Continental AG

XETRA:CON

Q1-2025 Earnings Call

[Max Westmeyer, executive]

Thank you, and welcome, everyone, to our Q1 2025 results presentation. I'm very glad that we have a strong C-level presence here today with our CEO, Nikolai Setzer; our CFO, Olaf Schick; as well as Philipp von Hirschheydt, the future Aumovio CEO.

A small reminder that both the press release and the presentation of today's call are available for download on our IR website. And I'd like to remind everyone that this conference call is for investors and analysts only. So 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 sell-side analysts. To provide a chance for all to ask questions, we would kindly ask you to limit yourself to no more than 3 questions at once. This will help us to conclude our call on time.

And before we finally kick it off, let me give you some details on the accounting technicalities. Due to the planned Aumovio spinoff in September, we have to apply IFRS 5 accounting for continued and discontinued operation, starting with the Supervisory Board decision on March 12. As a result, among others, depreciation and amortization for Automotive and Contract Manufacturing sectors had to be stopped. Therefore, you do see the EUR 55 million positive EBIT effect equal to 120 basis points in Automotive when looking at the quarterly statement. And of course, it's a cash neutral impact since we talk about D&A.

In the upcoming quarters, the full effect of stock depreciation will kick in. Again, in Q1, we only had it starting March 12, so just a fraction of the full effect. In Q2, you will basically see a full stop of depreciation and amortization. In the IR presentation, however, we are working with a like-for-like comparison, so still considering depreciation to reflect the operational performance of Automotive.

With this upfront, let me now finally hand you over to Niko.

[Nikolai Setzer, executive]

Yes. Thanks, Max. Well, warm welcome from my side. We have met several times already during this year because it's a very busy year with many important decisions, last decision at the AGM, the approval for the spin. Before, we have the supervisory approval where we informed on and the ContiTech independence, which we are preparing. So many, many things happened in the last 4 months, and there will be more to come.

At the same time, we see a market which is as volatile as we have not seen it despite the fact that we have already some experience of volatile markets on top. As you know, the tariffs situation and the trade barriers worldwide. So given that difficult environment operationally, we clearly had a solid start into 2025. And this is all thanks -- majorly thanks to the measures which we have implemented Capital Markets Day we informed December '23 that we are clearly pursuing in all sector self-help measures, and those have fueled the results and improved the results from last year first quarter. As you see, adjusted EBIT margin from about 2% to 6.0%, 6.0% excluding IFS because this is the like-to-like comparison with our depreciation, then obviously, the result is even better, but this is not the one which you should focus on comparing the operational improvements.

So the 4% or 400 basis points is mainly driven by Automotive, which was coming from a negative territory last year, a relatively weak, difficult first quarter. We have solidly improved by the self-help measures. This is the one component. The other component is that we have sustained, as we have informed before, sustainably more pricing already implemented, which has been affected in the first quarter, which clearly helped on top, March has been from the sales side, even if much better than we had foreseen and seen it.

You know that we are targeting breakeven now we are and much better with the plus 1 -- 6% than the breakeven, which we have seen at that point of time from here. However, strong improvement on the Automotive side, the comps are getting more tough. Last year, we caught up during the course of the year, stated that the EBIT margin was improving due to the fact that I just mentioned, sustainable pricing, we had retro effect pricing last year. This will get more difficult and less room for improvement going forward. However, that should be seen as positive as seasonality strongly reduced, which is a good one.

Would have been as well tires, particular replacement has been solid on truck and PLT. It's not outrageous. We would love to have even more tailwind, let's put it that way, but over 6% volume improvement while OE is going down is, from our point of view, solid results and OE down replacement helps as well the price/mix situation, which overcompensated the raw material headwind. That's why margins have been up. And please keep in mind that as well, '24 was weak in the first quarter, and we had as well certain one-offs, but it's clearly a solid start within our full year guidance.

And the ContiTech business continued unfortunately on the second half of last year's sales level, so weak auto and industry markets but the team applied strong cost measures, self-help measures. So despite a minus 6% organic growth, so going backwards, we kept the margin on prior year levels, so great job to the team in limiting operating leverage from sales to drop through into EBIT.

Good job as well on the free cash. As you see, last year, we have been at minus EUR 1.1 billion roughly. We have EUR 500 million. We had a onetime effect on the quantitative purchase effect. But even if you take this out, you see that we strongly improved operationally versus last year. So from the EUR 780 million, which you see here, EUR 500 million taken out, it's still the EUR 280 million, which we are better mainly driven by operational performance and as well by lower CapEx. So disciplined not only on the cost structure, but as well on the invest side. However, EUR 300 million is still minus. So it's still negative, which we will further improve during the course of the year, but it follows the typical seasonality which we have in the first quarter is typically the weakest cash quarter in particular, due to working capital.

So last but not least, you mention on the page is net indebtedness from EUR 52 million (sic) [ EUR 5,205 million ] to [ EUR 4,060 million ], so more than EUR 1 billion better we have seen already year-end. Strongly improved last year, and this follows you now, which is clearly as well, a solid start into this year.

