Forvia SE (FRVIA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to our H1 2026 results call, which I'm, as usual, presenting together with our CFO, Olivier Durand.

Good morning.

Before we start, let me remind you that our 2026 and also the 2025 H1 results are presented excluding Exteriors, excluding Interiors, since we plan to divest from it by year-end. So here's a brief look on today's agenda. I will start with our key highlights for the first half before handing over to Olivier, who will present our financial results. I will then come back to discuss our outlook for 2026, and we will conclude the program with a Q&A session. So let's start with key takeaways from the first half. Our activities have been fully focused on the execution of the IGNITE plan that we presented at our Capital Markets Day in February. Over the first half, we delivered tangible progress across all 3 strategic priorities. So let me start with performance. We improved our operating margin through disciplined fixed cost reduction, greater cost flexibility and effective management of inflationary pressures. We also delivered an 18% increase in net cash flow with improved quality again. So this enabled us to reduce net debt by EUR 0.5 billion, which marks the largest semester of organic debt reduction since the HELLA acquisition in 2022. Order intake was equally strong, increasing by 15% year-over-year. And we move to transformation. So first of all, let's talk about the Interiors divestiture. Here, we made good progress toward the completion of the sale of the business to Apollo. Several important milestones have already been achieved, including U.S., European, French antitrust clearances and the completion of the consultation process with the European Works Council. So we remain on track to complete the transaction in the fourth quarter of 2026 on metrics that are fully consistent with those presented at signing. Under transformation, innovation also remained a key focus. We held dedicated technology sessions organized across businesses and regions. These events are great motivators for our teams to accelerate innovation and strengthen cross-functional collaboration. As a result, we advanced our technology road map with many market-relevant innovations across the entire portfolio. Let's talk about the Lighting business next. All of our business groups improved their performance in H1, except for Lighting. HELLA management pushes the Lighting transformation program really hard with determination and has taken decisive actions to improve both profitability and growth. And last but not least, we have started leveraging our industrial know-how and advanced technologies to pursue selected defense-related activities. I'll be getting back to those in a minute. Finally, the third pillar, our culture. This is one of the topics that I'm personally paying close attention to since culture drives ultimate performance orientation into the group. We continue to roll out our Guide, Empower and Recognize principles across the organization. Project SIMPLIFY is delivering results right now. In the first step, the organizational structures were streamlined and now the focus is on process optimization. Through our business transformation studio, we automate processes and deploy AI, particularly in engineering and purchasing, and in supply chain management. So in summary, we create less bureaucracy, faster execution and much better ownership with the leaders and the teams. So here comes the resulting performance from H1. In fact, the results from half 1 mark our third consecutive half year of improved performance. And with this, we are firmly on track to deliver our full year guidance. Sales reached EUR 10.8 billion at constant exchange rate, placing us in the upper half of the guidance range. Margin improved by 30 basis points to 6% and net cash flow has also increased, now reaching 4.1% of sales, while leverage continued to decrease organically to 1.6x. So automotive production declined by 1% globally, and we mitigated rising inflation under increasing geopolitical tensions. Here, I would really like to thank the global FORVIA team who delivered despite a challenging environment. Thank you very much for that. So what's driving the performance? Actually, we continue to benefit from improvements across our operations. And this is reflected both in our operational metrics and in recognitions, which we received from our customers. We made significant progress in deploying the FORVIA Excellence System across our industrial footprint and also by increasing the convergence with HELLA. The number of FES focused plants was reduced by 18% in 6 months. Those are the plants that we want to uplift in performance and FES performance very consciously. And these remaining plants are being closely monitored and expected to improve rapidly. The progress becomes particularly visible in North America, a region that caused concern in prior years, and you remember that. So right now, launches are being delivered flawlessly, and General Motors alone rewarded 8 of our sites in North America with quality excellence awards. All global efforts contributed to a 33% reduction in customer claims versus prior year. That's a significant improvement in our delivered quality. So I'm happy to share that our operational excellence and innovation capabilities were recognized by a number of key customer awards. General Motors recognized the creativity of our electronics team; Ford, our excellent collaboration. And in China, Geely and Chery both appreciated FORVIA's outstanding innovations. These recognitions underline FORVIA's strong positioning for further growth. We're now getting to the Lighting transformation program. So HELLA Lighting continues to rely on its tech leadership and a full product range. However, the financial results in H1 marked the bottom with an operating income of 0.3%. This is driven by an organic sales decline of 4.7% in H1, which continued the trend that we have seen since H2 2024. So the transformation program is key, and it is currently being accelerated with a clear priority on improving the bottom line while building sales momentum. So we enhanced competitiveness by adjusting our R&D and manufacturing capacities by an enhanced implementation of the FES and CapEx and working capital both follow new targets. Last but not least, to SIMPLIFY, SG&A will be driven based on a benchmark. The actions currently underway will begin to deliver tangible benefits in the second half of 2026. Looking ahead, our committed goal is to progressively recover our 2025 operating margin by 2028. This, by the way, is fully consistent with the overall 7% margin ambition for the value cluster that we outlined at our Capital Markets Day. In parallel, we are step-by-step rebuilding a stronger pipeline of business by being more present in the mass market and diversifying our regional reach. Our efforts have started paying off with an order intake in H1 twice as large as in H1 last year. So there is significant share with volume customers as well as with customers outside of Europe. The expected acceleration in sales from 2028 onwards should provide a strong operating leverage effect, supporting a further improvement in operating margin. So the challenges are very well understood. The action plans are underway, and I can assure you that the turnaround of Lighting is at the very top of my priorities. Let me now turn to order intake, one of the very good results of the first half and a strong indicator of the growth opportunities ahead of us. Order intake reached EUR 13.4 billion, and that's without the interior orders. It is up 15% versus the first half of last year. This performance reflects the strength of our position in the growth areas identified at our Capital Markets Day. In fact, our growth cluster accounted for 60% of total order intake and delivered a strong book-to-bill ratio of globally 1.5x. In Seating, the most notable highlight is that half of order intake comes from conquest business. This reflects the strength of our offering and our ability to win market share. We also continued to make significant progress with Chinese OEMs, which accounted for 27% of the Seating awards. In Electronics, we secured significant awards in fast-growing technologies, including around EUR 1 billion in energy management, software-defined vehicles and in-cabin experience solutions. A major European contract for our interior monitoring systems is worthwhile mentioning. At group level, we progress well on diversification. 