Good evening. This is the conference operator. Welcome, and thank you for joining the Valeo third quarter 2026 sales webcast. As a reminder, all participants are in listen-only mode, and after the presentation, there will be an opportunity to ask questions. Please note that we will take two questions per person. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mrs. Marisa Baldo, Group VP, Financial Communication and Investor Relations.
Yes. Thank you. Good evening, everyone, and welcome to Valeo's Q3 sales conference call. With me for today's presentation is our CFO, Edouard de Pirey . The format will be a presentation for 10 to 15 minutes, followed by a Q&A session for sell-side analysts. As usual, you have the press release and slides available on our website at valeo.com, and a replay of the call will also be available on our website. Before Edouard begins, I want to quickly direct your attention to the disclaimer on slide 22, which I invite you to read. Thank you again for joining us. Edouard, the floor is yours.
Thank you. Thank you very much, Marisa, and good evening, everyone, and thank you for joining Valeo's third quarter 2026 sales presentation. I will start today with the key business highlight as usual, and then detail more the Q3 sales results. Let's begin with the key takeaways for the quarter on slide two. First, total sales came in at EUR 4.9 billion. This level of activity is consistent with our expectations and our full-year guidance. For Q4, we anticipate a standard sequential increase based on normal seasonal patterns. Second, we do confirm our full-year guidance across all indicators. Specifically, we now target an operating margin and free cash flow in the second half equivalent to those in the first half. Naturally, we would have liked to deliver a stronger H2, but we are factoring in a market environment that has become more demanding with headwinds intensifying over the summer.
We are addressing these challenges head-on. We have done that in the past successfully, and the teams are fully mobilized to deliver on these objectives. Lastly, you may remember that in previous calls I had said that I would be disappointed if BRAIN would not grow in the second half. Well, I am pleased to confirm that BRAIN is actually back to growth in Q3. This is a very positive signal and a first concrete proof point validating the third engine of our Elevate 2028 plan, the group's return to growth in 2027. Moving now to slide three, we are operating in a highly volatile market, and as you know, we are accustomed to this. We have the experience, we have the methods, and we are holding firm with a relentless focus on cost and cash. We continue to manage the situation regarding raw material inflations across two distinct cases.
On the one hand, index commodities, where cost increases are automatically passed through. On the other hand, non-index components, where we apply the same proven methodology, one, securing volumes, two, minimizing the gross cost, three, negotiate fair compensation with our customers. For memories, our volumes are fully secured for 2026, and we are ready to secure 2027 volumes upon pricing validation. Secondly, we stay laser-focused on cost reduction. We continue our efforts to lower the break-even point. We are accelerating R&D efficiencies by leveraging AI. We are achieving the EUR 300 million annual run rate of savings from our self-help measures as of this year. Third, we maintain an absolute rigor on capital spendings. Gross R&D is tightly contained, including capitalized R&D, and our industrial CapEx for 2026 will stay below our long-term objective of 4.5%-5% of sales.
On slide four, a zoom on BRAIN's momentum with some of the most recent achievements. We have been selected by Nissan as the tier one supplier for its next-gen ProPILOT program. This marks a new milestone in our SDV journey. We have demonstrated our ability to execute at Chinese speed with the Valeo Smart Safety 360. This is a full Level 2 system developed in less than eight months, for which we have secured 10 wins, eight of which are already in series production. With the Renault Group, our core SDV building blocks are now debuting on the new Trafic Van E-Tech alongside Google and Qualcomm. Finally, on the BMW Neue Klasse, where we supply the central ADAS domain controller.
Production in Europe is off to a strong start, with capacity already sold out through the first half of 2027, and this is just the first wave with scaling planned across more than 40 models. Turning now to slide five, a quick update on our beyond automotive strategic initiatives, where we continue to make progress. First in the defense sector, as you know, we secured our first win with Harmattan AI to supply e-motors for their drones. We are leveraging a proprietary sovereign e-motor architecture completely free of heavy rare earth. The industrial ramp-up is scheduled in Sainte-Florine in France early 2027. Second, in data center cooling. Last week at the OCP Global Summit in San Jose, alongside OVHcloud, we presented the validation status of our aluminum rear door heat exchanger solution. The corrosion tests have successfully reached the equivalent of over 10 years of operating life.
This is an important first milestone, and we are pushing testing up to 15 years to fully meet data center operators' expectations. Compared to traditional copper solutions, we demonstrated superior cooling capacity by 38% and reduced power consumption by 25%. The second part of my presentation, let's now look at the Q3 numbers in detail on slide six. Total sales stood at EUR 4.9 billion, down 2.6% on a like-for-like basis. Forex had a positive impact of 1%, reflecting the appreciation of the U.S. dollar and the renminbi against euro. Perimeter impact was a - 0.6% due to the sale of the powertrain automotive sensor business. We expect a smaller impact in Q4, given the timing of the disposal at the end of November 2025. OEM sales stood at EUR 4.1 billion, down 3.8% like-for-like.
