Valeo SE (FR) Earnings Call Transcript & Summary

Good evening. This is the conference operator. Welcome, and thank you for joining the Valeo Third Quarter 2026 sales webcast. [Operator Instructions]. At this time, I would like to turn the conference over to Ms. Marisa Baldo, Group VP, Financial Communication and Investor Relations.

Yes. Thank you. Good evening, everyone, and welcome to Vale's Q3 Sales Conference Call. With me for today's presentation is our CFO, Edouard de Pirey. The format will be a presentation for 10 to 15 minutes, followed by a Q&A session for sell-side analysts. As usual, you have the press release and slides available on our website at valeo.com and a replay of the call will also be available on our website. Before Edouard begins, and I want to quickly direct your attention to the disclaimer on Slide 22, which I invite you to read. Thank you again for joining us. Edouard, the floor is yours.

Thank you. Thank you very much, Marisa, and good evening, everyone, and thank you for joining Valeo's Third Quarter 2026 sales presentation. I will start today with the key business highlights as usual and then detail more the Q3 sales results. So let's begin with the key takeaways for the quarter on Slide 2. First, total sales came in at EUR 4.9 billion. This level of activity is consistent with our expectations and our full year guidance. For Q4, we anticipate a standard sequential increase based on normal seasonal patterns. Second, we do confirm our full year guidance across all indicators. Specifically, we now target an operating margin and free cash flow in the second half equivalent to those in the first half. Naturally, would have liked to deliver a stronger H2, but we are factoring in a market environment that has become more demanding with headwinds, intensifying over there. We are addressing these challenges head on. We have done that in the past successfully. The bid teams are fully mobilized to deliver on these objectives. Lastly, you may remember that in previous calls, I had said that I would be disappointed if brain would not grow in the second half. Well, I am pleased to confirm that brain is actually back to growth in Q3. This is a very positive signal and a first concrete proof point validating the third engine of our Elevate 28 plan the group returned to growth in 2027. Moving now to Slide 3. We are operating in a highly volatile market. And as you know, we are accustomed to this. We have the experience, we have the methods, and we are holding firm with a relentless focus on cost and cash. We continue to manage the situation regarding raw material inflation across 2 distinct cases. On the 1 hand, index commodities where cost increases are automatically passed through. And on the other hand, non-indexed components, where we apply the same proven methodology, one, securing volumes to minimizing the growth costs; three, negotiate fair compensation with our customers. For memories, our volumes are fully secured for '26, and we are ready to secure '27 volumes upon pricing validation. Secondly, we stay laser-focused on cost reduction. We continue our efforts to lower the breakeven point. We are accelerating R&D efficiencies by leveraging AI. We are achieving the EUR 300 million annual run rate of savings from our self-help measures as of this year. Third, we maintain an absolute rigor on capital spending. Gross R&D is tightly contained including capitalized R&D and our industrial CapEx for 2026 will stay below our long-term objective of 4.5% to 5% of sales. On Slide 4 is Zoom on Prince momentum with some of the most recent achievements. We have been selected by Nissan as the Tier 1 supplier for its next-gen ProPilot program, this marks a new milestone in our SDG. We have demonstrated our ability to execute at Chinese speed with a Valeo Smart Safety 360. This is a full Level 2 system developed in less than 8 months, for which we have secured 10 wins, 8 of which are already in service production. Then with the Renault Group. Our core SDV building blocks are now debuting on the new traffic ban eTech alongside Google and Qualcomm. And finally, on the BMW Neue Klasse, where we supply the central ADAS domain controller, production in Europe is off to a strong start with capacity already sold out to the first half and this is just us with scaling planned across more than 40 models. Turning now to Slide 5, a quick update on our beyond automotive strategic initiatives where we continue to make progress first in the defense sector. And as you know, we secured our first win with Harmattan AI to supply e-motors for their drones. We are leveraging a propriety sovereign e-motor architecture, completely free of heavy rare earth -- the industrial ramp-up is scheduled in Catharine in France early 27. And second, in data center cooling, last week at the OCP Global submit in San Jose, alongside Ovid Cloud, we presented the validation status of our aluminum Reader heat exchanger solution. The corrosion test have successfully reached the equivalent of over 10 years of operating life -- this is an important first milestone, and we are pushing testing up to 15 years to fully meet data center operators' expectations. Compared to traditional copper solutions, we demonstrated superior cooling capacity by 38% and reduced power consumption by 25%. So the second part of my presentation, let's now look at the Q3 numbers in detail on Slide 6. Total sales stood at EUR 4.9 billion, down 2.6% on a like-for-like basis. ForEx had a positive impact of 1%, reflecting the appreciation of the U.S. dollar under renminbi against euro. Perimeter impact was a negative 0.6% due to the sale of the powertrain automotive sensor business we expect a smaller impact in Q4 given the timing of the disposal at the end of November 2025. OEM sales stood at EUR 4.1 billion, down 3.8% like-for-like. This was largely driven by unfavorable base effect related to customer compensation recorded in Q3 2025 in the Power division. Aftermarket demonstrated continued resilience, growing by 3.0% like-for-like, supported by ongoing momentum across most geographies. And miscellaneous sales grew by 6.6% like-for-like driven by steady tooling and customer R&D contributions. Moving to Slide 7 with the performance by region. Globally, our OEM sales underperformed the market by 2.2 points primarily driven by the unfavorable base effect I mentioned earlier. This was mostly visible in Europe, where sales were down 7% like-for-like. In North America, however, we continue to outperform posting flat sales in a market down by 5%. In Asia, excluding China, our sales grew by 8% like-for-like, outperforming the local market by 3 points. Finally, in China, we underperformed by 7 points, while sales with Chinese OEMs were slightly down. Our strategic repositioning is advancing well. And over the 9 months of this year, Chinese OEMs represented 56% of our OEM sales in China compared to 53% in H1. By division now, starting with Power on Slide 8. Sales reached EUR 2.4 billion, down 10% like-for-like. As I mentioned earlier, this is largely driven by an unfavorable base effect specifically a high-voltage volume claim resolution that was booked in Q3 of last year. Beneath this headline figure, underlying operational activity remains solid. We saw continued good performance in North America, driven by new program SOPs and strong regional execution in India. Moving to BRAIN on Slide 9. This is the major highlight of the quarter. The division is back to growth with sales reaching EUR 1.2 billion, up 8% like-for-like. This translates to a significant 10 points outperformance versus the global market. We saw a strong commercial momentum across the board robust demand for ultrasonic sensors and cameras in Asia and solid results in Europe, driven by display, telematics and central control units. This is a tangible validation of the third engine of our Elevate 2028 road map. Finally, LIGHT on Slide 10. Sales were down 3% like-for-like, representing a 2 points underperformance. We recorded resilient performance in Europe, supported by successful new program start-up productions alongside strong performance in Asia, driven by production ramp-ups. In addition, we secured new business acquisitions to support gradual recovery in North America. So now to conclude on Slide 11. Our Q3 sales are consistent with our full year objectives. We are holding firm in a highly dynamic and demanding environment backed by rigorous operational cost and cash discipline. We've reiterated our guidance for 2026, and last, the return to growth of our Brand division is a key milestone showing that we execute Elevate 2028 as planned. Thank you for your attention, and we are now ready to take your questions.