So there has been a lot of other decisions on the Executive Board, which I have not mentioned at the beginning, 2 new appointments. So all again, Ariane Reinhart, CHRO, July 1. And Roland Welzbacher after 2 months handover with Olaf. So he will start in August 1 in the Executive Board and then after 2 months, October 1, he will take over the CFO function. Both individuals have been since long on the tire side, long experience, particularly Roland as well as in the capital markets, investment banking and so on. So there are solid proven, so to say, for a solid quarter to continue the job in the Executive Board and obviously coming from tires, that makes lots of sense.

Looking forward, how Continental will be once ContiTech is getting independence to follow. So swiftly summary and Olaf and Philipp will go more into the details, what I already mentioned, starting ContiTech minus 6%. You see EUR 110 million in sales, lead only to EUR 6 million less profit. So as mentioned, very solid operating leverage. However, markets still difficult where we are still hopeful that in the second half, we should see a certain upswing which we still assume.

And on the tire side, as mentioned 3.9% of this is 0.6% volume, which is, from our point of view, a good result in and helped for about 2 percentage points margin improvement. So in Automotive, thanks to the pricing advantage versus last year and overall solid performance, we have been slightly up 0.4%, so better than our sales weighted vehicle production. And I see on the right side from the minus 4-ish point to 1.6%. So a bit better than breakeven, and Philipp will explain now more the details, where does that come from. Philipp?

[Philipp von Hirschheydt, executive]

Yes. Thank you, Niko. And also a warm welcome from my side. Yes, and I'm very happy to be here today. You might imagine, for us, it's a very eventful year, eventful weeks and months. We have, just recently during the automotive Shanghai show, we revealed our new name, we are going to be called Aumovio. We have had them basically 10 days ago, the approval of the Annual Shareholder Meeting to conduct the spin off then, and it's targeted for September. And we also managed to get into the year quite decently with from our point of view, good start.

So what have we been doing? If you look at the Page 5, you can see that organically, we have been driving our business basically somewhat close to the results in quarter 1, a bit better, very slightly better in terms of organic growth. You see that we have had 2 business areas which were running well into the year, organically, also better than the first quarter. And ANS also organically doing better. But here, you can see one thing which we focus in Aumovio or today, Continental Automotive, tomorrow then, Aumovio very intensively and that is the clear value creation focus where we also look at projects where we not only look at costs -- and I will come to that, to our self-help measures.

But we also look into which projects are contributing to the bottom line and creating value year-over-year. And there, we also focus and take or give back businesses where we do not see a positive contribution that has happened in the first quarter where compared to last year, we have reduced the sales in our Architecture Network Solutions business area. That's the reason why we have been a bit shy in sales. We've got the core business of the business area is quite -- running quite well and also growing organically as the others did.

But that's something which you are going to see also over the course of the year. We are really focusing on projects which create value and where we do not see the value creation. And you might remember our Capital Markets Day, where I said we improved, we sell or we close the business. And in these parts, we do have some businesses where we are working on and getting them off our balance sheet.

If we look into the adjusted EBIT, you can see that we have been by 560 basis points better than last year. There is, on the one hand side, as Niko already mentioned, quite some contribution from sustainable pricing, which rolling over into 2025. We have also now concluded on some additional pricings, which we also call constantly working on over the course of the year to also improve there.

And we have been, as we are always saying, very much focusing on the self-help measures. We have, meanwhile, since January 1 reduced by close to January 1, 2024, by close to 12,000 headcounts. And that, for example, year-over-year, led on the adjusted R&D expenses means adjusted by restructuring and improvement of more than EUR 85 million in terms of absolute costs. So that's something we really work on getting our costs into the right direction, preparing for our spinoff and making by that the business more value creative and we're more value accretive.

If we go to the next page, looking into sales versus market. You can see that we have outperformed the market and the worldwide market, especially and thanks to the outperformance in Europe, where we have been 6 percent points better than the overall market. And we have also narrowed down the margin towards the market in North America as well as in China. However, here, we have been a bit weaker than the market, but something which we very much focus on going forward to see that how are we going to get into the right direction there.

As mentioned -- as Niko mentioned, pricing has been the main contributor and is going to be a main contributor, and that's something which, as I said, led to the fact that we also outperformed the market in some areas. As we then look -- want to look into the order intake, also there, we have had a decent start into the year. We are basically in EUR 1.5 billion better than quarter 1, 2024. We have managed to get a big contract, the biggest one in the first quarter of EUR 1.2 billion in North America for advanced around radar system, you can see autonomous mobility basically managing to get half of our total order intake, but we have also been successful in maintaining and getting businesses and awards for the latest generation of our brake systems here in China with the Chinese OEMs and have also concluded major orders for suspension systems and some of our sensors. I think that's basically from the automotive side.

And with that, I hand over to Olaf.

[Olaf Schick, executive]

Yes. Thank you, Philipp. I think you can hear from Philipp's presentation, the development speed at auto orders, it's very encouraging. And there's clearly positive momentum that we see.