30% of total order intake during the first half is with Chinese customers, Japanese customers, Korean customers, commercial vehicle and specifically also India. In India, our order intake reached EUR 600 million compared with H1 '26 sales of EUR 235 million. So you can see the growth. Most notably, we secured our first complete seat business, which will support the construction of a new just-in-time seating plant in India. The start of production is planned for 2027. This will bring our industrial footprint in the country to 10 plants. And with about 2,500 engineers based in India, we are dedicating part of this talent pool to support the further strong growth expected in the country. So let's go to China. Beyond the seating wins that I already mentioned, we continued to make strong progress with Chinese OEMs. They represented 17% of total order intake, corresponding to a 3x book-to-bill ratio. More than 70% of our Chinese order intake came from Chinese OEMs, and that's fully reflecting the shift of the Chinese market where they now account for a similar share of vehicle production. Notable wins were attained with Chery, Changan, Leapmotor, a new fast-growing EV tech player and our long-standing partner, BYD. So you can see how we further diversify our Chinese customer base. Overall, the quantity and quality of our order intake gives us confidence in the future growth of our business. Building on additional wins already secured in July, we are confident in our ability to sustain strong order intake momentum across the year. What's driving the growth? Let me turn to innovation, and that remains at the heart of our strategy. And again, that's a key growth driver. Across our pursued trends of electrification in cabin experience and safety and comfort, we continue to develop technologies that address major transformations shaping the industry. In Electrification, we will start production of our first integrated 12-volt lithium-ion battery pack next year. This solution reduces weight, it simplifies vehicle integration and has already won significant businesses with several international OEMs. We are also expanding our portfolio for extended range electric vehicles and plug-in hybrid vehicles as well with a new adaptive valve. So this valve in the exhaust system reduces the weight of the entire system. It creates space for additional battery capacity and it particularly reduces the muffler volume and therefore, also the cost of the system. Moving to the next column here. In our in-cabin experience, Appning, our apps market that combines third-party apps, vehicle functions and location-based services now provides drivers the benefits of an AI assistant for seamless interaction with that infotainment system and the vehicle in general. Next one, in safety and comfort, we will soon launch our transformer seat for Chinese OEMs. Remember, that's our AI-powered adjustment where Olivier, you get your setting when you enter the car, I get mine. They're slightly different. And also the seat adjusts during driving situations, depending if you are more sporty or more relaxed in using the vehicle. Last not least, in Lighting, we successfully launched our highly adaptive high-definition lighting solutions in China. The product performance and the cost have both been tailored to the fast-moving Chinese market. Altogether, these innovations demonstrate our ability to anticipate market trends, and we clearly bring differentiating technologies to production, which will support our future growth. So in general, our strategy remains unchanged. First, we focus on strengthening our core businesses. Second, we selectively expand into adjacent markets. Defense is one of these opportunities for FORVIA. Through FORVIA HELLA, we already have long-term experience in delivering lighting and electronics products into the defense market. And this gives us a deep understanding of the ecosystem and its processes. So now we can create value in 2 dimensions. On the one hand, through our industrial know-how and available capacities and on the other hand, through our technology and products. So on the industrial side, we benefit from a strong Franco-German footprint, which is fully aligned with European sovereignty ambitions and 2 strong marketplaces. On the technology side, you can easily see how actuators, sensors, energy management systems qualify for emerging applications just as drones. Just think about the low-voltage battery pack we discussed before. This is a lithium voltage pack up to 50 volts. And these will be produced in volume for automotive and can then power drones in the same good way. Therefore, our recently announced drone partnership marks an important step. From assembling first drones now, we are exploring the entire opportunity. Next to the assembly and component supply, the defense sector also offers opportunities to adjust our capacities. The Augsburg plant in Germany is being transferred to General Dynamics, which is a good illustration of that adjustment of capacities. We can offer 300 employees a new perspective. So this preserves employment, it avoids restructuring costs and supports long-term industrial activity. So you can see how we take a disciplined approach to diversification. It is about new markets, it's about new customers and the same FORVIA capabilities. Moving on to culture. As I said at our Capital Markets Day, delivering IGNITE is not only about strategy. It is also about culture, leadership and the way we work. During the first half, we continued to build momentum. We engaged more than 6,000 managers worldwide behind our IGNITE ambitions and priorities. That was a massive communications and leadership task. Also, we trained our managers on GER, Guide, Empower and Recognize. This is our new leadership framework that represents a significant departure from our previous top-down management approach. We are building a culture of performance through empowerment and accountability. A very good example for that is our Saline facility in Michigan. You know about that place because in prior years, the plan had caused significant losses when launching new products. The plan has now returned to decent profitability. Certainly, the group provided support to that recovery. However, in the end, it was not all the help we parachuted in that created the turnaround. It was to strengthen and empower local leadership team that managed the breakthrough. Another area of continued focus has been safety. I'm pleased to report further very significant progress. Our accident rate decreased by 37% to reach 0.89 in FR 1T, our metric. We are now already in line with our midterm target of an accident rate below 1 as presented at our Capital Markets Day. And last not least, on culture, we also took a very strong start into the year giving back to our communities. Through the FORVIA Solidarity days, more than 16,000 employees engaged in over 560 local initiatives around the world. So I have to say 18 months into building a new FORVIA culture, I'm truly encouraged by the progress and the engagement I see across the organization and across the globe. So to sum it up, in the first half, we made solid progress in executing on our IGNITE road map, which is built around 2 consecutive phases: focus and strengthen, and lead and grow. Being in the middle of Phase 1, we delivered further improvement of our financial performance. The Interiors divestiture is on track for Q4, and our cultural transformation is gaining momentum across the group. At the same time, some of these results already prepare us well for Phase 2. Order intake increased significantly, supporting our ambition to accelerate growth in the years ahead. Our innovation road map continues to differentiate FORVIA in the most attractive market segments. We have opened up new growth opportunities also in the defense sector for several of our activities. So overall, these achievements reinforce our confidence in our ability to deliver on our 2026 objectives and to create long-term value. With that, Olivier, I would like to hand over to you for more detail on the H1 results.