[Operator Instructions]. First question is from Jose Asumendi, JPMorgan.

A couple of questions, please. The first one on product mix. Can you comment on BRAIN and the revenue acceleration. Is this something that you think will be now structural into the fourth quarter and 2027? And whether the margins there that you report in the first half continue to be a statement for this division, where you have much higher EBITDA margins in BRAIN versus POWER & LIGHT, but also still on product mix, if you could please comment a bit also on power as I'm a little bit surprised that maybe we don't see more revenue growth in power in the light of the electrification trends we're seeing in Europe. And the second quick one would be on the guidance on the margin. When you say second half margin is similar, I understand versus first half, does this imply that margins in the second half could be slightly down versus the first half -- or is there a level of confidence to be similar, but at least in line with the first half?

Thank you much, Jose and thank you for your questions. So as far as the product mix is concerned, so for BRAIN, I do confirm that the revenue acceleration is planned also for Q4 and for 2027. While you have in mind that there was a specific impact in Q4 last year with a lot of compensation that we recorded in miscellaneous sales, but I do confirm that for the OEM sales, we do see this growth coming in Q4 and to remain in the full year of 2020. And this is what makes us actually more and more confident of the third engine coming back to growth coming in 2027. Now as far as power is concerned. And you are right, there is even more electrification in Europe. This is what we see from the market. And you have in mind that since we took over in 2022, the shares of Siemens in Valeo Siemens, we launched a full program to diversify the customers' portfolio. We are very focused on all programs in Europe that are almost over now. And we've been developing in India, in Korea, in China, in North America, and also in Europe. But these new steps of Europe are coming a bit later. And I have an important example. This is the famous ETEC, the van of the year actually, we are on with our high-voltage solutions, and that will deliver in the months to come. So basically, this is a kind of a timing issue. It is coming, and I have a lot of objectives regarding power also globally and in Europe as our electrification is concerned. Now for the guidance and what I would call somehow the soft guidance when we said that H2 would be at least equivalent to H1. And now we are seeing H2 would be equivalent to H1, we did not say it will be slightly down or we just said, it is equivalent to H1, so we are just precising somehow the SOP guidance that we gave in July. We know the environment is tough, and we are very committed to deliver what we said. -- and this is more a confirmation and a clarification of what we said. But we said equivalent, we did not say lower than.