Now if I continue with tires, as Niko already highlighted, quite a solid start into the year. On the sales side, we managed to grow by almost 4% organically, while volumes were only slightly up plus 0.6%. Price/mix was the main driver for this development. The volumes were mainly driven by healthy replacement demand in all regions in both truck and passenger car tires. OE, however, remained quite low. The price/mix side, we see a plus of 3.3%. We benefited from both positive effects in the sales channel as well as from a continuous trend to premium and ultra-high performance tires in our product portfolio.

FX came in slightly negative, which was quite a change compared to the good FX contribution at the beginning of the year. So the euro remained comparatively strong. This will further burden our sales development in the upcoming quarters. I think that's important to note. Looking at EBIT, healthy replacement markets contributed on the margin side as well as the positive price/mix development to overcompensate raw material headwind, which was in a mid- to high double-digit million euro range.

One more reason for the 170 basis points improvement compared to Q1 last year, last year was burned by some one-offs, for example, by a lower number of sales days in March. And also for tires, we are pushing improvement measures. In April, we announced that we will focus our commercial specialty tires business on material handling, wealth moving and port operations and exit the agriculture tires business by the end of 2025. And also in April, we announced the plant closure of our plant in Alor Setar, Malaysia by the end of the year. This is another measure to modernize and optimize our plant footprint with the clear targets to further strengthen our efficiency and the resulting return on invested capital.

Now on to ContiTech. What we see here is basic continuation of the second half 2024 development, both locomotives as well as the industrial markets remained on a weak level. Organically, sales declined by 6% as a result of the quarter-over-quarter comparison. However, the sales level was stable. We're still expecting improvements, particularly in our industrial business in the second half of the year.

However, the magnitude is difficult to judge. We all know there is higher uncertainty right now in the world and increasing trade barriers that could further arise. Despite the lower sales, we managed to keep the margin on the prior year's level, mainly due to strict cost management and our focus on price/mix optimization in our portfolio. And as we have already announced, we will continue to optimize our cost structure in the footprint in ContiTech, also throughout year 2025 to ensure continued strong operating leverage.

Now after looking at the group and the 3 sectors, let's look at our cash flow. The operating cash flow, as you can see, clearly improved compared to Q1 2024 and came in slightly positive, even despite the ongoing restructuring and severance payments, particularly in Automotive, as Philipp just mentioned. The main driver for the improvement was the clearly better operating results. In addition, also, we talked about that before. Last year's first quarter was burdened by roughly EUR 500 million from a purchase price payment for the repurchase of shares in ContiTech AG, you know that.

Also, on the investing side, we managed costs due to the cost discipline as well as further efficiency for the whole organization. CapEx on PPE and software was down EUR 43 million year-over-year in Q1. In summary, free cash flow came in much better than last year at minus EUR 300 million. This was also our expectation.

Yes. Next, we have summarized for you a page on the tariff situation, and I would like to give you an overview on where we stand. Let me start with a clear statement. Even though we are not fully positioned to quantify the net effect in this highly volatile situation, we're actually well prepared and we will mitigate tariff impact to the best extent possible.

Now on the left side, you see our setup, first, automotive. We have 2 local plants in the U.S. and the majority of the imports is coming from Mexico, almost completely USMCA compliant. Exports for automotive out of U.S. are very limited. ContiTech at the bottom of the page, we are facing quite a similar situation, but of course, much lower import volumes. And then tires, the situation is a bit different with our 3 local plants, we are able to produce more than 16 million tires per year. This covers more than 40% of our U.S. P&T volumes and more than 90% of the truck volumes. The vast majority of imports into the U.S. is coming from Europe. Mexico accounts for roughly 10% of U.S. import volumes.

Now in order to mitigate the tariffs that are in place and it might become effective at a later point in time, we have built up dedicated teams in all group sectors, actually quite significant teams. We're looking -- we take this very seriously and are working intensively on that. We're looking to increase to share in USMCA compliant imports even further. And in the longer term, we're also evaluating if the supply chain and production setup could be further improved. Of course, we are reviewing our customer agreements and are actively reducing our net exposure. Nevertheless, the situation is dynamic. And as you know, things can change overnight.

Of course, this is not just true for U.S. tariffs. We could also be burdened by potential retaliatory measures as we have seen it, the trade barriers that we introduced in China as a response. Okay, so much on tariffs. Then let's have a look -- yes, basically, a consequence of the tariff situation because as a result, the uncertainty that we have -- that we see in this volatile environment, we are now expecting worldwide light vehicle production to decline in 2025, in particular, due to a much lower outlook in North America. Our outlook mainly follows S&P assumptions. We have reduced our assumptions for North American volumes by 7 percentage points compared to our initial market outlook for the year. We're also seeing a larger downside through the North American truck replacement market, should industrial production decline.

But the visibility is relatively low in this case and truck business, as you know, can change quite quickly. Yes, because of -- on the next page, because of the mentioned volatility and dynamic, we have decided to not incorporate the potential significant changes to global tariffs into our 2025 guidance. However, this is important for us to note, given a solid start into the year that we have seen and that you see in our Q1 numbers and the broader guidance range, we currently do not see a need to adjust our guidance. We are now because of the accounting implications that Max explained at the beginning, splitting our guidance in continued operations, that's Continental, including tires and ContiTech, and discontinued operations, that's Automotive and Contract Manufacturing.