This was largely driven by unfavorable base effect related to a customer compensation recorded in Q3 2025 in the POWER division. Aftermarket demonstrated continued resilience, growing by 3.0% like-for-like, supported by an ongoing momentum across most geographies. Miscellaneous sales grew by 6.6% like-for-like, driven by steady tooling and customer R&D contributions. Moving to slide seven with the performance by region. Globally, our OEM sales underperformed the market by 2.2 points, primarily driven by the unfavorable base effect I mentioned earlier. This was mostly visible in Europe, where sales were down 7% like-for-like. In North America, however, we continued to outperform, posting flat sales in a market down by 5%. In Asia, excluding China, our sales grew by 8% like-for-like, outperforming the local market by three points. Finally, in China, we underperformed by seven points.
While sales with Chinese OEMs were slightly down, our strategic repositioning is advancing well, and over the nine months of this year, Chinese OEMs represented 56% of our OEM sales in China compared to 53% in H1. By division now, starting with POWER on slide eight. Sales reached EUR 2.4 billion, down 10% like-for-like. As I mentioned earlier, this is largely driven by an unfavorable base effect, specifically a high voltage volume claim resolution that was booked in Q3 of last year. Beneath this headline figure, underlying operational activity remains solid. We saw continued good performance in North America, driven by new program SOPs and strong regional execution in India. Moving to BRAIN on slide nine. This is the major highlight of the quarter. The division is back to growth, with sales reaching EUR 1.2 billion up 8% like-for-like.
This translates to a significant 10 points outperformance versus the global market. We saw strong commercial momentum across the board, robust demand for ultrasonic sensors and cameras in Asia, and solid results in Europe, driven by displays, telematics, and central control units. This is a tangible validation of the third engine of our Elevate 2028 roadmap. Finally, LIGHT on slide 10. Sales were down 3% like-for-like, representing a two points underperformance. We recorded resilient performance in Europe, supported by successful new program start-up productions, alongside strong performance in Asia, driven by production ramp-ups. In addition, we secured new business acquisitions to support gradual recovery in North America. To conclude on slide 11, our Q3 sales are consistent with our full-year objectives. We are holding firm in a highly dynamic and demanding environment backed by rigorous operational cost and cash discipline. We reiterate our guidance for 2026.
Last, the return to growth of our BRAIN division is a key milestone, showing that we execute Elevate 2028 as planned. Thank you for your attention, and we are now ready to take your questions.
Excuse me. This is the conference operator. We will now begin the question-and-answer session. If you wish to ask a question, please press star and one on your touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. We will only take two questions per person. First question is from José Asumendi, JP Morgan.
Thank you very much. Hi, Edouard, Marisa. Couple of questions, please. The first one on product mix. Can you comment on BRAIN and the revenue acceleration? Is this something that you think will be now structural into the fourth quarter and 2027? And whether the margins there that you report in the first half continue to be a statement for this division where you have much higher EBITDA margins in BRAIN versus POWER and LIGHT. But also still on product mix, if you could please comment a bit also on POWER, as I am a little bit surprised that maybe we don't see more revenue growth in POWER in light of the electrification trends we're seeing in Europe. The second quick one would be on the guidance on the margin.
When you say second half margin is similar, I understand, versus first half, does this imply that margins in the second half could be slightly down versus the first half, or is the level of confidence to be similar, but at least in line with the first half? Thank you.
Thank you. Thank you very much, José, and thank you for your questions. As far as the product mix is concerned, for BRAIN, I do confirm that the revenue acceleration is planned also for Q4 and for 2027. While you have in mind that there was a specific impact in Q4 last year with a lot of compensations that we recorded in miscellaneous sales. But I do confirm that for the OEM sales, we do see this growth coming in Q4 and to remain in the full year of 2027. This is what makes us actually more and more confident of this third engine coming back to growth, coming in 2027. Now, as far as POWER is concerned, and you're right, there is even more electrification in Europe. This is what we see from the market.
You have in mind that since we took over in 2022 the shares of Siemens in Valeo Siemens, we launched a full program to diversify the customer's portfolio. We are very focused on all programs in Europe that are almost over now. We have been developing in India, in Korea, in China, in North America, and also in Europe. These new steps of Europe are coming a bit later. I have an important example. This is the famous E-Tech Van, the van of the year, actually, we are on with our high voltage solutions, and that will deliver in the months to come. Basically, this is a kind of timing issue. It is coming, and I have a lot of objectives regarding POWER also globally and in Europe as far as electrification is concerned.
