Hello, and welcome to the 31st Deutsche Bank Depositary Receipts Virtual Investor Conference, DB VIC. My name is Zafar Aziz from the DR Investor Relations Advisory Team at Deutsche Bank. I am pleased to announce that our next presentation will be from Continental. Please note, all of today's presentations were recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I am very pleased to welcome our speaker from Continental.
Yes, and welcome everyone. Warm welcome, everyone from my side as well. Thanks for joining. Thanks for taking the time to visit Continental. It is my great pleasure to be in front of you here today. I am Max Westmeyer. I am heading the Investor Relations Department of Continental. If we would have talked a couple of years ago, then I would have presented a completely different story. Continental has undergone a tremendous change throughout the last couple of years, and going over the disclaimer, you can see the main extracts here.
We have gone through being a full-blown automotive supplier, with, honestly speaking, a couple of difficult years, through an era of transformation that we have done within the company, terminating basically with the spin-off of AUMOVIO that we have achieved in September 18, 2025.
This has left us with a rather focused group, bringing the tech company AUMOVIO in the automotive supplier space to the stock exchange on a separate note. If we look at what that means for Continental, we shrank from roughly EUR 45 billion revenue to around EUR 20 billion revenue as per full year 2025. However, we did not stop there. Continental still consisted out of very different players, the tires business for what it is probably most known for, as well as the chemical and industrial specialist ContiTech, which consisted of two different entities.
Since the synergies were very limited between the entities and the challenges were large in the respective industry, we decided to continue our transformation towards a tire pure play, and have achieved that by selling the Original Equipment Solutions business, so the ContiTech portion that was more focused on the automotive sector, in February 2026.
In July 2026, we have also signed the sale of the remaining ContiTech business to Lone Star Funds, a U.S.-based private equity company. So once that transaction is done, which we envisage for the turn of the year, we will be a tires pure play moving forward. Let me just give you a couple of information on the ContiTech sale, since it is quite a relevant size for the company.
ContiTech, with the parameter that we are selling it with, has sales of roughly EUR 4.4 billion and realized an adjusted EBIT margin of 7.1% in full year 2025, with approximately 22,000 people working there. The transaction was valued at an enterprise value of EUR 4 billion, and we are looking at net cash proceeds out of the transaction of roughly EUR 3.1 billion. Again, closing is expected around the turn of the year.
We have earmarked roughly EUR 2.5 billion, so about 80%, for shareholder returns, which we plan to execute presumably through a combination of share buybacks and a special dividend to our investors. In addition, EUR 600 million will be used for deleveraging, since we have a slightly elevated leverage ratio on the group right now, especially after the AUMOVIO spin-off in 2025.
With the EUR 600 million, we are very confident to achieve our leverage target of around one time or below by 2029. Once the transaction is closed, we are going to be a tires pure play. That means the former tires group sector will become Continental Group, and Continental will then only be a tires manufacturer moving forward. Looking at what that means is predominantly more transparency for investors in the first place.
So far, we've only reported headline figures for the overall group sector as one of the many reporting segments that we've had. With the Q3 results a couple of days ago, we've broken down the tires results into the regional sectors. The European, or more precisely the EMEA region, is the largest portion both sales-wise and particular also EBIT-wise. In Americas, we're doing roughly 1/3 of our sales.
However, not with the profitability that we have on the group level for many different reasons. APAC is the smallest regions in terms of sales. But one of the more profitable ones, actually with the largest profitability in percent of sales among the three in full year 2025. Of course, it's a very interesting market since it's growing from a structural point of view. We are serving the respective markets with a very cost-efficient and local-for-local footprint.
What you can see here on the slide is our 19 production sites, and the plants in bold are so-called mega plants. Those are highly standardized plants with a tonnage output of 100 kilotons plus per year, which is a huge volume for tires. Eight so-called mega plants are producing roughly 80% of our overall tires production. That means very much focused into specific plants with the huge benefit that we have a highly efficient and flexible footprint to cater to an ever-increasing amount of complexity in production. We have been very early in moving to best-cost countries, with around 75% of our production located in those best-cost countries, allowing us to scale our product very cost-efficiently.
