Valeo SE ($FR)

Good evening. This is the conference operator. Welcome, and thank you for joining the Valeo First Quarter 2026 Sales Conference Call and Webcast. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Marisa Baldo, VP, Financial Communication and Investor Relations of Valeo. Please go ahead, madam.

Good evening, everyone, and welcome to Valeo's first quarter sales conference call. I'm [indiscernible], and joining me is our CFO, Edouard de Pirey. The format for today will be a presentation for 10 to 15 minutes, followed by a Q&A session for sell-side analysts. For your reference, the press release and slides are already available on our website at www.valeo.com. A replay of the call will also be available on our website. Before Edouard begins, I want to quickly directly -- direct you, sorry, direct your attention to the disclaimer on Slide 19, which I invite everyone to read. Thank you again for joining us. Edouard, the floor is now yours.

Thank you. Thank you very much, Maria, and good evening to all, and thank you for joining Valeo's First Quarter 2026 sales presentation. So let's start with the key takeaways for the quarter on Slide 2. In a global environment that remains volatile, we delivered a solid performance. Total sales were up 1.3% on a like-for-like basis, consistent with our full year objective. OEM sales decreased slightly like-for-like in the market down by 3% resulting in a 3-point outperformance. All 3 divisions outperformed. The execution of our ELEVATE 2028 plan remains on track. Specifically, regarding the growth engine, we confirm our anticipation of a return to growth in China in the second half of the year and we are laying the groundwork for broader growth resumption in 2027. On this basis, we are reiterating our 2016 guidance across all indicators. We look for sales between EUR 20 billion and EUR 21 billion with flattish OEM sales. We target operating margin between 4.7% and 5.3% and and free cash flow in excess of EUR 400 million. These objectives take into account S&P Global Mobility estimates published in April and assume no significant changes in macroeconomic projections or significant supply chain disruptions. Moving on to Slide 3. We are operating in a challenging environment. This is a situation that has persisted for several years. So I get it now seems to be the new normal for our industry. On a positive note, we have become accustomed to this. We have successfully adapted and demonstrated our agility. We will approach the current challenges exactly the same way. drawing on the experience of the past crisis and applying the same proven method with consistency and discipline. Regarding the Middle East conflicts, our first outs obviously are for the people affected, and we hope for a swift return to peak. As far as value is concerned, there are very limited direct industrial consequences. We have no industrial operations and negligible revenue exposure in the region. We have only one supplier there, a supplier of aluminum tubes that remains fully operational. Logistics flows between Asia and Europe are routed via the Cape of Good Hope. It has been the case for a couple of years now. We are not energy intensive. Direct energy cost represents 1.5% of sales for electricity and 2.5% for gas. So in total, 1.5% of sales, and we rely on long-term contracts. Finally, we have not observed any material impact on customer demand so far. Nevertheless, we remain vigilant and closely monitor the situation. That was for the Middle East. Now on the supply chain side, we are proactively addressing tensions in the memory market. Since we released full year results last February, we have made significant progress in terms of coverage. We now have secured more than 90% of our memory volumes for 2026, and we are confident that we will be able to serve customer requirements over the full year. Furthermore, we are in constructive pass-through discussions with our customers, and we are managing the technology transition with a dedicated task force. Lastly, obviously, in such an environment, we stay focused on delivering profitability and cash. On the one hand, we are on track to achieve the annual run rate of EUR 300 million in savings from our self-help measures as of this year. And on the other hand, we maintain strict discipline on CapEx and R&D, keeping our investment spending under tight control to support our cash generation target. Now on Slide 4, a focus on the third engine of Elevate 28, which is growth to show that we are executing our road map as planned, with key milestones unfolding in 2 of our growth regions. In North America, we have started to build a new site in Magellan in Texas, to deliver one of the largest orders in Valeo's history, the central compute unit for General Motors. This is an illustration of the conversion of our portfolio of order intakes with production set to start in 2027. Note that the investment of $225 million over 5 years is well taken into account in our Elevate plan. In India now, we announced 2 new manufacturing lines to support the ongoing rapid development, a new line in Pune for power dedicated to electric powertrain systems designed to support the Mahindra new born electric platform. And a new line in Sanand for [indiscernible] to manufacture vision cameras for several major OEMs in India. Moving now to China on Slide 5. With the Beijing Auto Show opening tomorrow, we want to illustrate the momentum we are building in the region by highlighting a non-exhaustive list of recent start of productions. We have several key start of production in March, April 26, including the 51 deep integration power electronics module for a major Chinese automaker, the dual layer HVAC which has entered in production in March 26 of several Chinese partners, including Cherry a domain controller for GD OEM first of the longest of businesses in this domain for both JVs and Chinese OEMs and facia and localize for the XPENG P7. This dynamism confirms that we are on track for a return to growth in China in H2 this year. Looking now at the numbers on Slide 6. As I said in the inductor remarks, group sales reached EUR 5.1 billion, up 1.3% like-for-like. Perimeter impact was 0.6 percentage points negative essentially due to the sale of the powertrain automotive sensor business. ForEx had a negative impact of 4.3 percentage points, reflecting the appreciation of the euro versus the U.S. dollar and the Asian currencies. OEM sales stood at EUR 4.2 billion, slightly down by 0.6% like-for-like in a global automotive production down by 3.4% according to S&P meaning an outperformance of around 3 percentage points. Aftermarket remains a steady pillar, growing 1.9% like-for-like, supported by the performance in North America and Asia as well as the development of new services with distributors. Miscellaneous sales grew by 37% like-for-like, thanks to tooling and R&D contributions from our customers and helped by a favorable comparison basis. Turning to Slide 7 now with the performance by region. The 3 points outperformance in OEM sales was supported by a favorable geographic mix impact of 1.5 points. Europe underperformed by 2 points, reflecting a decline at Power, partly offset by the good performance of light and displays and telematics in brain. North America was a standout of the quarter, growing 7% like-for-like and outperforming by 9 points, driven by power and brain. Asia, excluding China, also grew like-for-like and outperformed during the quarter, essentially driven by brain. Note that the momentum in India continued at a brisk pace in accordance with the Elevate roadmap. In China, we outperformed the market by 1 point, supported by light. The progress to reposition our customers' portfolio continues and as I mentioned earlier, we are on track for a return to growth in China in H2 2026. By division now, starting with Power on Slide 8. In the first quarter, the division outperformed the automotive production by 2 points, bolstered by a strong start in North America. In China, the performance was in line with the market, reflecting a transition phase between the first wave of electrification and the upcoming scale-up with Chinese EV players. Overall, the good performance in e-technologies offset the slowdown in high technologies. On Slide 9, the brain division posted an outperformance of 3 points, reflecting the continued good performance of displays and telematics, thanks to the ramp-up of last year's wins. Momentum in software-defined vehicles continues to develop as demonstrated by the new site in Texas, a point that I commented on earlier. We are also scaling up in India at our Sanand plant to support local OEMs. Last but not the least, on Slide 10, Light posted a robust performance in the quarter recording like-for-like growth of 2% and outperforming the market by 5 points. This is primarily driven by China and Europe. In China, the division continues to gain traction, driven by successes achieved with Chinese OEMs. This has led to robust growth and strong outperformance in the quarter. This is consistent with our earlier statement, which is that light with its faster cycles from order intake to sales, would be the first division to experience a return to growth in China. In Europe, the ramp-up of lighting program for mainstream and premium customers remains a key driver. As a conclusion, on Slide 11. Q1 performance is in line with our full year objective. We are operating in a challenging environment, and we have the experience, a proven methodology and the agility to manage the situation effectively. On this basis, we reiterate our guidance for the full year 2016. And last, we are executing the Elevate 2020 plan as planned. Thank you very much for your attention. I'm now happy to take your questions with Marisa.