Thank you, Martin, and good morning, everyone. As communicated at our Capital Market Day at the beginning of the year, our segment reporting is now built around 6 activities, which are structured on growth cluster and value clusters. In this context, Electronics is now reported separately with HELLA Electronics included in the growth cluster, while Clarion is part of the value cluster. Let me remind you the principle of the different -- of the 2 clusters. Growth cluster is focusing on accelerating growth, strengthening technological leadership, diversifying customers and partnerships and supporting disciplined investment. The value cluster is focused on operational performance, cash generation and value creation. Let me start the financial presentation with the sales and the operating margin. Once again, we delivered a meaningful step-up in profitability despite a challenging market environment. The reported sales amounted to EUR 10.5 billion, down 4.3% versus H1 '25. On an organic basis, i.e., excluding foreign exchange variances, sales declined by 1.9%, slightly below global automotive production, which was down 1% in the period. In this context of soft sales, we increased operating income to EUR 632 million and delivered an operating margin of 6%, up 30 basis points year-on-year. And this is fully in line with our guidance range for the year. This performance reflects, first of all, strong operational execution. It shows also that the productivity initiative and disciplined fixed cost management from EU FORWARD and the rapid rollout of our Simplify programs are paying off. The residual impact of inflationary pressures related to Middle East conflict was limited in the period. So in short, in a challenging market context, we maintain our strong cost discipline to further improve our operating profit performance. Let me go now on the regional performance for more details in sales and margin results. Overall, we delivered solid performances in the Americas and in Europe, while we continue to demonstrate resilience in China despite a reduced level of activity. As in the first quarter, North America and Europe continued to outperform underlying automotive production and delivered growth despite a soft demand environment. This was driven by Electronics, Clarion and Clean Mobility. In China, performance remained impacted by customer mix effect, particularly with BYD. In the rest of Asia, however, we continue to deliver strong growth, and we have significantly outperformed the market in those countries. If I turn to profitability, the regional picture is encouraging. In North America, operating margin increased sharply to 7.1%, up 170 basis points year-on-year. This improvement was driven by stronger operational performance and by Clean Mobility activity. In Europe, the margin improved to 3.7%. It reflects the continued benefit of EU FORWARD rollout as well as the ongoing challenges in Lighting. In Asia, margins remain at a very robust level of 9.8%, which is up 20 basis points year-on-year. This reflects the continued improvement in the rest of Asia, combined with highly effective cost flexibilization measures in China. As a result, the group regional profit contribution has become more balanced compared to the past. We have a resilient model in China, further upside in Europe and sustainable improvement in North America. Let me turn now to the performance by the respective clusters. I will start with the growth clusters. There, sales were down 4.8% organically to EUR 5.5 billion, with strong growth in Electronics more than offset by softer sales in Seating. Electronics continued to benefit from solid demand in radar and Energy Management, while Seating was impacted by the significant unfavorable customer mix in China that we mentioned before. When we look ahead, commercial momentum is remaining strong. Order intake is reaching EUR 8 billion in this cluster, and it represents a book-to-bill ratio of 1.5x, which provides good visibility on the future growth. Operating margin in the cluster improved by 20 basis points to 6.1%. This was driven by disciplined R&D spending in Electronics on the one hand and strong operational -- stronger operational execution in Europe and in North America as well as the continued cost flexibility measures in China in Seating on the other hand. Overall, the growth cluster demonstrated its ability to improve profitability while building the solid foundation for the future growth. Now I turn to the value cluster, where we are pleased to report another solid performance, both in terms of sales and in terms of profitability. The sales grew 1.5% organically, driven by strong momentum at Clarion, particularly with Japanese OEM and a mid-single-digit growth at Lifecycle Solutions. Clean Mobility was roughly stable, building on our strong momentum in North America. These positive trends have been partly compensated by the expected evolution in Lighting, which reflect the program phaseout in this business. The cluster also delivered a strong profitability performance with operating margin improving by 60 basis points to 6%. Expansion was primarily driven by Clean Mobility, supported by cost reduction initiatives, while Lifecycle Solutions and Clarion benefited from favorable volumes and mix. Lighting remains a key area of attention, and we are fully focused on executing the transformation plan that Martin presented earlier. Overall, the value cluster demonstrates its capacity to combine resilient growth with improving profitability. Let me cover now the rest of the income statement. The net income group share is reaching breakeven at EUR 3 