So you can see the underlying guided figures for Tires, ContiTech, Automotive and Contract Manufacturing are unchanged. So the building blocks of the guidance are still intact. Consequently, we are now expecting sales for the Continental Group, consisting of the continued operations Tires and ContiTech, of EUR 19.5 million to EUR 21 million and 10.5 to 11.5 percentage margin. This considers an unchanged sector guidance for Tires and ContiTech as well as the respective amount for holding costs we expect to remain with Continental in 2025.

Also PPA amortization, special effects, financial results, CapEx and tax rate are now only considering the part for the continued operations. In our free cash flow guidance, now at EUR 600 million to EUR 1 billion. We are guiding for the Continental Corporation as we expect it to look like at year-end 2025. If you compare the new guidance to the old guidance, then you can make the assumption that the remaining part of the former guidance will stay with Automotive, but it should be good indication of the underlying business, even though, of course, Aumovio will, at a later point, introduce their own guidance.

For Automotive and Contract Manufacturing in the future, Aumovio Corporation, we are also expecting unchanged KPIs. That means sales of EUR 18 million to EUR 20 billion and an adjusted EBIT margin of 2.5% to 4% in our discontinued Automotive sector. And this is, of course, not considering the stop depreciation that we have mentioned. And with that, Max, I think we are through with the presentation.

[Max Westmeyer, executive]

Yes. So it's Q&A time, I would say. And we would like to hand the rest of the time to you. So please open up the line for Q&A.

[Operator]

And the first question comes from Harry Martin, Bernstein.

[Harry Martin, analyst]

Yes. Thanks for the presentation. So I'll ask 3. The first question, just to help get a sense of the sustainability of the automotive margin improvement. I guess something you haven't mentioned is product or regional mix? I know that the Safety and Motion business is back to the top grower after a very negative 2024. So does that segment still have the highest margin within the Automotive business under the next-generation products starting up margin-accretive?

And then a second question, just to ask for a bit more detail on the Tire business. Can you help break down the volume growth of 0.6% into OEM replacement? It's going to be important to help us understand how your volume market share is progressing as this business becomes independent. So are there any key replacement markets, you're seeing share gains? And how is the sort of the exposure to imported competition evolving?

And then finally, just an update on the spin-off and restructuring costs that you expect? It seems like activity in terms of restructuring has been increasing. So is there any more upfront cost to consider related to some of the restructuring? Any help on that would be useful.

[Philipp von Hirschheydt, executive]

Harry, this is Philipp speaking. With regards to the sustainability of the order margin improvement. So I mean, we are working on very consistently on improving, a, our pricing side and, b, on the self-help measures for quite some time, meanwhile, which we do see now in the bottom line and our overall cost structure, which should lead to the fact that we do see a consistent improvement quarter-over-quarter. And which would also roll over then into the future.

We have many of our projects and restructuring efforts. We have done across all business areas, which lead to the fact that we expect to have basically all business areas to improve. Some more than others. What we have seen also, what we do see in the beginning is a very positive sentiment in the business area Safety and Motion. And we expect then that we are going to see also over the course of the year, the improvement there. More and more detailed figures with regards to business areas, we are going to show in the Capital Markets Day, end of June.

[Nikolai Setzer, executive]

Okay. Coming to the tire part, breakdown volume, growth, OEM replacement, market share gains. So in general, we don't break it out. However, you can assume that we have been within the market. If you look for S&P, Europe has been down minus 7% in past and North America, minus 5%. So we follow the market roughly so mid-single-digit number down. And as you know, it's roughly 25% of our business, then you can make the math and see that how much replacement has been positively contributing.

[Unknown Executive]

To your third question, spin-off and restructuring costs, first of all, as Niko said, spinoff on track, right? We expect the spin-off and the listing to happen within the course of September. Cost for the spinoff is in the area of low to mid-3-digit million euro amount. Taxes, low 3-digit million euro amount. So this is market standard transaction of this size as you also have heard from the presentations here today, strong focus anyhow on efficiency in managing our cost position.

[Operator]

And the next question comes from Horst Schneider, Bank of America.

[Horst Schneider, analyst]

I have got also 3 in total, 2 on Aumovio and 1 on tariffs. On Aumovio, also in the context of the tariffs, could you maybe give us any feeling what amount of prepay you have seen at the end of Q1 and how you see the call off developing now? So are they reversing now? Or have they reversed already in April?

And on the tariffs in Aumovio, is it fair to assume that you can largely pass on the tariff to the OEMs? Or will that be difficult due to the structure of the contracts that you have? So any indication on that would be great. And also on Aumovio is -- regard to the price effect that you talked about. So any quantification on that? And if the pricing will continue to improve also versus Q1 going forward? And what amount of self-help measures remain from here?