Now for the guidance and what I would call somehow the soft guidance, when we said that H2 would be at least equivalent to H1 and now we are saying H2 would be equivalent to H1. We did not say it will be slightly down. We just said it is equivalent to H1. So we are just precising somehow the soft guidance that we gave in July. We know the environment is tough, and we are very committed to deliver what we said. This is more a confirmation and a clarification of what we said. But we said equivalent, we did not say lower than.
Thank you.
My pleasure.
Next question is from Ross MacDonald, Citi.
Yes. Thank you. Good evening. Thanks for taking my questions. I had two questions. The first one, again on POWER, just kind of linked to José's question there. I appreciate the comps are high. It looks like POWER is pretty flat versus Q3 2024. But can you help us explain what are the conditions that would drive growth in this division? Is it a continued acceleration in BEV on those specific platforms? I am just getting questions around whether this is driven by legacy ICE exposure that is driving the business lower in Europe here and now. Just be good to maybe drill further into when we should expect a top-line recovery in that business. Then the second one, just on China and customer activity.
I think the first half results you talked about being back to growth with Chinese OEMs in the second half, so it would be good to see or hear your thoughts on that. I do not see any mention in the slides around the Chinese activity specifically. Then linked to that, just customer activity more broadly, Edouard, if you could comment on what we are seeing in Europe. Obviously, take your point around the headwinds that have emerged. Are you seeing a deterioration in call-offs in Europe, in China? How should we think about customer activity into the end of the year? Thank you.
Thank you. Hi, Ross, and thank you for your questions. As far as POWER is concerned, what drives the growth? What is driving the growth is as for all Valeo, I would say, is we are taking orders and we are growing step by step. We said clearly that it would come first through BRAIN, and this is what we see now, and it will come a bit later with POWER and LIGHT. Actually, LIGHT was not bad neither last year. I have difficulties to tell you about a specific platform because you know always we are not authorized to talk about one platform, one customer or the other. Sometimes we can, and we are happy to do so. Clearly in POWER, we are trying to be well-balanced, well hedged against the electrification, because sometimes electrification is up, sometimes it is down.
We've seen the change of politics in the U.S. two years ago, and we were quite happy to have kept at least some ICE-related technologies also. We are strong in ICE technology. We are strong in 48 volts. We are strong in hybrid technologies. When BEVs is up, we also have to be strong in BEV. It's all about being balanced in our customer's portfolio, in our technology's portfolio. Let us not forget, on the other hand, that as a CFO, sometimes I love when the traditional technologies are selling well because this is EBITDA directly into cash, because you have no investment, no CapEx, no R&D for these programs. As far as China is concerned, you're right, we said we will be back to growth with Chinese OEMs in the second half.
We are, and you will see that actually, not necessarily in the presentation, but also in the press release, that we are actually slightly down with Chinese OEMs in Q3, which is much better than what we saw in the quarters before. We are step by step improving. To be frank, the market is super dynamic. We are super agile to follow, to get the right products and with the right customers. But sometimes, you are just on the platform that is selling well one month and not the other month. So difficult to fully confirm what will happen in Q4. But what I can tell you is that we are continuously focusing on growing with these Chinese OEMs. We've taken 25% of our global order intake in the first half with these Chinese OEMs.
This is exactly their share in the market, and we are continuing pushing getting orders with them, because we know that when we get orders with the Chinese OEMs, it means that we are competitive and we are competitive worldwide. I said also in my speech that Chinese OEMs were 53% of our sales in China in the first half, 56% first nine months. You know how to do the math, 60% for the Q3. This is, I think, also the right direction that we are heading to. Lastly, your question on Europe. We do not see, actually we are following every single day what is this evolution on the call-offs. It's a lackluster market, but we do not see deterioration of call-offs at that stage. We are following that precisely.
But today, market is as we expected, meaning a weak market, but this allows us to keep our guidance because this is how we forecast. You remember, each time we tell you, we prepare our budget, our medium-term plan with S&P Global Mobility - 3%, because we want to be safe. Also as a CFO, I'm happy because I'm pushing the guys to decrease their fixed costs. This is why we are now able, even if the market is not so strong, to confirm our guidance.
Thank you.
Pleasure.
Next question is from Thomas Besson, Kepler Cheuvreux.
Thank you very much. Good evening, everyone on my side. First question, I would like to get back to a comment you made on the presentation about the reimbursements of specific components that are now not in place. I would like you to eventually share with us a bit more, how much you are purchasing of that. So in particular, on memories and PCB, can you remind us or share with us broadly how much you purchase of that? Your visibility, both on the extent and the timeline of compensation for these products that I understand you secured, which is great. The question is, are you sure you are going to be able to get compensated in Q4 more than Q1? Staying on the cost side, could you remind us your energy hedging policy for 2026 and 2027, please?