[Operator Instructions] The first question comes from Jose Asumendi of JPMorgan.

Presentation on the comments. Just maybe just a couple of questions. I think, one, if you can comment a bit more within brain when do you expect the revenue acceleration to pick up a bit more. Is it kind of a second quarter event? Or do we expect that to follow through maybe second half of the year? And you mentioned in the comments, the new U.S. footprint. And I believe also you have a strong order backlog in this division. So any additional light into the growth operate? And then second, when it comes to raw materials and inflation costs, is there a risk that as a result of rising raw materials across the supply chain. I mean not just value but just in general for the supply industry we might end up with larger headwinds than expected on the back of the recent volatility we're seeing in materials, which may contract margins a bit more than expected in the second half versus the first half, and which mechanisms do you have to pass on price increases, please?

Thank you. Thank you very much, Jose, and good evening. Thank you for your question. So as far as brain growth is concerned, so you have in mind that we have not guided for exactly when this would pick up we said that we would grow in China in H2 '26. We said that we would outperform the market in China in '27 and that we would have growth in Nevertheless, you are fully right that the underlying growth of grain will come and will support this growth I hinted that I would be disappointed if Brad would not grow in H2 this year. Clearly, this is part of what we have in mind. Nevertheless, it is not part clearly of the guidance that we offered to the market. As far as the raw materials are concerned. So it is true that the is there is clearly an increase of raw materials these days, aluminum, copper, steel, resin, oil, everything. You also have in mind that for most of the raw materials, we are well invested with our customers for what is not index or what is not automatically passed through we have, I think, a strong track record to be able to pass it through our customers. We have done it in the last few years. We have learned how to do that. Naturally, sometimes there is a bit of lag between the actual price increase of the raw material and what we get from the customer -- but at the end of the day, we have been able up to now to pass everything through, and I am confident that we will continue to pass through in the future.