And the last 1 on tires, sorry, is in the within the price mix, maybe you could indicate what was the higher share -- I guess the higher share was about mix, but then also what amount was related basically to raw mat pass-through and this raw-mat costs, you talked about the negative impact in Q1. That should come off now basically, right? Or does that continue for a few quarters?

[Philipp von Hirschheydt, executive]

Okay. So what we have seen in the month of March is some prebuys in the low to mid-digit arena. What we do not see yet is a reduction in sales, but it's not entirely reversing yet. And what we are -- as Olaf explained, we have set up a huge task force working on how to deal best with the tariffs. We do have by far close to a very, very significant share, which is USMCA compliant in what we do. So we are still running there on a very positive or, let's say, healthy side. And as long as this is not going to change, we do feel as well set up.

With regards to the cost side, we have booked during the month -- during the first quarter, again, EUR 180 million restructuring costs, which show that we are still working on that. We announced in the month of February that we are wanting to reduce our R&D workforce by another 3,000 headcounts over the course of 2025 and 2026. And as you might remember, we -- with our main SG&A program called Accelerate, we have always intending to have EUR 200 million improvement in 2024 and EUR 200 million in addition in 2025. So this is working very well, and we do see chances to get even better than that. And that means we do see that we are going to get on the comparison base still into a more positive territory over the course of this year.

[Horst Schneider, analyst]

Okay. Tires?

[Nikolai Setzer, executive]

Coming to Tires, your assumption is right, Horst. The mix part is a large part within price/mix. And as you know, we don't differentiate into those 2. However, you can assume that it's a big part is coming out of mix. And as mentioned before, OE growing substantially down versus replacement up, truck being relatively solid that itself gets to a solid mix contribution, which we assume as well going forward in the second quarter.

So raw material impact Q1, how does it go from here? So we assume that it continues. We have seen some effects of the tariff announcements and so on. So volatility in natural rubber, for instance, but it came then back again on to the level before or slightly below. So we still assume to have headwinds during the course of the whole year. Second quarter, from today's point of view, on a similar level than the first quarter, and it might then because last year already raw materials was moving upwards in the third and in the fourth quarter. Level out, however, for our quarters from today's point of view, we still assume headwinds.

[Operator]

And the next question comes from Christoph Laskawi, Deutsche Bank.

[Christoph Laskawi, analyst]

I'd like to come back a bit on your comments with regards to the Q2 run rate that you've made. Could you comment both on autos and tires across the regions? Are there any significant changes in the volumes on an absolute level? Or any sort of disruption that you see from the tariffs so far in North America? And that also related to just are there any goods potentially standing at the border? Or is it becoming far more complicated to move the goods?

And then just on tire pricing again. I know you don't want to comment too explicit, but some of your competitors have announced price increases in North America that's essentially due since this month. Could you comment on if you have adjusted prices in that market already as well? Or if you are planning to do so in the near future?

[Nikolai Setzer, executive]

The order run rate was -- run rate auto, and then I continue with run rate tires?

[Philipp von Hirschheydt, executive]

I mean, what we have -- as I said, we have had some -- from our point of view, prebuys compared to at least our estimate during the month of March. We have seen that April is running or has been running okay. And we see not a significant reduction yet in May and June. So that's with regards to the run rate in the U.S. as also in the rest of the world.

[Unknown Executive]

I think it's fair to say if I can add. It's -- our expectation is to come out at adjusted EBIT margin in Q2 above last year's Q2.

[Philipp von Hirschheydt, executive]

Absolutely. I mean as we are working diligently month after month. So we should see also an improvement, as I said, over the course of the year in the quarter.

[Nikolai Setzer, executive]

Right. So on the tire side, what are the assumptions in terms of run rate and your pricing questions. So for the second quarter, as I already mentioned, we assume to be price/mix in a similar corridor as we've been in the first one. And already now the answer to the pricing question, we will not be explicit exactly because this will be, as always, for us, depending on the cost and the volume mix to increase in the market and we act then accordingly in order to...

[Olaf Schick, executive]

And communicate in the right channel.

[Nikolai Setzer, executive]

And communicate in the right channels. Exactly. Thanks that we have Olaf here with us to remind us here. So overall, what effects do we see? Too early to judge with tariffs in the U.S. part. So how the market dynamics, you know, tire dynamics are relatively fast and they can change depending on how imports and local production will run. We will obviously do our best to mitigate all the effects and then taking opportunity from our U.S. local footprint, which is particularly strong on the truck side, which is okay as well on the pad side, but obviously, to already see right now what the net effect is basically impossible. I have to say we have to be agile and we have to make the best out of it.

On the margin side and on the run rate, given that first quarter, we have been in our guidance, we assume as well in the first half. Looking on last year, we've been in the first quarter, relatively weak in the second quarter. Then we've been up at the end, we ended there in the middle, that's where we assume to end up as well in the first half as well in 2025. So we -- they are somehow even. Tire side is the most shaky, I would say, in terms of tariffs because the reactions can be relatively swift, but it's too early to judge. We give them more flavor, most likely on our June Capital Markets Day than we are in June, then we know much more mid and June, those are in effect at least the auto tariffs for close to 2 months, and then we know more how the effects might look like and how the market has reacted.