million in H1 '26. This is a significant improvement compared to the loss of EUR 269 million that we recorded a year ago. This progress is driven by solid operating income, lower restructuring costs that peaked in '25, lower financing costs, reflecting the reduction in gross debt. It is also worth recalling that last year first half result was heavily impacted by the nonrecurring charge of EUR 136 million related to Symbio. When I look forward to H2, as communicated during our presentation of the '25 results, the divestiture of Interior is expected to trigger a one-off charge at closing of around EUR 150 million in H2. This is related to taxes at closing on capital gains in certain jurisdictions and the recycling of cumulative currency translation reserve to the P&L. Let me highlight that the cash out of this charge are already priced in the metrics of the transaction that we previously communicated and that we confirm. While reported net income is expected to be negative in the second half, including due to the one-off items that I just mentioned, the underlying trajectory continues to improve. Let me cover now the net cash flow. We delivered a strong and high-quality net cash flow in the period. It is up 18% year-on-year to EUR 432 million, representing 4.1% of sales. Important to mention, working capital and factoring had a limited impact in those results. Actually, the recurring net cash flow, which exclude working capital movement, exclude factoring and other operating items, stood at EUR 403 million, 3.8% of sales, up 70 basis points year-on-year. This performance was supported by strong underlying profitability, EBITDA increasing by 40 basis points and low level of investment. Related to investment ratio, it was at a low level of 4.8% of sales. We expect some catch-up in the second half. This is reflecting both the normal phasing of our investment and one specific transaction that I will comment in a minute. We anyway expect that the full year investment ratio to be between 6% and 6.5% of sales, i.e., broadly in line with last year. Net cash flow also reflects a EUR 62 million increase in restructuring cash out. We mentioned before the restructuring cash out is expected to peak in '26 at around EUR 300 million and before progressively declining thereafter, and we confirm that. Overall, this is a robust and sustainable cash flow performance, demonstrating stronger cash conversion and the growing quality of our earnings. For the second half, we expect the net cash flow to remain of good quality, but I would like to mention 2 clearly identified one-off cash outflow. The first one is the exercise of a purchase option on a major manufacturing facility in Mexico, which will temporarily increase the CapEx, but vice versa reduce our lease liabilities. And the second one is the settlement of some past historical tax litigation, which will increase temporarily the cash tax payments. Together, those 2 nonrecurring items are expected to represent approximately EUR 150 million of cash outflows in the second half '26. Those one-offs are fully reflected and integrated in our confirmed net cash flow guidance of at least 3% of sales for the year '26. I will mention -- I will comment now the net cash -- the net debt, sorry, and leverage on a pre-IFRS 5 basis since the Interiors transaction is not yet closed. During the first half, we reduced the net debt by EUR 503 million. The net debt went down from EUR 6 billion to EUR 5.5 billion. As already highlighted by Martin, this represents the strongest semester of organic net debt reduction since the acquisition of HELLA. The reduction was driven by EUR 579 million of net cash flow generation when we combine continuing operation and the interior business. As a consequence, the leverage continued to improve, and we went down from 1.7x to 1.6x, keeping us firmly on track to achieve our year-end guidance of 1.5x at the end of '26. Looking ahead, we expect the Interiors transaction to close during the fourth quarter. And upon completion, we confirm that the transaction should generate more than EUR 1 billion of additional net debt reduction, providing a further step change in our balance sheet strengthening. In other words, we are already delivering meaningful deleveraging organically and the closing of Interior divestiture will provide an additional and significant net debt reduction in the second half. Let me conclude this financial presentation with our debt profile. Financial flexibility continued to improve across the board. FORVIA has reimbursed around EUR 850 million debt maturities since the start of the year, including the repayment of the EUR 428 million Schuldschein in July. Having now cleared virtually all '26 maturities, our stronger cash flow generation profile and the expected proceeds from the interior divestiture gives strong visibility on our debt management. Liquidity has also been significantly strengthened through the successful renewal of the FORVIA revolving credit facility of EUR 1.5 billion, which is now maturing in '31 with the extension option of up to 2 additional years. On a pro forma basis, end of July, gross cash amounted to EUR 4 billion. And on the credit side, let me recall that those recent progresses as well as the announcement of the sale of Interiors have led to both Fitch and S&P to improve their rating outlook in the course of the first half. So overall, the first half demonstrate FORVIA's ability to improve profitability, strengthen cash generation and continue deleveraging and debt reduction even in a challenging market backdrop. With that, I hand over to Martin for the outlook '26.