Coming back to a Ross question, I think the question was about potential changes in some of your customers' plans, because one of your French competitors mentioned specifically that some of their customers seem to have changed their plans in the U.S. and in Europe. You do not seem to have seen that in Europe. Have you seen that eventually in the U.S.? I have a last more anecdotal question. I remember, I think you started, in June or July, your first big diversification contract in BSS in the U.S. If I remember correctly, it was $225 million over the life of the contract, so it is not a huge thing. I wanted to know where you are reporting revenues for that contract if it effectively started. Thank you, Edouard.
Thank you. Thank you much, Thomas. Thank you for your different questions. You know that we do not report business related or business secrets, and we don't want to make the life of our sales team even more complicated than they are already. As far as electronics related components are concerned, we do not give more color on top of what we already gave regarding the amount of what we buy or about the inflation that we see from our suppliers. Our job is always the same, is we secure the supply chain. And you know that these days it's not easy every day to secure the supply chain. And I'm happy to report that 2026 is secured and 2027 is secured as soon as we get the right prices from the customers. We tell the customers we have the product, this is the price.
If you want the product, you get them, and we will get them, and we have the commitment from our suppliers to get those, but we need to be compensated. That's very clear and straightforward. As far as energy is concerned, this is also very sensitive information.
Sorry, Edouard, if I may.
Go on.
The timing of the compensation was also the question. I understand you don't want to share how much you're buying, if you don't want to share that, but are you clear that you'll be able to be compensated on time, not to have a negative effect in Q4?
Up to now, our teams have done an amazing job. In the last five years, they've always been able to get compensated in the half year, the same semester as the cost. We have the tools, we have the toolbox, they are on the road. Ask me to commit on something that is not done yet, I will not. But clearly, the objective is to get everything compensated this year. There is no choice here because these are order of magnitudes that we have to get in the right half years. As far as energy is concerned, as I said, this is very sensitive information, and we don't want to make the life of Cecilia again more complicated. We do not disclose anything on our hedging policy for energy.
As far as potential changes in customers' plans in Europe, yes, as you have seen and as one of our peer in Europe said in the last weeks, there are changes here and there. But remember that we do not have any specific plan. We do not have a just-in-time business. So it's overall the kind of volume we are looking at. Even there have been some announcement of some closures of plants or some slowdown in some plants. I do not see an impact on the overall business and overall call-offs that we have received, neither in the U.S. nor in Europe yet, I would say. Clearly, this is not what I see today, and actually we are following that with Christophe every single day. Last but not least on BSS. BSS is quite small, as you mentioned yourself already a few times.
This is a almost EUR 225 million program that we announced in February already. This is today under miscellaneous sales, and this is negligible at that stage.
Very much, Edouard.
My pleasure. Thank you, Thomas.
Next question is from Stephen Benhamou, Bank of America.
Yes, good evening, and thanks for taking my question. The first one is on your raw mat. You said that a part of that was benefiting from indexation clauses. Can you please remind us what is the percentage of raw mat that are under those indexation clauses? My second question is more about Q4 and in 2027. Given this changing environment, flat production, high inventories, cost inflation, what are the growth levels that you can activate and that are not dependent on any external factors? What are your own, I would say, levels that you can activate to deliver a mid-single digit top-line growth that your midterm guidance implies? Thank you.
Thank you, Stephen, for your questions. That reminds me of your questions. I am back to the question of Thomas on the energy hedging policy. This is also very sensitive information because I do not want my competitors to know what I have as a contract. I do not want neither that all the customers would compare where they are against a kind of average of the group. What I can tell you is that this indexation ratio is significant as soon as there are indexes. Okay, there are no indexes on electronics, but there are indexes on copper, there are indexes on aluminum, there are indexes on steel. There are indexes on lot of different things. This is where we have significant, actually, indexation.
As far as your question on Q4 and 2027 is concerned, actually what we can do now to secure Q4 and 2027 is rather limited. What we have done in the last five years to secure this growth is exactly what we have done, is all the businesses that we have taken and that are starting delivering. Well, you know that always the number of businesses we can talk about is always limited. You have in mind that Neue Klasse we are in, and BMW is fully booked on this business. On the E-Tech Van from Renault, we are strong, we get lot of content on this business and it is starting. It is just starting now, actually, the production. So we see all these businesses kicking in with lot of different businesses and very soon you will get also the start of the General Motors CCU in the U.S.
All of that is giving us this confidence that we are able to grow even if the market would be flat. We have been investing in technologies. We have been investing in businesses. We have these worldwide capacities of getting businesses and growing with all the customers, and this is what makes us so confident to tell you that, yes, the third engine will be on in 2027.
That is clear. Thank you.
My pleasure.
There are no more questions registered at this time. Back to the management for the conclusion.
Okay. Thank you very much all for participating in this call, and I am very happy for our next interactions in the short term.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.