Good afternoon, ladies and gentlemen, and welcome to the Continental AG Analyst and Investor Call, Q1 Results 2025. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Max Westmeyer, Head of IR.
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 calls are available for download on our IR website. I would like to remind everyone that this conference call is for investors and analysts only. 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 three questions at once. This will help us to conclude our call on time.
Before we finally kick it off, let me give you some details on 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 a EUR 55 million positive EBIT effect equal to 120 basis points in Automotive when looking at the quarterly statement. Of course, it's a cash-neutral impact since we talk about D and A. In the upcoming quarters, the full effect of stopped 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.
Yeah, thanks, Max. 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 had the supervisory approval where we informed on and the ContiTech independence, which we are preparing. Many, many things happened in the last four 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 with volatile markets. On top, as you know, the tariff situation and the trade barriers worldwide. Given that difficult environment operationally, we clearly had a solid start into 2025. This is all thanks, majorly thanks to the measures which we have implemented.
Capital Markets Day we informed December 2023 that we are clearly pursuing in all sectors self-help measures, and those have fueled the results and improved the results from last year's first quarter. As you see, adjusted EBIT margin from about 2% to 6.0%, 6.0% excluding IFRS because this is the like-to-like comparison without depreciation. Obviously the result is even better, but this is not the one which you should focus on comparing the operational improvements. The 4% or 400 basis points is mainly driven by Automotive, which was coming from 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, as we 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 sale side even much better than we had foreseen and seen it. You know that we are targeting break-even. Now we are a notch better with the plus 1.6% than the break-even 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 staggeredly. The EBIT margin was improving due to the facts 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 is strongly reduced, which is a good one. Good has been as well. Tires, in particular, replacement has been solid on truck and POT. It's not outrageous.
We would love to have even more payment, let's put it that way, but although 6% volume improvement while OE is going down is, from our point of view, solid results. OE down, replacement up helps as well the price mix situation, which overcompensated the raw material headwind. That's why margins have been up. Please keep in mind as well 2024 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. The ContiTech business continued, unfortunately, on the second half of last year's sales levels, so weak auto and industry markets. The team applied strong cost measures, self-help measures. Despite a - 6% organic growth, so going backwards, we kept the margin on prior year's levels.
Great job to the team in limiting operating leverage from sales, the drop-through into EBIT. Good job as well on the free cash. As you see, last year we have been at EUR -1.1 billion roughly. We are EUR 500 million. We had a one-time effect on the ContiTech purchase effect. Even if you take this out, you see that we strongly improved operationally versus last year. From the EUR 780 million, which you see here, EUR 500 million taken out, it is still a EUR 280 million, which we are better, mainly driven by operational performance and as well by lower CapEx. Disciplined, not just not only on the cost structure, but as well on the invest side.
However, 300 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 quarters, typically the weakest cash quarter, in particular due to working capital. Last but not least to mention on the page is net indebtedness from EUR 5.2 million- EUR 4.6 million, so more than a billion better. We have been already year-end, strongly improved last year, and this follows huge now, which is clearly as well a solid start into this year. Solid has been as well further decisions on the Executive Board, which I have not mentioned at the beginning. Two new appointments. Ulrike Hintze will follow Ariane Reinhardt as CHRO July 1, and Roland Welzbacher after two months handover with Olaf.
He will start August 1 in the Executive Board, and then after two 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, the capital market, investment banking, and so on. They 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 into independence to follow. Swiftly, summary, and Olaf and Philipp will go more into the details. What I already mentioned, starting ContiTech -6%, you see EUR 110 million down in sales, lead only to EUR 6 million less profit. 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. On the tire side, as mentioned, [EUR 3.9 billion] of this is 0.6% volume, which is from our point of view a good result and helped for about 2 percentage points margin improvements. 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. As you see on the right side, from the minus 4-ish point to 1.6, a bit better than break-even. Philipp will explain no more the details. Where does that come from, Philipp?