Okay. Thanks a lot. So let's go over that outlook. The market environment is expected to remain challenging with global automotive production projected to decline by around 3% in H2 compared with the second half of last year, and that's happening across all major regions. Based on our H1 sales performance and our current assumptions for the second half, we expect full year sales to be in the upper half of our guidance range. That said, we remain cautious given the uncertainty that continue to affect the market, including geopolitical tensions, developments in China and the broader inflationary environment. In this context, our priorities are very clear. First, we will continue to maintain strict cost discipline and ensure that inflation is offset through operational actions and commercial recoveries. Second, we will remain focused on cash generation. And third, we are fully mobilized to close the Interiors transaction in the fourth quarter. Finally, we intend to build on the strong commercial momentum achieved in the first half and maintain a robust order intake pipeline to support future growth. Overall, while the market backdrop remains challenging, we are confident in our ability to continue executing with discipline and to deliver to our commitments. So therefore, our 2026 guidance is fully confirmed. Sales is expected to be between EUR 20 billion and EUR 21 billion at constant exchange rate, operating margin between 6% and 6.5%, net cash flow at least 3% and the leverage ratio down to 1.5x. With this, I would like to thank you for your attention, and now we are happy to take your questions.

[Operator Instructions] The first question comes from the line of Michael Foundoukidis from ODDO BHF.