[Christoph Laskawi, analyst]

If you allow me one follow-up just on autos and the prebuy. Was this mostly in Europe on the production side that was shipped then into the U.S.? Or was it also just in the U.S. or USMCA region overall?

[Unknown Executive]

We don't quantify that.

[Nikolai Setzer, executive]

Honestly, we don't know in Europe where the cars are going as the products on the automotive side, they are dependent on which market they are. So that would be just guessing from our side. We don't know.

[Operator]

And the next question comes from Jose Asumendi, JPMorgan.

[Jose Asumendi, analyst]

I'm glad to see the ship is moving in the right direction. A couple of questions, please. I think the first 1 on tires, do you expect the seasonality of margins to be stronger in the second half versus the first half? Or should we expect a bit more sort of leveled out when we look at margins first half and second half on tire?

And second, on auto, I guess I will have to wait for the Capital Market Day, but I'd love to understand a bit better which subdivisions within auto drove the margin improvement in the first quarter. Do you have any of these subdivisions still in loss-making or red territory? And then final one on auto, should we expect -- I think the answer is yes, but it was not for me, not very clear in the last discussion. And then the last question, should we expect auto margins to be up in Q2 versus Q1?

[Nikolai Setzer, executive]

So on the tire seasonality, as visibility is somewhat difficult right now, we should assume a more flattish development. I mentioned before, it might be better in the second half of the year-over-year raw material effect might melt down. On the other hand, we have to see how the market dynamics are at that point of time and how our costs are. We took some cost decisions already now. You could see we have closure of the tire plant in Malaysia, which we have recently announced in order to optimize the footprint. And several others moved -- stepping out of the Agriculture segment, as Olaf said. So we are doing -- we are working on ourselves on the cost side. But again, you should assume for right now to be somewhat flattish on the market. I think it's better we don't mind. And then we -- our actions are coming in place. But right now, it's too early to see whether any upswing in the second half, what downside could come.

[Philipp von Hirschheydt, executive]

Okay. With regards to the auto questions. If we are looking into our subdivisions or business areas, as we call them, basically all business areas have improved compared to quarter 1, 2024. But detailed figures, we are going to provide them during the Capital Market Day, end of June.

And with regards to the second question of quarter 2 versus quarter 1, as we already said, we expect -- I mean we are working on a constant manner to improve our margins. We expect that these cost measures, which we initiated, which are rolling over also going to roll over into the second quarter. And we would expect that over the course of the year, quarter-over-quarter, we are going to improve the margin, and we should by then and also better -- we should -- we will be better in Q2 than in Q2 2024.

[Unknown Executive]

Exactly both better than Q1...

[Nikolai Setzer, executive]

Q2 is better '25 than '24, it's better than Q1.

[Jose Asumendi, analyst]

Got it. If I may have a quick follow-up. I tend to get a question for investors, there's a lot of market volatility, there's a whole tariff discussion. From your perspective, Niko, the CMD is going ahead. Everything is on track. Is that how we should read it, right?

[Nikolai Setzer, executive]

Everything is on track. I like that one. As much on track as it can be. But I mean, we haven't had a -- we are used to term or left and right. As we have already mentioned, our competitors and perhaps the similar situation. We have all to deal with tariffs. We have all to adapt in our supply chains. We have solid exposure on the U.S. side as well now in Europe. We have performed solidly in the first quarter. So I would say, yes, on track as long as we can stay on track.

[Max Westmeyer, executive]

I think if I may add, Jose, on track on the operative side, but also on the implementation of all the structural changes that we have decided, we're fully on track. So we're in the implementation mode.

[Nikolai Setzer, executive]

Yes, that's a good point.

[Operator]

And the next question comes from Monica Bosio, Intesa Sanpaolo.

[Monica Bosio, analyst]

The first is on the market outlook for the -- in the auto industry, you [ worsened ] the global car production outlook. And I remember, if I remember well, that in the last call, you say that in front of a minus 1%, plus 1%. The company was expected to perform overall in line with the market. Is it still the case in minus 3% global car production by year-end?

And my second question is on tires. As for trucks, it seems to me that the market outlook is now worse than before, both in original equipment and aftermarket. Within this environment, do you still expect tires to record positive volumes across 2025? And it has any kind of indication that could be useful. And the very last is still on tires, sorry. You already answered that for the prices increase, it's still too early to say. But would be -- can we imagine that the company could be willing to get market share in U.S.A. without implementing any price increase could be a strategy?

[Nikolai Setzer, executive]

The first question on the market outlook, minus 1% to plus 1%, minus 3% to -- we basically follow S&P there, what you could see and as we kept our margin guidance stable, you see that we still assume that we can perform within the corridor. And as you've seen on purpose, we choose the corridor, which might be seen as relatively large. From EUR 18 billion to EUR 20 billion, we did this on purpose because we saw already before that certain volatility might act and on top of all the other actions. So this is a larger window where we still assume that we are in.