Yeah, thank you, Niko. Also a warm welcome from my side. Yeah, 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, revealed our new name. We are going to be called AUMOVIO. We have had then basically 10 days ago the approval of the annual shareholder meeting to conduct the spinoff, and it's targeted for September. We also managed to get into the year quite decently with, from our point of view, a good start. What have we been doing? If you look at page five, you can see that organically we have been driving our business basically somewhat close to the results in quarter one, a bit better, very slightly better in terms of organic growth.
You see that we have had two business areas which were running well into the year, organically also better than the first quarter. A&S also organically doing better. Here you can see one thing which we focus on in AUMOVIO or today Continental Automotive, tomorrow then AUMOVIO very intensively on, 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. 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 is the reason why we have been a bit shy in sales, but the core business of the business area is running quite well and also growing organically as the others did. That is 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. You might remember our capital markets day where I said we improve, we sell or we close the business. In these parts, we do have some businesses where we are working on 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 is rolling over into 2025. We have also now concluded on some additional pricings, which we are also constantly working on over the course of the year to also improve there. We have been, as we were always saying, very much focusing on the self-help measures. We have meanwhile, since January 1st, reduced by close to January 1st, 2024, by close to 12,000 headcounts. That, for example, year- over-y ear, led on the adjusted R&D expenses, means adjusted by restructuring and an improvement of more than EUR 85 million in terms of absolute costs. That is 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 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 thanks to the outperformance in Europe, where we have been 6 percentage points better than the overall market. 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 how we are going to get into the right direction there as well. As Niko mentioned, pricing has been a main contributor and is going to be a main contributor. That is something which, as I said, led to the fact that we also outperformed the market in some areas. Else we then want to look into the order intake.
Also there, we have had a decent start into the year. We are basically EUR 1.5 billion better than quarter one 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 surround radar system. You can see autonomous mobility basically managing to get half of our total order intake. 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. They have also concluded major orders for suspension systems and some of our sensors. I think that is basically from the Automotive side. With that, I hand over to Olaf.
Yeah, thank you, Philipp. I think you can hear from Philipp's presentation, the development, the speed at Auto, that it's very encouraging. There's clearly positive momentum that we see. 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, + 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 slow. On the price mix side, we see a plus of 3.3%. We benefited from both positive effects in the sales shell 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. Should the euro remain comparatively strong, this will further burden our sales development in the upcoming quarters. I think that's important to note. Looking at EBIT, the healthy replacement markets contributed on the margin side as well as a positive price mix development to overcompensate the 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 burdened by some one-offs, for example, by a lower number of sales days in March. Also for Tires, we are pushing improvement measures.
In April, we announced that we will focus our commercial specialty tires business on material handling, earth moving and port operations, and will exit the agriculture tires business by the end of 2025. 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 target 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 the Automotive as well as the industrial markets remained on a weak level. Organically, sales declined by 6% as a result. 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's high 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. As we have already announced, we will continue to optimize our cost structure and the footprint in ContiTech also throughout the year 2025 to ensure continued strong operating leverage. Now, after looking at the group and the three 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 result. 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 throughout 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 EUR -300 million. This was also our expectation. Yeah, next, we have summarized for you a page on the tariff situation. We'd like to give you an overview of where we stand. Let me start with a clear statement.
Even though we are not in the position to quantify the net effect in this highly volatile situation, we're actually well prepared and we will mitigate tariff impacts to the best extent possible. Now, on the left side, you see our setup. First, Automotive. We have two 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 the U.S. are very limited. ContiTech, at the bottom of the page, we are facing quite a similar situation, but of course, with much lower import volumes. Then Tires, the situation is a bit different. With our three local plants, we are able to produce more than 16 million tires per year. This covers more than 40% of our U.S. PLT 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 might become effective at a later point in time, we have built up dedicated teams in our group sectors, actually quite significant teams. We take this very seriously and are working intensively on that. We are looking to increase, to share in USMCA compliant imports even further. In the longer term, we are 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, 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, as trade barriers that were introduced in China as a response. Okay, so much on tariffs. Let's have a look, basically, at the consequence of the tariff situation, because as a result, and 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 are also seeing a larger downside to North American truck replacement markets should industrial production decline. The visibility is relatively low in this case, and truck business, as you know, can change quite quickly.