Yes, Mike Foundoukidis from ODDO BHF. Congrats for the results. Three questions on my side. First one, on North America, margin was very strong at 7%, which is a level I'm not even sure that you ever reached. Olivier, you framed the performance in your comments as sustainable. So would you consider this 7% plus level as a new normalized ambition going forward in the region? That's the first question. And second question is more on H2 margin. Usually, and given the restructuring going on, it's better in H2 versus H1. But you have raw mats, you have other probably headwinds in H2 with production, et cetera. So could you give us some color on the puts and takes for H2 margin and if we should improve sequentially better H2 versus H1? And last question is more long term and more for Martin probably. But following the interior disposals, what will be the next capital allocation priority after deleveraging?

It's a good set.

Yes, very comprehensive set, Mike. So let's get started. North American margin, very strong. Is that sustainable? And here, I'm happy to report, yes, it's really the operational performance that you see in the margin. So no special effects that would have boosted in H1. And it goes back to what I said, we have really stabilized the operations. And in that sense, looking forward, we want to enjoy that same level of profitability from the North American region. Maybe in short, H2 margin expectations, yes, we expect them to be at least as good as in H1. And maybe you want to give it some color, Olivier.

Yes. So in terms of raw material, so the raw material has, of course, the price increase related to inflation. We anticipate, in fact, that the impact of the inflation is higher in H2 than in H1, but we expect also that our compensation measures internally as well as pass-through unable to have an impact fairly similar in absolute terms between H1 and H2. On the activity itself, we -- you see that in the first half, we are on a fairly good trajectory compared to our guidance, and we expect that to remain under the current conditions. Of course, we are very careful in this matter given the uncertainties in the China market, and I would say the volatility related to the Middle East geopolitics.

Good. And then we get to question number three. How about capital allocations beyond the interior disposals? So let's quickly reflect where we are in the journey. So we stay by the guidance of 1.5x leverage by year-end, and that is including the divestiture of Interior. Now many you recall our IGNITE strategy, we said by 2028, we want to get the leverage down to 1.2x. And that is the target point by which we will become a much more normal company in the sense that we can qualify back to investment grade and have also the freedom to allocate capital not only to the leveraging, but also we want to invest into further growth and consider our investors, our shareholders in terms of capital allocation. So the Board, the management are committed to thinking of investors and thinking of instruments like dividends and share buybacks once we reach that level of leverage that I just described.

The next question comes from the line of Christoph Laskawi from Deutsche Bank.

I'd like to start on an announcement of VW from last Friday where they essentially said that they want to reduce the variance of their vehicles quite substantially and also the component variance within them. They called out essentially in the mass market side, seat main modules to be reduced by 30% and in the premium side, the seats variety to be cut by 90%. Just wondering, given it's one of your biggest customers, how you think this would impact your business? Is it helpful given your broad offering? Or would it make the RFQs way more competitive? And then secondly, just on China, obviously, significant underperformance. At the same time, the margins are pretty stable. Could you share a bit more detail on how you manage that on the margin side and when we could expect the underperformance to improve again?

Thanks for those 2 questions. Let me start with Volkswagen's announcement to reduce the variance both for vehicles and components. We welcome that. We applaud that step because overall, it takes complexity out of the system that we have faced as suppliers, and that is definitely impacting the competitiveness of the Volkswagen product and therefore, our sales ultimately as well. So we fully appreciate that trend. And we feel that we are very ready to compete in that space. If I just look at our growth cluster, Electronics and Seating, we have shown good strength again this first half in acquiring new business. And what's really outstanding, for instance, on the seating side is that we have quite a high share in conquest business. That's proving the competitiveness. So we'll go after these big chunks of business, and I'm confident we'll be successful. The second one in terms of China underperformance, you read that well. We have still a setback from our exposure to BYD that has been weak in the last couple of quarters. The good news is BYD is starting to catch up again. It's stabilizing. Nevertheless, we see that in the sales result. And you also well observed that we could sustain margin. And that goes back to really very strict cost management, where the local team in China flexed our internal costs and where we work very diligently also with our supply base to make sure we can deliver the same margins under these reduced capacities that we need. Going forward, you heard about our order intake. It's strong. It's strong in China, 17% of our global order intake going into China and also with a diversified customer base. So if we take the typical lead time of 1 to 1.5 years, you can see how this new sales is going to boost our top line in China. So we remain fully committed to the regions, to our Chinese customers. We want to serve them in China and in the world, and we will see that in the sales curve swinging back as well.