The next question comes from Christoph Laskawi of Deutsche Bank.

The first one will be on DRAM and thank you for providing the comment that you secured more than 90% of the volumes. Could you remind us what percentage share you had when you presented the full year numbers? And also how you secure the 90% potentially impacted pricing of that? And if you can, any comment on '27 and how it looks for that period would be appreciated. And then the second question would be just on OEM compensation payments. if you've seen any of those or bigger payments in or what to expect also heading into Q2? And it seems like you don't want to report high voltage in other like divisional breakdown revenues anymore. Any specific reason for that? Or did I just miss that across to release?

Yes. Thank you much, Christoph. Thank you for your questions. So as far as DRAMs are concerned, so you have in mind that we said that our normal amount of purchasing for DRAM is $150 million a year. Now talking about over pricing or price increase of DRAM, if I was telling you how much it would be. This would be a challenge for our teams then because of negotiations. And this is actually competitive topic that I cannot make public here. But clearly, our objective is to get it compensated by the customers and the discussions we have with them are good understanding on where we are, and we are confident that at the end of the day, the net impact would be limited. As far as the volumes are concerned the supply chain, I don't have in mind exactly how much it was in February. We did not disclose it. But I'll tell you, it was not a -- and we are now not safe yet, but we are convinced that we are able to deliver all the volumes requested by the customers for this year. It has been a very strong job done by our purchasing teams and existing teams, and I really appreciate all the efforts they have put there. Now seeing what they have been able to do in 2026. I'm sure they will do the same for '27. I don't say it's gone. It's not done yet, but we still have 8 months to go to secure the full year '27, and I'm convinced we will be able to do it by the end of the year. Your second question was about compensation by the customers. As far as the raw material price increase that Jose was mentioning earlier, this has no impact on Q1. You have in mind that iron ore started at the first end of February, and the impact of raw materials was rather limited in the month of March and all our job actually to report this increase of prices for the latest possible. So in Q1, no impact. You also mentioned that we did not break down the high voltage. You have in mind that we have gone from the move-up plan 225 to the ELEVATE 28 plan. So during the move up, we committed to a certain number of -- a set of KPIs that we changed, and I understand that globally investors and analysts appreciated the change we had in the KPIs at that moment. And we explained at the CMD that we would change the KPIs, including changing also the way we report. You have in mind that what we were reporting as high-voltage sales where the former value Siemens sales, which are only motors and power electronic sales for EVs, and we are not all the technologies that we are selling. On top of that, in the meantime, we have changed our organizations, and we are not following, and we're not able actually to have in all our reporting on a daily basis what we sell for IV or technologies. We told you what we were aiming at by the end of 2018, but we said that we would stop reporting and splitting within the division.

The next question comes from Thomas Besson with Kepler Cheveraux.

Two questions as well, please. First one, the main driver of your revenue growth, a bit like last year is your miscellaneous revenues. Can you remind us what this is and why they are higher than a few years ago when you had higher revenues, where the proportion is growing. Maybe there's an amount of accounting change. The second question -- can you comment on the local content outcome, even if it's not voted by the parliament I'm sure it's going to be even weaker after than now. But do you believe that it effectively answers what Christophe was referring to champion in terms of reducing the need for European suppliers to shut down manufacturing output in Europe?

Thank you very much, Thomas, for your questions. As far as the miscellany sales are concerned, yes, it grew 37% but you have in mind maybe that it is compared to last year where it was minus 15% the first quarter, 25% compared to 24%. So this [indiscernible], if you remember, this is customer contributions to R&D. And this is basically a good mark of the future growth because the more you have sales of prototypes of R&D, the more you prepare the future for the growth to come. So there is a strong basis effect from Q1 '20 to 2025 and then from Q1 '25 to Q1 '26.

Yes. So if I can -- sorry, just a follow-up on that. If I look at rolling 12 months for that line, it's never been at that level ever even when you had higher revenues. So has there been any change over the last 2, 3 years on what you are putting in misters revenues, please?

No, there has not been any change in the definition of Micellar self in the last years, but there is more R&D revenues. There is more prototypes because there are more projects because they are more things to prepare for the future growth. And I do confirm there is absolutely no change in the definition. As far as the local content is concerned, you have in mind that the Christophe has set 4 main requests. The first request was about the actual number for local content. We said 75%, it is actually 70% in the European Commission proposal. Basically, it's a question of how you compute it, we consider this is a good result, and this is acceptable, and this is the right direction. Then the second request we had was it is about all vehicles. And the proposal of the European Commission is about PHEVs and EVs, so you might think that it is not what we requested, but actually, in the mind of the European Commission, in 2035, all cars sold in Europe will be either PHEV or EV or [indiscernible] extender. Therefore, we have no issue with this point, and this meets the requirements that we have. The third one -- the third request we had was about excluding the battery, and the battery is excluded in the computation, there is a specific clause for battery in the product of different condition. Last but not least, it was the question of which countries are acceptable, which are part of Europe in the definition. There is a kind of until situation here is are the countries part of a relationship of a trade relationship with Europe included in the fair trade, let's say, agreement and included. This means that Europe will be from [indiscernible] to Tokyo or is it just about Europe '27 and this is where we have seen a question and where we ask the European Commission to be clear about. And we asked for Europe to be Europe. That is -- those are the 4 points that we mentioned and this how Christophe reads it afterwards.