The products that we're producing are of high quality, so-called premium tires, winning in plenty of our recent tire tests that we've participated, and especially the SportContact 7, which is a summer tire that we use in the European market, for example, is a strong proof of our capabilities when it comes to innovation. The tires won or achieved top three places in 27 out of the last 29 tire tests that it participated in.
Again, a very strong lineup, not just in Europe, but also when we look at the U.S. market, for example, where we've just introduced the SecureContact AW. In addition, we are providing roughly 650 new UHP sizes to the market, ultra-high-performance sizes of tires that are catering to the ever-increasing demand for larger rim sizes, mainly driven by the adaptation of SUVs and also battery electric vehicles.
With our brand, Continental, we are among the top three tire brands in the world, even though we are just the fourth-largest manufacturer when it comes to sales. A strong recognized brand with an approach of being also local for local when it comes to advertisement. You may see us not necessarily in, I don't know, Champions League, but let us say looking at advertisement placements where we get the most attention for the money. Continental, as a premium tire manufacturer for, in the meantime, over 155 years. The trend towards ultra-high-performance tires that I mentioned is also something that we see in the figures over the next couple of years, and we have also seen that recently.
The ultra-high-performance tire share has increased from roughly 24% of our volumes to 39% of our volumes in 2024, and it is currently growing with the compound annual growth rate of between 8% and 9%. Clearly outperforming the overall market growth that we are expecting of just roughly 1%. At the same time, the share of so-called non-UHP tires or standard sizes below 17 inch is constantly shrinking, especially over the last couple of years, and we expect that to continue moving forward as well. That means the market trend is certainly supporting the direction that we are going in. The good news around that is we are also benefiting from that from an absolute point of view. When we look at our average portfolio, we benefit from the increase in rim sizes.
When we look at what we can earn with a 17-in tire as a baseline and the EBIT potential on a 19-in tire, then the absolute EBIT per tire sold is around 3x . If we compare the 21-in tire versus the 17-in tire, then it is actually 6x EBIT per tire between those sizes. The so-called mix effect in our sales is not just supporting the top line, but especially also the bottom line, and of course, covering topics like increasing inflation or currently also increasing raw material prices. To sum this all up, with the footprint that we have established, we have realized a very difficult-to-replicate business model.
That is also true for the product setup that we have established, innovative product portfolio, highly winning, and a very close relationship to our customers, which we think makes it very difficult to replicate, and therefore provides a strong moat when it comes to competition, especially also from Asia entering the Western markets.
The strong customer relationships that we have established, the vast majority of the sales that we are doing is done with the workforce on the respective grounds, and not just by regional or worldwide setups, but really a local for local, country- by- country approach is, from our point of view, not just only a strong differentiation against the Asian competition, but also amongst the other premium suppliers of the tire space. We think that this is another reason why we are doing fairly well when it comes to competitive positioning.
Looking at the regional setup that we've recently introduced, the EMEA region is certainly the backbone when it comes to sales and profitability, leaving us with strong profitability, strong supply chain established. The region is also supporting the Americas with tires that we deliver into the region, which is certainly a challenge in light of the current tariff scenarios, but we have proven over the last couple of quarters that we're doing fairly well when it comes to finding the necessary commercial countermeasures in light of those challenges.
The Americas region, roughly 1/3 of our sales, is below the target profitability, and here we are clearly focusing on the operational and commercial turnaround to bring the region back into double-digit margin territory, which is our clear target, and we have a dedicated roadmap on how to get there.
When it comes to Asia, it is our clear ambition to continuously focus on the highly profitable UHP passenger car business, like we have done before, and to scale the business wherever reasonable and feasible in the region, not to be everywhere, but to be there where it matters. So maybe that as a, let's say, general overview on our business. I just want to use the opportunity as well, before we go into the Q&A, to discuss our Q3 results, since they've only been out a week now, just recently, and also talk about a bit more near-term, short-term financials when it comes to our guidance. Our third quarter has been very strong when it comes to tire profitability.
At the same time, when you look at the figures, you can also still see the change in the organization since a couple of prior year figures in particular are still impacted by the ongoing transformation. When you look at the sales, for example, yes, we have had an organic growth of - 1.5%. However, the reported sales decline here is significantly higher and is mainly driven by the sale of our Original Equipment Solutions business within ContiTech.