Yeah, because of the, 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 the 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. You can see the underlying guided triggers for Tires, ContiTech, Automotive, and Contract Manufacturing are unchanged. 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 billion-EUR 21 billion and 10.5%-11.5% 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 result, 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-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.
This should be a 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 billion-EUR 20 billion at an adjusted EBIT margin of 2.5%-4% in our discontinued Automotive sector. This is, of course, not considering the stop depreciation that we have mentioned. With that, Max, I think we are through the presentation.
Yeah, it's Q&A time, I would say, and we would like to hand the rest of the time to you. If you could please open up the line for Q&A.
Yes, thank you. Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. In case you wish to withdraw a question, press three and star on your telephone keypad. The first question comes from Harry Martin Bernstein. Please go ahead with your question.
Yeah, thanks for the presentation. I'll ask three. The first question, just to help give a sense of the sustainability of the Automotive margin improvement, I guess something you haven't mentioned is product or regional mix. I noted the Safety and Motion business was back to the top grower after a very negative 2024. Does that segment still have the highest margin within the Automotive business under the next generation products starting up margin increases? A second question, just to ask for a bit more detail on the tire business, can you help break down the volume growth, the 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. Are there any key replacement markets you're seeing share gains?
How is the sort of the exposure to imported competition evolving? Finally, just an update on the spinoff and restructuring costs that you expect. It seems like activity in terms of restructuring has been increasing. Is there any more upfront costs to consider related to some of the restructuring? Any help on that would be useful. Thank you.
Should I start?
Yep.
Harry. This is Philipp speaking with regards to the sustainability of the auto margin improvement. I mean, we are working very consistently on improving A, our pricing side, and B, on the sales measures for quite some time meanwhile, which we do see now in the bottom line and in our overall cost structure, which should lead to the fact that we do see a consistent improvement quarter- over- quarter, and which should 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.
We expect then that we are going to see also over the course of the year improvement there, more and more detailed figures with regards to business areas we are going to show in the capital market day end of June.
Okay. Coming to the tire part, breakdown volume, growth, OEM replacement, market share gains. In general, do not break it out. However, you can assume that we have been within the market. If you look for S&P, Europe has been down - 7 in pass and North America - 5. We follow the market roughly, sort of mid-single digit number down. As you know, OE is roughly 25% of our business. You can make the math and see how much replacement has been positively contributing.
To your third question, spinoff and restructuring costs. First of all, as Niko said, spinoff on track, right? We expect the spinoff and the listing to happen within the course of September. Cost for the spinoff is in the area of low to mid three-digit million Euro amount. Taxes low three-digit million Euro amount. This is market standard for a transaction of this size. As you also have heard from the presentations here today, strong focus anyhow on efficiency and managing our cost position.
Thank you very much.
The next question comes from Horst Schneider, Bank of America. Please go ahead with your question.
Yes, good afternoon. Thanks for taking also my questions. I've got also three in total, two on AUMOVIO and one on Tires. On AUMOVIO and 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-offs developing now? Are they reversing now or have they reversed already in April? On the tariffs in AUMOVIO, is it fair to assume that you can largely pass on the tariffs to the OEMs, or will that be difficult due to the structure of the contract that you have? Any indication on that would be great. Also on AUMOVIO is regard to the price effect that you talked about. Any quantification on that?
If the pricing will continue to improve also versus Q1 going forward, and what amount of sales measures remain from here? The last one on Tires, sorry, is within the price mix, maybe you can 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 press through and these raw mat costs? You talk about the negative impact in Q1. That should come off now basically, right? Or will that continue for a few quarters? Thank you.