Positive volume across '25, yes. For the volume, yes, we have still the target to be positive on the volume side. Let's see how much OE that we're finding down on the replacement market. We have not done revised our guidance on the truck side, we did. And truck is the smaller part of our volume. The largest one is the PLT replacement. So the largest business part, which we have is untouched at least from the market assumption.

However, given what I said before now situation, we have to see how that works out. And market share gains without implementing price increases with -- our strategy is value creation. So we have to find the best sweet spot price/mix volume to grow our margins and grow our value creation and whatever is the best decision point we will take.

[Operator]

And the next question comes from Ross MacDonald, Citi.

[Ross MacDonald, analyst]

I have three, please. One on automotive, one on ContiTech and then finally one on tires. Firstly, on automotive, just looking at Slide 6. It looks like very strong improvement in the China business. Conscious this is still underperforming the market but in the fourth quarter, you were lagging China LVP by 8 percentage points, now just 2 percentage points. So be curious if there's anything you would call out as this driving that improvement sequentially? And then related to that, whether we should expect to see Conti outperforming China light vehicle production in any of the coming quarters of this year?

Secondly, on ContiTech, obviously, if I annualize the current top line run rate, you're slightly below the full year guidance at the low end of EUR 6.3 billion. How should we think about ContiTech in the second quarter? Are you seeing any signs of an inflection? Or would it be fair to assume a similar sort of level to Q1? And then related to that, what end markets effectively are supporting that second half recovery that you're expecting?

And then finally, just on tariffs as it relates to the tires. Thank you for the summary. Could you maybe help frame the action plan for tires in terms of your capacity in the region? It looks like USMCA compliant Mexican products could get some relief. So how quickly can you ramp production in Mexico? And then given the CapEx increase for the Tire division, where do you see that capacity in the U.S. over 40%? How quickly can you get that up to, let's say, 60%, 70% of volumes? Thank you.

[Philipp von Hirschheydt, executive]

Yes, let me get started, Ross, on the auto side. Yes, we have seen that we have been doing better in the first quarter than in the fourth quarter, which was particularly bad with a very bad customer mix. We are now -- what we do see is that we do have a good business profile. We are working on that. We have had some pricing readjustments in the first quarter, which also helped. We are working and improving our relationship -- working relationship and order intake with C OEMs, I mentioned that we gained also a new contract for our integrated brake system with the Chinese OEM. So you see we are improving there on a constant base.

But in order to be -- to materially outperform the LVP in 2025, I think that's going to be nothing which we should expect now. But I mean, we are -- as I said, we are working on a decent business case. We're always focusing on quality of earnings versus business growth, and that's how we have improved, and now we are working on going forward.

[Nikolai Setzer, executive]

For ContiTech, how is the sales development, how should you see this. It's basically flip-flopped our assumption to what we've seen last year. So first half last year has been still on a higher run rate than it dropped to the run rate, which we see now in the first quarter. We assume second as well on a similar level and then the second half, up again. This is based on what the market research is telling us well, what we hear from our customers. However, it has to be translated in orders and we have to see it. We have assumed already last year, an earlier recovery of the industry markets which didn't come.

And you asked what are the main markets there. Those are basically all the main markets which we are in ContiTech, construction and home, mining, energy management, those are the main parts, which we assume to recover them. As well of highway, we see some soft signs when this come off highway is very difficult to trigger and very volatile. That's the ContiTech part.

On tires, how swiftly can we ramp up capacities or shift in tires, things take longer. So to build up capacities and ramping them up, takes a certain time. However, we will obviously max out our capacities which we have in North America. Mexico just accounts for 10% of what we are doing in the entire North American part. So will not fill the whole gaps, our plants in North America. We will further debottleneck whatever we can do and increase then the output wherever the market demand is for that and further measures we have invested strongly in the last years. The further measures to get more local, local for local will take them time, and if not -- you should not expect the big effects within 2025.

[Operator]

And the next question comes from Thomas Besson, Kepler Cheuvreux.

[Thomas Besson, analyst]

It's Thomas from Kepler Cheuvreux. I have a few questions, please. First, I'd like to come back to the substantial adjusted EBIT improvement in autos. Just trying to get a better grip on the bridge for that. So you just indicated EUR 85 million improvement in absolute in R&D cost. We can see the headcount reduction, which is quite impressive. Is there something else we should be aware of? Because it's quite unusual to improve profitability that much from the business that doesn't see any revenue improvement. The first question.

The second, could you give us an update on whatever you can say about the OESL disposal process and the BMW brake disputes, the discussions there, where do we stand? And lastly, [indiscernible] question. What should we expect to get at the capital market events you'll host in terms of reporting structure for the 2 companies? And what kind of history are you going to give us for this?

[Philipp von Hirschheydt, executive]

Yes. Thomas, let me get started on the improvements quarter-over-quarter. So on the one hand side, we mentioned the R&D costs, which we significantly improved. You might remember that we started end of 2023, our third quarter -- fourth quarter 2023, our SG&A cost reduction program, which led to a significant cost reduction of more than EUR 200 million in 2024. And this is now rolling over into the next year. So the comparison base in the first quarter 2024, significantly higher.