Next question is from Ross MacDonald, Citi.

I had 2 questions. First one, again, on Power, just kind of linked to Jose's question there. And I appreciate the comps are high. It looks like power is pretty flat versus 24 Q3. But can you help us explain what are the conditions that would drive growth in this division? Is it a continued acceleration in BEV on those specific platforms? I'm just getting questions around whether this is driven by legacy ICE exposure that's driving the business lower in Europe here and now. Just be good to maybe drill further into when we should expect a top line recovery in that business? And then the second one, just on China and customer activity. I think at the first half results, you talked about being back to growth with Chinese OEMs in the second half, it would be good to see or hear your thoughts on that. I don't see any mention in the slides around the Chinese activity specifically. And then linked to that, just customer activity more broadly, Edward, if you could comment on what we're seeing in Europe. Obviously, I take your point around the headwinds that have emerged. Are you seeing a deterioration in call-offs in Europe in China? How should we think about customer activity into the end of the year?

Thank you, Ross, and thank you for your questions. So as far as power is concerned. So what drives the growth? What is driving the growth is as for all value, I would say, is we are taking orders, and we are growing step by step. We said clearly that it would come first through BRAIN, and this is what we see now and will be -- it will come a bit later with POWER and LIGHT. And actually, LIGHT was not bad either last year. I have difficulties to tell you about a specific platform because you know always we are not authorized to talk about one platform, one customer or the other. Sometimes we can, and we are happy to do so. But we are -- clearly, in power, we are trying to be well balanced, well hedged against the electrification because sometimes electrics up, sometimes it's down. We've seen the change of politics in the U.S. 2 years ago, and we were quite happy to have kept at least some ICE-related technologies also. So we are strong in ICE technology. We are strong in 48-volt. We are strong in a hybrid technology and when BEV is up, we also have to be strong in BEV. So it's all about being balanced in our customers' profile in our technology portfolio. And let's forget -- let us not forget on the other hand that as a CFO, sometimes I love when the traditional technologies are selling well because this is EBITDA directly into cash because you have no investment, no CapEx, no R&D for these programs. As far as China is concerned, so you're right, we said we will be back to growth with Chinese OEMs in the second half. We are -- and you will see that actually, not necessarily in the presentation, but also in the press release that we are actually slightly down with Chinese OEMs in Q3, which is much better than what we saw in the quarters before. So we are step-by-step improving. Now to be frank, the market is super dynamic. We are super agile to follow, to get the right products and with the right customers. But sometimes you are just on the platform they're selling well 1 month and not the other months. So difficult to fully confirm what will happen in Q4. But what I can tell you is that we are continuously focusing on growing with these Chinese OEMs. We've taken 25% of our global order intake in the first half with these Chinese OEMs. This is exactly their share in the market and we are continuing pushing getting orders with them because we know that when we get orders with the Chinese OEMs, it means that we are competitive and we are competitive worldwide. I said also in my speech that Chinese OEMs were 53% of our sales in China in the first half, 56% first 9 months you know how to do the math, 60% for the Q3. And this is, I think, also the right direction that we are heading to. Lastly, your question on Europe. We do not see -- actually we are following every second what is the evolution on the call off. It's a lackluster market, but we do not see deterioration of calls off at that stage. We are following that precisely. But today, market is as we expected, meaning a weak market, but this allows us to keep our guidance because this is how we forecast. And you remember, each time we tell you, we prepare our budget, our medium-term plan with S&P Global minus 3% because you want to be safe. And also as a CFO, I'm happy because I'm pushing the guys to decrease their fixed costs. And this is why we are now able, even if the market is not so strong to confirm our guidance.

Next question is from Thomas Besson, Kepler Chevreux.