Okay, 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 is not entirely reversing yet. 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 a close to a very, very significant share, which is USMCA compliant in what we do. We are still running there on a very positive, or let's say healthy side. 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 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. As you might remember, with our main SG&A program called Accelerate, we have always intended to have EUR 200 million improvement in 2024 and EUR 200 million in addition in 2025. This is working very well, and we do see chances to get even better than that. That means we do see that we are going to get on a comparison base still into a more positive territory over the course of this year.
Okay. Tires?
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 two. However, you can assume that it's a big part is coming out of mix. And as mentioned before, OE going substantially down, whereas 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. Raw material impact Q1, how does it go from here? We assume that it continues. We have seen some effects after tariff announcements and so on, some volatility in that rubber, for instance, but it came then back again onto the level before or slightly below.
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. It might then, because last year already raw materials was moving upwards in the third and then fourth quarter, level out. However, for all quarters from today's point of view, we still assume headwinds.
Okay, that's clear. Thanks very much.
Thank you, Horst.
The next question comes from Christoph Laskawi, Deutsche Bank. Please go ahead with your question.
Good afternoon. Thank you for taking my question. I'd like to come back a bit on 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? 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? Just on tire pricing again, I know you don't want to come too explicit, but some of your competitors have announced price increases in North America that essentially do 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? Thank you.
Okay, we have auto run rate was auto, and then I continue with run rate Tires.
I mean, 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. We see not a significant reduction yet in May and June. That is with regards to the run rate in the U.S., as also in the rest of the world.
I think it's fair to say, if I can add, that our expectation is to come out with adjusted unit margin in Q2 above last year's Q2.
Absolutely. I mean, as we are working diligently month after month, we should see also an improvement, as I said, over the course of the year.
Correct. On the tire side, what are the assumptions in terms of run rate and your pricing questions? For the second quarter, as I already mentioned, we assume to be price mixed in a similar corridor as we have been in the first one. 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 situation in the market, and we act then accordingly in order to.
Communicate in the right channels.
Communicate in the right channels. Exactly. Thanks that we have Olaf here with us to remind us here. Overall, what effects do we see? Too early to judge with tariffs in the U.S. part. How the market dynamics, you know, tire dynamics up relatively fast, and they can change depending on how imports and local production will run. We will obviously do our best to mitigate all 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 pass side. Obviously, to already see right now what an effect is, 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 that 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. Being there somehow even tire side is the most shaky, I would say, in terms of tariffs because the reactions can be relatively swift. Too early to judge. We give them more flavor, most likely on our June capital markets day than we are mid-June. Then we know much more mid and June. Those are in effect, at least the auto tariffs for close to two months.
We know more how the effects might look like and how the market has reacted.
Thank you very much. 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?
We don't quantify that. Honestly, we don't know in Europe where the cars are going as the products on the Automotive side. They're independent in which market they are. That would be just guessing from our side. We don't know.
Thank you.
The next question comes from José Asumendi, J.P. Morgan . Please go ahead with your question.
Thank you very much, Niko. I'm glad to see the ship is moving in the right direction. A couple of questions, please. I think the first one 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? Second, on auto, I guess I will have to wait for the capital markets 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? Final one on auto, should we expect? I think the answer is yes, but it was not for me very clear in the last discussion, in the last question.
Should we expect auto margins to be up in Q2 versus Q1? Thank you.
On the tire seasonality, as I said, visibility is somewhat difficult right now. You should assume a more flattish development. I mentioned before it might be that in the second half of the year, the 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. Several others are stepping out of the agriculture segment, as Olaf said. We are working on ourselves on the cost side. Again, you should assume for right now to be somewhat flattish on the market. I think it is better we do not mind, and then our actions are coming in place.
Right now, it's too early to see whether any upswing in the second half or downside could come.
Okay, with regards to the auto questions, if we are looking into our subdivisions or business areas, as we call them, basically, not basically, all business areas have improved compared to quarter one, 2024. Detailed figures we are going to provide then during the capital market day end of June. With regards to the second question of quarter two versus quarter one, 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, are also going to roll over into the second quarter. We would expect that over the course of the year, quarter- over- quarter, we are going to improve the margin. We should by then also better, I don't know, we should, we will be better in Q2 than in Q2 2024.