And we also mentioned last year that -- and that's why we had quite -- or not so satisfying quarter last year, 12 months ago. Because we, at that time, didn't agree on pricing adjustments because we said we need to find something which is sustainable and which is covering all the costs which we need to incur. And this, we all agreed upon until the end of the year. That means the sustainable roll-forward pricing is significantly better. And I think -- these are the major topics.

Now we have better price. We have better fixed costs, and we have some slight improvements on the material side. And that helped us to significantly improve our results in the first quarter 2025.

[Olaf Schick, executive]

Let me continue with OESL, Thomas. So the carve-out process basically completed. We are now in the midst of the M&A process. Too early -- I mean, we are on track, but too early to give more details on where we stand. We will communicate later at the right moment in time.

On the BMW brake issue, actually nothing new to report with the measures taken, the vehicles with the brakes can be delivered to the customers worldwide to the end customers, what we said earlier on our accruals. This is still valid. Overall, I would also like to state that we have a constructive relationship with our customers.

[Nikolai Setzer, executive]

Okay. And the last question, CMD reporting structure. As we don't change as well our structures in 2025, we should not expect different structures at the CMD. As always, we will give more insights on certain KPIs and certain drivers going forward, which we'll deep dive. But from a structural standpoint, you should not expect something new there. The structure, we have 2 days. Okay. Philipp, just mentioned, yes, 1 day on automotive and 1 day then on the continued business, so to say, on ContiTech as well as Tires. That's the only structural change.

[Operator]

And the next question is from Michael Foundoukidis, ODDO BHF.

[Michael Foundoukidis, analyst]

Michael from ODDO. Two questions on my side. The first one, sorry to insist, is about tariffs. As you said, I mean there was some prebuy recently, you may have increased your inventories and customers might have done the same, but it may take a few weeks to see the effects. But unfortunately, for everyone, the tariffs are now in effect since last week. And you are subject to, let's say, the 25% tariff for the non-USMCA portion of your import flow, which, if I'm not mistaken, would exceed 50% of the EUR 4.1 billion import volumes that you mentioned in the presentation.

So sorry to insist, but could you clarify a bit your strategy going forward? And what would you assume in the coming weeks, let's say, for tires, for example, do you intend to fully compensate through price increases in the replacement segment? Even if it costs you some market share, that could be the strategy? And in autos, any idea where you think you can end up in terms of compensation? And how do you did concretely with the situation now for the past that you have to send a broad, let's say, this week or in the next 2 weeks?

And then the second question on the automotive orders and the book-to-bill. It's only 1 quarter, so I doubt it's relevant, but within the 4 sub divisions, there's only 1 division, autonomous mobility, which has a book-to-bill, which is above 1x, well above 1x with the 3 others below. So what should we think about that? And especially on the U.S. business, which has been significantly below 1x for a couple of quarters now and which was supposed to be, let's say, carved out at some point?

[Nikolai Setzer, executive]

Michael, for the first question, there is nothing much more to add than we put on our chart, which Olaf has explained and which we already mentioned before. So we will try -- we will work on all mitigation measures, which is supply chain rerouting of our product. Obviously, we will talk as well to our customers and find agreements on our way in order to mitigate those impacts, find the best solutions.

The net impact, as we mentioned, particularly on the tire side, it's very difficult to judge. That's why we are not in a position yet to guide on that part. We will add more flavor than in June and how that goes forward and how we really see the situation here, value creation is our driving force. So we have to create value. That's what we strive for, and it's not the market share or whatever other KPIs simply once we are in terms of and returns on our capital employed. That's what we strive for on that part. Book-to-bill?

[Philipp von Hirschheydt, executive]

Yes, I mean, you're absolutely right. The -- with the significant order intakes, which we have managed to get into AM, we boosted our book-to-bill to 1.2. But that's actually the nature of the beast. I mean, there are some -- the businesses which are being awarded in some quarters and others in other quarters. So it's always that we have some business areas which are overachieving in 1 quarter and might get down in the second quarter.

I mean, we are pleased to have autonomous mobility. We're being quite successful. I mean this is the business of the future which we drive quite significantly forward. We also see a great demand in that business area for our products and our systems. But we see similarly also in the other business areas. So I'm expecting that we are going to see across all business areas, quite decent and significant order intake in 2025, and that varies then from quarter-to-quarter.

And with regard to user experience, yes, I mean, user experience has had in the last 2 quarters, not big business, but in 1 big contract in the first half of last year. We have a very strong and competitive product portfolio and the strong order backlog. And we do see also the significant interest and which we also are very confident also come over the course of this year.

[Max Westmeyer, executive]

With that, unfortunately, we have to end it for today since we have a hard cut. Sorry if you did not have the chance to ask your questions live. Please reach out to the IR team if you have any follow-ups you would like to address.

And with that, thank you, everyone, for participating in today's call. As always, we're very happy to be there for you guys. And with that, we would like to conclude for today. Thank you, and goodbye.