Despite the sale, we managed to increase our adjusted profitability to EUR 514 million in the quarter, especially due to the healthy price mix contribution from ultra-high performance tires among others, as well as from the accelerating truck tire volumes, especially in the North American OE business, which is helping us to constantly increase the capacity utilization, especially in North America.
With the price mix, we've also managed to offset the raw material inflation that we've seen as a result from the Iran war, even though this will presumably no longer be manageable to the same extent in the upcoming quarters. Here, we still have to see and define additional measures in light of the recent oil price changes, which are impacting our profitability also, especially presumably in Q4 as well as in H1 2027. Nevertheless, we have historically proven that we are capable of finding the necessary countermeasures, and we are confident that we will also do that moving forward.
In light of the strong profitability that we've achieved, and also in light of the solid working capital management, we have increased the full-year guidance for 2026, both for the free cash flow as well as for the margin on the adjusted EBIT side.
As a result of the performance as well, we have also made further progress when it comes to bringing the leverage ratio down, improving the net income, and also on the net debt side, we've increased over the last 12 months by roughly EUR 500 million. All going in the right direction as planned. Looking at the guidance, I mentioned the update, we are now guiding for a corridor of EUR 13.5 billion-EUR 13.9 billion sales for the tires business alone.
This is exiting out the still existing ContiTech sales in 2026, which is basically taking pretty much the midpoint of the previous guidance, just narrowing the corridor down a bit. On the adjusted EBIT margin, we have clearly increased the range versus our previous guidance, so now guiding for a margin of 13.4%-14% profitability for the full year 2026.
The main driver for the increase in profitability are both the EMEA and APAC region and their respective performance in the tires business. Adjusted free cash flow now also increased in terms of guidance, so we increased the corridor from previously EUR 700 million- EUR 1.1 billion to now EUR 1 billion-EUR 1.3 billion, which certainly is a very strong contribution of the tires business, especially in Q4. Right now, year to date, we are slightly above EUR 300 million. That means there is roughly EUR 800 million-EUR 900 million still to come in Q4 if you look at the midpoint of the guidance.
However, this is something that we see very typically in Q4 given the working capital seasonality, where we usually see a sequential cash inflow of around EUR 1 billion in the quarter due to especially the payment terms that we have in the European tires business, where we allow our customers to sell the tires first and then pay us for the tires that we have delivered during the selling period.
With that, I am at the end of my presentation, and I would now go through the questions that I have received from the audience. I will read them out, not mentioning your name. Whenever you have any additional questions, feel free to type them in again. Hopefully this is insightful now moving forward. The first question that I received is, "Europe delivered an 18.7% margin this quarter.
What's working there that you can replicate elsewhere?" Europe is a very specific region for us. We have a very strong brand heritage. I mean, we are a German company, having been there for 155 years now, a very close customer relation that grew over decades really, and also a very strong production and supply chain set up in the region. Customer proximity paired with high efficiency, and what also helps us is that Europe is a regional market.
That means the switch that we often see from summer tires to winter tires is leading to a stronger customer relationship with the respective dealers. If dealers see the customers more frequently, they have more often the time to sell tires. We have convinced the dealers that it's a good idea to sell Continental tires, also because of the strong supply chain performance.
That means we are capable of delivering our products very short term, especially when the seasonal markets, looking out of the window, it's not snowing yet, but when the seasonal markets are strong and season changes, we are strong as well with supply chains. Our customers appreciate that, and that helps us to be a strong performer in Europe. We try to learn our lessons also for other regions of the world and try to replicate that where it's possible.
At the same time, looking at the U.S. market, it's a completely different environment with also larger wholesalers in the region compared to, partially at least country by country in Europe, a different setup with smaller shops that are directly customers of ours. So different customer environment, also, a larger country when it comes to distance.