We now have a question from the line of Jose Asumendi from JPMorgan.

A few questions, please. Can you comment on how do you manage to maintain such strong earnings seen in Asia with the decline in revenues? That was, I think, very impressive in terms of how you managed to hold up margins there. Second, can you comment on the key elements of self-help and cost savings you plan to book in the second half of the year on a group level? And then three, can you comment on Seating, which are the key maybe actions to improve the profitability beyond the current levels?

All right. Jose, good morning. So let's start with the maintained margin in Asia. I commented already on our activities to flex our cost to work the entire cost base in China. Just to add, our local to local helps very much in that context. So remember, we are deeply localized in the Chinese market. And the pressures that we can, of course, feel from the OEM side are completely transferred also on the supply side. So we stay in shape and we maintain our margin. The rest of Asia is a good profitability, too. So that adds to that overall published number. Number two, cost savings to be planned for H2. The good news is that we have quite a number of initiatives that have been running and have been running over the semesters. So if you go back 2 years, we started EU FORWARD, and we have taken another lift up in EU FORWARD savings. End of the last year, we shared a number of 6,400 agreed departures from FORVIA. That number has now gone up to 7,300 by the end of H1 2026. That's still the parameter including Interiors. So you can see how that include -- consequently increases the savings from the restructuring. Large program #2, SIMPLIFY. So we had predicted 40% of the EUR 110 million savings to be effective in 2026. That's also happening. So overall, from these programs, we can look at EUR 110 million roundabout of savings in the entire year 2026. So that boosts H2. And then it comes to really short-term adjustments. We stay cautious about the volumes in the market, and we are ready to react and to flex on all cost levers. And let me tell you one thing. Here, our cultural transformation really plays in nicely. So the empowerment, the delegation of responsibility in the organization shows real effect because not every action has to be directed from the top of the house, but it's happening as we speak in the plants where the profitability is really ensured. Question number three, Seating actions for profitability. So here, you also see from the results that Seating has very well accommodated the sales weakness with China customers. and has stood by its profitability of before. So also here, fantastic flexing taking place, and we are going to continue that in the year. Our focus for Seating, sure, we want to maintain profitability, but our focus clearly goes in the direction of growth. And here, diversification of the customer base, moving into commercial vehicles also geographical expansion in India with that first full seat business now and a new plant in India. That's the key orientation for Seating. That makes perfect sense because Seating is part of our growth cluster, so we want to boost that direction.

In light of all the self-help cost savings, price recoveries in the second half of the year, I know the market outlook still is very uncertain. But is there not a chance to potentially upgrade the guidance in the second half of the year?

I mean when you look at our guidance, we see that sales is going to be in the upper half of our band. And we think that consecutively, the H2 profitability is going to be at least what we delivered in H1, but that keeps us well in the band that we have guided and recommitted today.

The next question comes from the line of Vanessa Jeffriess from Jefferies.

Congratulations on the results. First, I just wanted to ask about the sustainability of some of the large margin improvements you saw like in Lifecycle Solutions and in Clarion, which also faced some memory headwinds. Because I guess to me, if I just use first half '26 as an example and put your 3% target on Lighting, you're almost nearly at your 2028 margin target and not that much to do in the rest of the business. So the biggest piece is really Lighting. Is that fair?

So I think you are mentioning the totality of the cluster. So I would say that Lifecycle Solutions is on the high side in terms of profitability profile. It's really a very good semester that has been recorded by Lifecycle. And Clarion, it's really a sustainable progress. It's not only the growth in revenues, but it's also the outcome of all the actions that have been done in terms of rationalization of the R&D in particular, but as well previously of the manufacturing footprint. So clearly, this is showing progress there. And indeed, the -- let's say, the contribution that is really to improve is what you mentioned, which is Lighting, and this is what we are mentioning with the transformation plan that has been described by Martin before and starting with returning to 3% in '28. And that will be a good complement to the evolution of the cluster indeed.

And then congratulations on your progress in defense. I was just wondering if you could talk more about the attractiveness of either volume or profitability in that area because we've heard some different things, I guess, from different companies.

