to customers while enabling efficient sourcing and production. These strengths have been developed over decades, and we will continue to invest in them. We are enhancing manufacturing capacity, increasing standardization, expanding flexibility across plants and are further optimizing our supply chain to ensure we remain well positioned for increasing demand and rising product complexity. Before we move into the regional discussions, let me briefly connect the dots. What we have shown over the last slides is the foundation of our competitive advantage as a tire pure-play company. a highly efficient global manufacturing footprint, industry-leading supply chain capabilities, strong customer relationships and a premium technology and brand position. At the same time, becoming a focused tire company also brings greater transparency. So as mentioned before, for the first time, we are providing a more detailed view of the performance drivers of the new Continental AG, giving you greater insight into where earnings come from, how value is created across the business and where we see opportunities for profitable growth. So let's [indiscernible] Page 9 with EMEA. As I said earlier, our powerhouse and largest contributor to our earnings. Within the challenging European market environment, EMEA continues to deliver strong profitability, 16.7% in 2025 to be precise, which is more than EUR 1.2 billion of adjusted EBIT. In H1 2026, the adjusted EBIT margin even improved to 17.1%. In particular, in Q2, we saw a clear step-up with an adjusted EBIT margin of 17.5%, driven by a healthy price/mix, thanks to the strong UHP performance and lower raw material costs. Just like for the other regions, and we talked about this, however, raw materials will turn into a headwind in H2. The resilience in the EMEA region is driven by the structural strength of the business. The region benefits from a high share of PLT replacement business, a premium focused brand mix and a broad customer base across Europe. While the UHP share in Europe is structurally lower than in North America or parts of APAC, the quality of the business remains strong. Our profitability demonstrates that success is not driven by a single product category, but by the strength of the overall business model. The foundation, we are close to our customers, maintain long-term or long-standing relationships across the value chain and operate a responsive and efficient supply chain. These capabilities allow us to deliver high service levels, respond quickly to changes in the demand and create value for our customers in volatile market environments. Looking ahead, we see attractive opportunities to further strengthen this position predominantly by growing our UHP business while maintaining the right balance in our brand portfolio. Furthermore, we are well positioned to grow with the Chinese OEMs entering the European market. We already maintain strong relationships with a growing number of these customers, and we do see potential to expand this business in the years ahead. So overall, EMEA remains a key foundation of our group's success and I think demonstrates very, very obviously, the effectiveness of our strategy of customer proximity, operational excellence and premium positioning. Turning to the Americas on Page 10. The picture is somewhat different. The region operates in an environment that has become ever more challenging throughout the last years. We have built a solid Tier 1 position, particularly in the premium passenger tire segment. And in many markets, we are already outperforming the industry from a commercial perspective. Our premium products continue to gain recognition and our market position is sound. However, 2025 was affected by a combination of factors that clearly weighed on profitability. Geopolitical developments, tariff-related uncertainties, foreign exchange effects and subdued market demand created a difficult operating environment, which is also reflected in the 8% adjusted EBIT margin. At the same time, weak demand in the truck tire business resulted in insufficient capacity utilization and weighed on the earnings as well. In the first half of 2026, we already saw some improvements, although sales remained below the first half of 2025. Profitability increased to an adjusted EBIT margin of 9.4%. Also here, the second quarter was encouraging with an adjusted EBIT margin of 10.5%, back in the double-digit margin area, a step-up mainly due to the mitigation measures we've implemented in light of the U.S. tariffs. However, pressure on volumes and insufficient capacity utilization, predominantly on the truck tire side are expected to remain challenging within 2026. While these challenges are significant, they are well understood and come with clear priorities for action. First, we want to continue growing our premium and ultra-high performance business, where we already have a strong product offering and attractive profitability. Yet we have multiple product launches upcoming to further increase our 4x4 and light truck presence where we are currently still underrepresented. Second, we are focused on improving manufacturing efficiency and increasing the productivity of our existing footprint. With this, we intend to strengthen our market position and to gain share in the United States and Canada. And finally, we will maintain a clear focus on cost efficiency and disciplined capital allocation. With these actions, we are convinced that we will improve earnings quality back to the double-digit margin levels Americas is capable of delivering. So then let's finally let us take a look at APAC, which you find on Slide 11. From a sales perspective, APAC is our smallest region. At the same time, it is one of our most attractive regions. The 16.9% adjusted EBIT margin in fiscal year 2025, an impressive 18.8% in H1 2026 and the premium passenger car business mix shown on this slide underline the quality of our positioning in the region. Consequently, APAC contributes disproportionately to earnings. Nevertheless, we also expect APAC profitability to remain below H1 2026 in the second half of the year. Given the strength of the region, we intend to continue expanding our presence and investing in growth opportunities across the APAC region. Our first priority is to fully capture the potential offered by established OE customers throughout the region. We have built strong relationships over many years and see attractive opportunities to further deepen these partnerships. At the same time, we see substantial growth potential with fast-growing Chinese OEMs, particularly as they continue to expand their export activities globally. As mentioned for EMEA, their growing international footprint creates opportunities not only in China, but also in other regions where these manufacturers are gaining market share. That said, our objective is not to pursue growth at any cost. We will remain selective and disciplined. Our focus is on attractive premium segments, particularly ultra-high performance tires where our technology, product quality and brand positioning provides a competitive advantage. Combined with our premium reputation, OEM relationships and localized manufacturing footprint, APAC offers attractive long-term growth opportunities within the new Continental. So I can say I'm really excited that we are now able to share more details around our premium tires business with you moving forward. Again, this is just the starting point. Therefore, I would like to reiterate my key takeaways from today's presentation. So what stands behind our performance is a resilient and difficult to replicate business model, built on premium products and efficient global manufacturing footprint, leading supply chain capabilities and strong customer relationships. These advantages create meaningful differentiation and we are convinced limit that these limit the impact of lower-tier competition. Talking about the regions. EMEA remains the foundation of our earnings profile and is well positioned to sustain industry-leading profitability. In the Americas, as explained, our focus is firmly on executing the operational and commercial measures required to restore earnings quality and unlock the region's full potential. And in APAC, we continue to build on a highly profitable foundation, capturing attractive growth opportunities while maintaining our disciplined premium positioning. Taken together, we believe these strengths position Continental well to deliver profitable growth sustainable value creation and long-term competitiveness as a focused tire pure-play company. So what's next? First, Q3, which, by the way, is progressing as planned. Even though the volumes continue to be challenged, especially given the tough comps from Q3 last year, we are doing very well in terms of price/mix and also in terms of profitability as a result. Q3 margins should once again move more towards the upper end of our full year guidance range. And of course, with our Q3 2026 results, the new segment structure for Continental will become effective. And already today, you have plenty of information to prepare your financial models accordingly. But this is just the beginning in the upcoming year, presumably in H1, a little bit dependent on the closing date of the ContiTech sale, we plan to host a Capital Market Day dedicated to the future Continental and an even more detailed view into Continental as a pure-play tire company and our ambitions and targets. So with that, I would now like to hand over to the operator for the Q&A, for which Roland will join us as well and would like to thank you for listening and spending the time with us.