Exactly. Both better than Q1.
Yes, Q2 is better. 2025 than 2024 is better than Q1.
Correct.
Yes. Got it. If I may ask a quick follow-up, I tend to get the question from investors. There's a lot of market volatility. There's a whole Tires discussion. From your perspective, Nico, the CMD is going ahead. Everything is on track. Is that how we should read it, right?
Everything is on track. I like that one.
Okay.
As much on track as it can be. I mean, we have an agile organization. We are used to turn our left and right. As we have always mentioned, our competitors will have 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. I would say, yes, on track as long as we can say on track.
I think if I may add, José, on track on the operative side, but also on the implementation of all the structural changes that we have decided, we are fully on track. We are in the implementation mode.
Yeah, that's a good point.
Thank you very much. Thank you, Nico.
Welcome.
The next question comes from Monica Bosio, Intesa SanPaolo. Please go ahead with your question.
Good morning, everyone, and thanks for taking my questions. The first is on the market outlook for the auto industry. You wrote the global car production outlook. I remember, if I remember well, that in the last call, you said that in front of a -1% to +1%, the company was expected to perform overall in line with the market. Is it still the case? It is a -3% global car production by year-end. 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 will record positive volumes across 2025? If yes, any kind of indication could be useful. The very last is still on Tires. Sorry, you already answered that for the prices increase.
It's still too early to say, but can we imagine that the company could be willing to get market share in the U.S. without implementing any price increase? Could be a strategy. Thank you very much.
Yeah, the first question on the market outlook, -1 to +1 , -3 to we basically follow S&P there, what you could see. As we kept our margin guidance stable, you see that we still assume that we can perform within the corridor. As you've seen, on purpose, we choose a corridor which might be seen as relatively large from EUR 80 billion to EUR 20 billion. We did this on purpose because we saw already before that certain volatility might act and on top all the other actions. This is a larger window where we still assume that we are in. Positive volume across 2025. Yes, for the volume, yes, we have still the target to be positive on the volume side. Let's see how much OE then will be finding down on the replacement market.
We have not 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. The largest business part which we have is untouched, at least from the market assumption. However, given what I said before, now we have to see how that works out. Market share gains without implementing price increases. Our strategy is value creation. 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.
Okay. Thank you very much for the clarifications. Thank you.
The next question comes from Ross MacDonald, Citi. Please go ahead with your question.
Yes. Hi there. Thank you for taking my questions. I have three, please. One on Automotive, one on ContiTech, and then finally one on Tires. Firstly, on Automotive, just looking at slide six, 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. I would be curious if there's anything you would call out as driving that improvement sequentially. Related to that, whether we should expect to see Continental outperforming China light vehicle production in any of the coming quarters of this year. Secondly, on ContiTech, obviously, if I analyze 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? Related to that, what end markets effectively are supporting that second half recovery that you're expecting? 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 release. How quickly can you ramp productions in Mexico? 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.
Yeah, 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. 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 working relationship and order intake with OEMs. I mentioned that we gained also a new contract for our integrated brake system with a Chinese OEM. You see we are improving there on a constant base. In order to materially outperform the LVP in 2025, I think that's going to be nothing which we should expect now. I mean, as I said, we are working on a decent business case.
We're always focusing on quality of earnings versus business growth. That is how we have improved and how we are working on going forward.
Yeah, 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. First half last year has been still on a higher run rate. Then it dropped to the run rate which we've seen now in the first quarter. We assume second as well on a similar level. The second half up again. This is based on what the market research is telling as 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. You ask 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 then. Whereas as well off-highway, we see some soft signs when this come. Off-highway is very difficult to trigger and very volatile. That is the ContiTech part on Tires. How swiftly can we ramp up capacities or shift in Tires? Things take longer. 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. This will not fill the whole gaps, our plans in North America. We will further de-bottleneck whatever we can do and increase then the output wherever the market demand is for that. Further measures, we have invested strongly in the last years.