Yes. No, good question, Vanessa. So yes, we made a very conscious decision now to extend further into the defense space. And I'll tell you, we have already a good foothold into that market space. This FORVIA HELLA that for many years have sold Lighting and Electronics products basically to defense vehicles. So we understand the ecosystem. We understand the processes. And we have now very intensely over the last 6 to 9 months looked at that field of drones. That was the announcement this week that we have secured a first assembly contract for drones. Why do we think it's good for us to play in that field? So I talked about the familiarity, and we see basically 2 ways to conquer that space. One is through manufacturing capabilities and capacities. The other one is through components. We have capacities in Europe, in Germany and France specifically in our plants that we can use for that kind of business. And we see the investment that goes with it as limited and very manageable for us. And then when we go on to the component side, I mean, those products that I mentioned earlier, right, for energy management, for battery packs, for motors, for actuators, that's right in our wheelhouse. So it is really a very proximate adjacency that we can use. So that gives us the confidence that we can go into that market, convince more customers, and we do it in a serious manner. So we have now a dedicated team in place that will explore opportunity by opportunity, and we'll book them one after the next. So I hope that describes the rationale good enough for you to relate to it.

Yes. And finally, I was just wondering if you could talk about the Chinese OEM order intake year-on-year. I guess if you work it out from the presentation last year, it looks maybe lower year-on-year, but obviously, the numbers aren't comparable. So I mean, just if you can talk about that progress. And then also just wondering if you're still assuming fourth quarter for BYD in Hungary.

Yes. Let me answer on the Chinese OEMs. It is a good number again, and maybe we didn't show it in the same format, but let me give you some clarity on that. So 17% of our global order intake is with Chinese OEMs specifically. So this time, we chose to show that, and it compares to about 10% of their share into our 2025 sales. So you can see that there is quite an upswing. I think the book-to-bill ratio, if you would calculate that is about 3x for the Chinese OEMs. And maybe, Olivier, you want to comment?

The second part of the question, we confirm that there will be activity with BYD in Hungary. And actually talking about Chinese carmakers in Europe, it will be also the case with Leapmotor in Spain.

We now have a question from the line of Ross MacDonald from Citi.

I have 3 questions also. The first 2 on the cash flow generation, which is obviously very strong. So my question is for Olivier on those 2 items. Olivier, you touched on some of the second half step-ups in terms of headwinds on the free cash flow side. I just wanted to make sure that when we go through the net cash flow bridge that I am on top of all of these. So you mentioned the purchase option in Mexico and the assessment of tax litigation. I think that was EUR 150 million of additional. It looks like on your CapEx guidance, that will step up probably from 4.8% to maybe something like 7% of sales in the second half. What are the other moving parts in terms of free cash flow generation? Should we expect a neutral impact from working capital? Obviously, it sounds like margins will be flat or up on EBIT. But altogether, how do we think about the sort of quantum of free cash generation in the second half? It looks like you only have to generate under EUR 200 million here to hit the guidance. So it looks reasonably comfortable. The second question linked to free cash flow, specifically on Interiors, easy to forget, but it's had a very strong first half on cash generation also. How should we think about the second half cash generation there? Obviously, that still benefits the group on a de-gearing basis? And then my final -- third question for Martin, just on the China order book as discussed there, 17%, obviously, a very nice number. I think some of your competitors talking more about mid-20s on the order bank with China or Chinese OEMs. So what's the internal target of where you'd like that book-to-bill or order bank as a percent of sales to get to? And then just for the sake of comparison, are you using the S&P estimates for the nameplate volumes when calculating those order banks?

Olivier, go ahead.

So let me start with the first question related to the cash flow. So the EUR 150 million is related to those 2 items. And let's be clear, they are one-off. They are not repeatable, but it's important in terms of the sequence because compared to usual seasonality of cash flow, this is something that you have to capture. The second point is that I confirm that the guidance is including those items. And let me remind that the guidance is a minimum of 3% of sales. So clearly, this is the minimum and the idea is really to be well inside. Related to other moving parts, the working capital should be the seasonality working capital, H1, H2 should be fairly similar to last year. So we have more working capital contribution normally in the second half. That should be the case as well. But clearly, yes, investment will be higher in the second half related to, in fact, the EUR 90 million of the EUR 150 million that is related to CapEx, but also the seasonal aspect. So we are in a good trajectory, a good trend. And I would say the recurring trend inside is quite positive on the cash flow generation. Related specifically to Interior, so because of the IFRS 5 rules, operating metrics are not including interior already. This is true also for the net cash flow. But of course, the cash flow of interior contribute to the debt reduction and the improvement of the financials of the company until closing. I would say that we expect the second half to be lower than the first half, which was particularly strong. It's also reflecting that we will finish, in fact, the closing within Q4. So you can consider some contribution, but not to the same extent as in H1.