[Operator Instructions] The first question is from Monica Bosio from Intesa Sanpaolo.

Just on Americas, where the profitability was well below the average. I was just wondering if you can share with us what is the current capacity utilization? And if you have a target maybe in 2, 3 years' time in terms of better saturation. And -- so I'm just wondering if you can share with us also if you have a target in 3-year time within your higher margin guidance, specifically for the Americas? And second question is just a check. I'm sorry, but I didn't catch what are you expecting for the APAC market in terms of margins by year-end? And I didn't catch what were the margins for the APAC in the first and second quarter.

Monica, then I think I go first. So capacity utilization in Americas was the question, I think. So as I said, I mean, we clearly have a different situation between PLT and truck tire. In general, I would say, and I mentioned this in the past, we target for a healthy -- or we a utilization rate of 90% plus/minus as a healthy targeted utilization rate because it gives you then enough opportunity also to respond to changing customer demands, while at the same time, you're running at a level where you can optimize efficiency. So on the PLT side, we are not far below that target level. And this is true for the Americas as well as for Europe, even though we are below this 90%. Whereas on the truck side, globally, we are running roughly at an 80% utilization rate. And in the Americas, especially in North America, we are even below this 80%. So -- and this is one of the reasons, and you have seen the chart that in North America, we also have a higher share of the truck tire business of the total business. And we also in the U.S. have a lower capacity utilization rate even on the truck than in the global average or in Europe. It's part of the reason, but only part of the reasons why you see a lower profitability level in the U.S. So what are our targeted rates that was then the question, obviously, to get back to the 90% for PLT, we are very confident that we maintain this healthy utilization rate levels and will slightly improve once again from where we are today. On the truck side, it's much more challenging. And obviously, getting back to this level depends very much on when do markets recover, how much will they recover. And we talked about, I think, the U.S. market situation a couple of times. So margin targets then was the second question for the U.S. or for the Americas. I mean before -- second -- that was the -- second question, let me start with a little bit of a historic view. So if you go to times before corona, so -- and really the corona pandemic left the biggest marks in our operations in the Americas, there was basically hardly any difference in profitability between the 3 regions. So the Americas has the potential, we are convinced to get to similar and comparable profitability levels than the other regions, but definitely above the 2-digit level. Part of it is under our control, and this is what we are working on. Part of it is not under our control, tariff situation, FX situation, raw material supplies and so on and so forth. But we feel confident that, let me say, if everything remains stable as what it is today, we should be definitely able to get back to the at least 2-digit level within our midterm time frame. And midterm for us is always latest 2029, and that's clearly our target. And then your last question was, I think, on APAC. So -- and there you also had 2 questions, I think, if I got it right. One was our current trading and performance and the other one was our outlook for the total year. I'll start with the second part. We are not providing an outlook on a regional level yet. And so this is why I also didn't mention the targeted profitability for APAC for the total year. But obviously, with the Q3 reporting, we will also then need to provide and will provide regional guidance that will be part of the change. But current performance, what I mentioned was 16.9% adjusted EBIT margin in 2025 and 18.8% in the first half of 2026. I hope I covered all of your questions.