We also have to look at different ways to maneuver the supply chain, and also when it comes to best cost versus high-cost approach. It's difficult to replicate Europe, and it's also difficult to replicate Asia, which is of equal, let's say, performance when it comes to margin. We just have to look at the regional specifics and make the best out of the respective requirements from our customers, and just be the best in the respective region. Again, trying to leverage what's possible, but it's not easy to replicate that everywhere. Next question is, "Congrats on the new Volkswagen ID. Cross fitment. How do you turn an original equipment worldwide into a repeat of replacement sales?" We are carefully looking into each OE fitment, whether it provides the benefit for us.
Typically, the profitability in the replacement business is higher compared to OE profitability, and we are carefully looking into the overall business case of a tire fitment, not just for OE, but the combination of OE and replacement. That means we have assumptions on how high the loyalty within the respective OE fitment is when it comes to the first couple of replacement cycles. And on the back of that, whether we think a replacement cycle would go with Continental tires, or maybe there's a tendency for down trading, for example, then there's maybe less willingness on our end to invest into that.
At the end of the day, it's important to be relevant at the point of sale, so that means to be there where the replacement cycles happen, to either have our own stores or to have a strong dealer network that is interested in selling Continental tires. Next question then is, Continental has delivered over 95% of European dealer orders within 24 hours. Does that service advantage help you win share?
It is certainly one of the reasons why we're performing so strong in Europe, yes. And it's not just our Continental brand tires, so that's the premium brand, but it's also the secondary and third brands, so maybe for tier 2 tires that we also have in our portfolio, which provides certainty to our customers that they will receive different tiers of tires very short term.
And especially with an ever-increasing complexity of different rim sizes, different fitments, different load indices, and so on, it becomes more and more difficult for our customers to have the right tires on stock, and they rely on a short-term and flexible supply chain, and we think we can differentiate there. Therefore, it certainly helps us to win new customers and also to bind our existing customers, also despite competition. Next one is there any plan to expand capacity, I think in the U.S., since the question is looking at Sumter or Mount Vernon. We're always looking into the business cases in the respective regions, and we've certainly looked into utilizing the capacity that we have installed to the best extent.
At the same time, we have a very strong best-cost footprint in Europe, for example, which is one of the bases for our imports into the U.S., and we also always have to look at the, let's say, certainty of making additional investments in the region. So, that means now looking at tariffs, for example, it's very important for us to understand how long will tariffs be in place, or could they change again, because we talk about a couple of hundreds of millions of EUR investments into plant expansions in order to increase meaningful capacity. Therefore, we are relying on a more reasonable and more secure economic framework to make investment decisions. Then the next question is the adjusted EBIT margin trajectory and how much of the improvement is structural versus cyclical.
We think the margin improvement overall, looking at the UHP discussion that we've had, generally speaking, is solid. But at the same time, we're also doing our homework. So we've exited a couple of businesses where we have not performed to the extent we wanted to, and that has certainly also helped us to increase the margin. Therefore, I would say the improvement that we've had is structural, and the ambition that we have for the tires business is a 14%-15% margin corridor midterm.
So, given that we're guiding for 13.4%-14% now, there is also further room for improvement in the midterm from our point of view. Okay, then next question is on the UltraContact NXT introduction and what we're learning about the customer's willingness to pay for tires with a higher sustainable material content, and whether that could support a broader product category.
Unfortunately, the willingness for customers to pay for sustainable tires is very limited, if we're being quite honest. So, we are looking into that. We are learning a lot from producing that product. At the same time, it's very difficult to price the additional costs that result out of that. Therefore, we have to see how customer behavior will change in order to define whether or not we increase the scope for those tires when it comes to production volumes. Next one then is, how are we repositioning the equity story as Continental is becoming a tires pure play? I mean, we have discussed a lot of transformation for Continental over the last couple of years, really, and we are gradually repositioning Continental.
The additional disclosure depth is certainly a next step in the right direction, and we will follow up with a Capital Markets Day, presumably in 2027, in order to give you further information and to further sharpen our equity story for Continental. With that, unfortunately, I just realized looking at the time that I do have to wrap up already. I really appreciate the time that you took. Sorry I couldn't answer all the questions. If you want to, please feel free to reach out to me and to the IR team of Continental, which you can find on the Continental Investor Relations website. Thank you very much for attending today. Thank you for listening in, and have a great rest of the day. Bye-bye.