The further measures to get more local, local for local will take time. You should not expect them to have big effects within 2025.
Thank you very much.
The next question comes from Thomas Besson, Kepler Cheuvreux. Please go ahead with your question.
Thank you very much. Hi, it's Thomas at Kepler Chereux. 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. 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 on a 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? Lastly, a dumb and honest question.
What should we expect to get at the capital market events you'll host in terms of reporting structure for the two companies? What kind of history are you going to give us for these? Thank you.
Yeah, Thomas, let me get started on the improvement quarter- over- quarter. On the one hand side, we mentioned the R&D costs, which we significantly improved. You might remember that we started end of 2023 or 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. This is now rolling over into the next year now. The comparison base in first quarter 2024 is significantly higher. We also mentioned last year that, and that's why we had a quite not so satisfying quarter last year, 12 months ago, because we at that time did not agree on all 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.
We all agreed upon this until the end of the year. That means the sustainable and rolled forward pricing is significantly better. I think these are the major topics. Now we have better price, we have better fixed cost, and we have some slight improvements on the material side. That helped us to significantly improve our result in the first quarter 2025.
Let me continue with OESL. Thomas, the carve-out process basically completed. We are now in the midst of the M&A process. 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 customer.
Okay, and the last question, CMD reporting structure. As we do not change as well our structures as in 2025, we should not expect different structures at the CMD.
As always, we will give more insights on certain KPIs, on certain drivers going forward, which we will deep dive, but from a structural standpoint, you should not expect something new there.
Thank you very much.
Yeah, the structure we have two days. Okay, Philipp just mentioned, yes, one day on Automotive and one day then on the continued business, so to say, on ContiTech as well as on Tires. That is the only structure change.
Thanks, Thomas.
The next question is from Michael Foundoukidis , ODDO BHF. Please go ahead with your question.
Yes, hi 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 pre-buy recently. You may have increased your inventories and customers might have done the same, it may take a few weeks to see the effects. Unfortunately for everyone, the tariffs are now in effect since last week. 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 $4.1 billion import volumes that you mentioned in the presentation. 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. In autos, any idea where you think you can end up in terms of compensation and how do you deal concretely with the situation now for the parts that you have to send abroad, let's say, this week or in the next two weeks? The second question on the Automotive orders and the book-to-bill, it's only one quarter, so I doubt it's relevant, but within the four subdivisions, there's only one division, autonomous mobility, which has a book-to-bill which is above one time, well above one time, with the three others below. What should we think about that?
Especially on the UX business, which has been significantly below one time for a couple of quarters now, and which was supposed to be, let's say, carved out at some point. Thank you.
Yeah, Michael, for the first question, there is nothing much more to add than we put on our chart which all of us have explained and which we already mentioned before. We will try or 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, is very difficult to judge. That is why we are not in a position yet to guide on that part. We will add more flavor then in June, 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 is what we strive for.
It is not the market share or whatever other KPI, it is simply what we create in terms of returns on our capital employed. That is what we strive for on that part. Book to bill?
Yeah, yeah, I mean, you're absolutely right. With the significant order intakes, which we have managed to get into AM, we boosted our book-to-bill to 1.2. Actually, that's the nature of the beast now. I mean, there are some businesses which are being awarded in some quarters and others in other quarters. It's always that we have some business areas which are overachieving in one quarter and might get down then in the second quarter. I mean, we are pleased to have autonomous mobility 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. We see similar also in the other business areas.
I am expecting that we are going to see across all business areas quite decent and significant order intakes in 2025. That varies then from quarter- to- quarter. With regards to user experience, yeah, I mean, user experience has had in the last two quarters, not big business, but won a big contract in the first half of last year. We have a very strong and competitive product portfolio and a strong order backlog. We do see also there significant interest, which will also, I am very confident, also come over the course of this year.
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. With that, thank you everyone for participating in today's call. As always, we're very happy to be there for you guys. With that, we would like to conclude for today. Thank you and goodbye.