Also Q1 versus Q2, we had 19.1% margin in Q1 in APAC and 18.5% margin in Q2.

[indiscernible] is from Ross MacDonald from Citi.

First question, just an admin question, but trying to download the Excel, the historicals, can you maybe give us an update on how much history we should expect to receive for these divisions, for these new divisions, for the group? I'm just trying to get a sense of how we should think about seasonality in these divisions by quarter and maybe peak versus trough margins versus history. It would be great to understand how much of that data you'll give us. The second question, just on EMEA. If I look at the EMEA sort of data that you've given us, it looks like you have very high Conti brand share, but still quite low penetration with the UHP tires. So that would imply there's a lot of upside potentially on mix in Europe over the midterm. So how should we think about that given you're already making quite a strong margin in EMEA, how should we think about long-term margin potential for Europe from here? And then my final question, just on North America. Can you maybe help me understand the very high OE share? I know this is 2025 data that you're presenting, but how should we read that? Because obviously, the margin is low at 8% in 2025, but on a very high OE basis, would it be fair to assume a sort of long-term 25% OE share and how to think about that going forward?

Okay. Roland, you will jump in.

I will.

So I think first question was how much history we will provide. I think the data will show 4 quarters per region.

Exactly, yes.

So that's the level of history we are able to provide. Your second question was around EMEA and the correlation, I think, between UHP share, brand share. And based on that, if your read of additional UHP opportunity or mix opportunity is correct. So I would say your read is correct. I mean, be a little bit careful, obviously, in Europe. In Europe, we have this historical brand portfolio as well. So we have, yes, a high share of Continental, but compared to the other regions, actually also the highest share of other brands. And in these other brands, we are not as UHP heavy, let me say, as we are in Continental. But clearly, there is additional mix opportunity. What we always said, and I think the numbers do show that there is or where this potential lies. Americas, and I hope I get all of your question, was the question on the relatively high OE share. So that's a correct reading. I mean, if you compare this also to APAC, we also have a relatively high or an overproportional OE share, so 28% in the Americas, 32%; Europe, only 19%. A couple of things to mention. Number one, in the Americas as well as and especially North America and in APAC, we are -- I mean consciously targeting a slightly higher OE share also to provide the foundation for profitable later replacement growth. But in the long run, I mean, once we are more equally exposed in the individual regions, there should not be really a difference in terms of balance between OE and replacement share in the different regions. And there's one Americas specific subject. You have seen that in the Americas, we have the highest exposure to the truck tire market. And on the truck -- or in the truck tire business, the OE share is even bigger of the total business than on the PLT side. So this also drives a relatively higher share of OE business of our total business in the North American region.

Christian, can I maybe just sneak in a quick follow-up just on North America. Obviously, you were saying previously prior to COVID that the margin profile by region was fairly balanced. Has something changed beyond the obvious tariff headwinds? Has the purchasing power of your customers become stronger? And is it reasonable to assume that North American margins can get to sort of mid-teens level like the other divisions?

No, I mean if you take a look at the underlying mix, if I start on the positive note, on the underlying mix, the mix opportunity, especially in North America, is at least as positive and healthy as it is in the APAC region and definitely even better than on the European market. So and I mentioned our under-indexation on the AT and 4x4 side, where we definitely have additional profitable growth opportunity. So what has changed in the Americas? So tariff is one element, no doubt about that. And the other part is the operational performance in our plants. So corona, I mentioned this also in other meetings and discussions, we had -- the biggest impact really in our North American operations in terms of fluctuation rates, difficulties to replace the workforce, and this has really led to inefficiencies and operational or a deterioration of the operational performance, which we are now reestablishing step by step. But then there's also a third element, which is really significant for us, which is the exchange rate effect. As you know, I mean, before the corona or if I go back to the 2018, '19 days, the dollar, especially for us, the dollar to euro exchange rate was very different to what it is today. And you know we are still producing, especially on the PLT side, quite an amount of tires in Europe, which we sell in the U.S. So we complement our portfolio produced in the U.S. with production from Europe. And this has led also or this is weighing on our performance as well. And I mean, let's see what the exchange rate will do in the long run. But this is also an impact which has clearly changed the pre-corona versus today's world.