The next question comes from Vanessa Jeffriess of Jefferies.

I know there was no kind of compensation effect in the first quarter. But wondering if there was anything more one-off in nature to be aware of the influence that strength in Power in North America in the first quarter? And if you see that level of outperformance continuing throughout the year?

Thank you, Vanessa. Actually, no, there is no specific one-off to be considered in this outperformance in North America in the first quarter of this year. You have in mind that last year, we had quite weak operations in North America, especially with 1 customer that we faced a lot of postponement of staff of production of with even very low volumes. We are now back. We are back with these customers also with the others. You have seen that we also get continuous awards, continued recognition from our customers, so clearly, the North American market was before more, I would say, all type of case market with not a lot of technology actually not of electrification, but also not a lot of ADAS technologies and software-defined vehicle technologies and it is coming, actually. It is coming. So it is the time. We said it is the time of value in India, but it's also the time of value actually in North America because the market is moving towards much more electronics, much more software, and this is where we are strong at, and this is where we can get businesses from. So this is where this performance in North America comes from.

And secondly, on a more general basis, I know you said you haven't seen any material change in demand. But I guess do you think -- do you envision there will be any pull forward in demand happening in the second quarter?

So that's a tough question, Vanessa. Actually, what we are following on a weekly basis is appearing, we don't see any change in the delivery instructions from our customers. Are they pulling in parts today? Are they increasing the inventories before the second half, I cannot tell. What I can tell you is that I'm following S&P Global Mobility's forecast. I'm following the delivery instructions we receive. We have not seen any sharp increase like pull in or decrease because of lack of something today, we see just delivery structures as we planned, and the semester is really going as we planned from the January 1.

The next question comes from Stephen Benhamou with Bank of America.

I have 3 questions actually, if I may. The first one is to come back on Thomas' question regarding the miscellaneous line -- if I'm not mistaken, you've benefited from client compensation last year for EUR 300 million, which shouldn't occur in 2026. So I'm struggling to reconcile this headwind in 2026 and the strong performance that you delivered in Q1? The second question is regarding your indexation clauses. So can you please remind us what's the percentage of the raw mat, which are under indexation clauses and finally, a quick one on the guidance. So you've confirmed your guidance despite no lower assumptions in terms of light vehicle production. So to what extent are you able to compensate for a lower volume environment? And should we see the lower end of the guidance as a more credible scenario from them.

Thank you very much, Stefan. So as far as the claims for '25 are concerned, you remember that these plays are mostly in Q4 last year. So as we are only talking here about Q1, I don't really understand how we could compare. So yes, you're right, there was the EUR 300 million claims that we mentioned for the full year. but this was absolutely not in Q1 '25, and this is why it is not comparable. As far as the indexation closes are concerned, I would say this is a competitive question. And I don't want to make, as Christophe always says, I'm not here to make the job of our commercial teams even more complete, so I will not comment too much on that. What I can tell you is that as far as the L&E raw materials are concerned, we are very well indexed with our customers. Now for the guidance, if I may, can you rephrase your question because I have not in mind at all that S&P has a view of lower volumes for the full year. So I do not see why we would have to change here.

Well, the thing is that, if I'm not mistaken, your initial guidance was based on assumption in Fed, which was minus 0.4%. Now S&P anticipate minus 1.8% LVP decline in 2026. -- given the fact that your guidance is based on those new assumptions, I was wondering to what extent you're able to mitigate this lower volume environment. And if we should not see the lower end of the guidance as a more credible scenario given this lower volume environment?

I did not pay attention exactly to this exact number. Thank you for making them a very clear year. I do not see a strong impact today on my forecast. I -- when I review my forecast for the months and quarters to come, I clearly confirm the guidance globally, and I would not guide you through the lower end or the higher end of the guidance.

There are no more questions registered at this time. Mr. Pierre, back to you for the conclusion.

Thank you. Thank you very much, and thank you all for your attentive listening. Thank you for your questions. So you have understood -- this was a solid first quarter that allows us to reiterate our full year guidance. Next event is our AGM on May 21 and half year results on July 22. And -- we hope to see you there. Thank you very much, and have a good evening.

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