HannoverFour four weeks ago, optimism dominated in Hannover. Continental, Germany’s second largest automotive supplier, just had one comprehensive corporate restructuring announced. Construction, reorientation, securing the future – wanted with it Conti shine. “With the new holding structure, we are ensuring that the decisions are delegated out of the central office, better even two stages. We want to create more entrepreneurial freedom, “said CEO Elmar Degenhart in conversation with the Handelsblatt,
One month later, gray everyday life has once again found its way into the Hanover-based supplier group. Continental has on Wednesday a profit warning for the remainder of the year pronounced and the previously widespread return targets withdrawn. The Dax group had to pay for it with a massive crash of the share price. For the afternoon, the minus was 13 percent, other car values were affected. For Conti, it is the biggest price drop of the past ten years.
The single profit warning would probably have been less the problem. Much harder, however, is that it’s the second profit warning this year. As early as April, Continental had to withdraw its targets for 2018 for the first time, That makes confidence among investors disappear. Especially as Continental had also appeared relatively optimistic in the publication of its half-yearly balance at the beginning of August.
“We are sorry that we have to take back our annual targets,” said CFO Wolfgang Schäfer in the afternoon in a telephone conference. The outlook for the rest of the year would have deteriorated quite significantly within a few weeks. Four weeks ago Conti had spread the hope that there would be a turnaround in August.
But the trend reversal has failed, even the forecasts for September do not look as good as expected. Even in the fourth and last quarter of the year, the Hanoverian company is now making some calculations, customers from the automotive industry are holding back. Conti also has a problem with rising costs.
For the entire group, the management of CEO Degenhart now expects a margin of more than nine percent instead of an adjusted operating margin (EBIT margin) of more than ten percent this year. In terms of sales, the Group now expects about 45 billion euros instead of the previously announced 46 billion. The sales expectation alone shows how strongly the Conti businesses are slowing down towards the end of the year.
Conti mentioned in detail several reasons for the weaker outlook. The original equipment business in Europe and China in the automotive sector and in the industrial division Conti-Tech was below expectations. In addition, weaker demand in the tire sector leads to reduced sales expectations. Above all, this affects the replacement business with private end customers, who after a few years have to raise new tires on their cars.
Higher drive costs due to the conversion to new systems for hybrid and electric cars also clouded the Conti balance sheet. As a consequence of the profit warning, the austerity measures should be tightened. Almost the entire car industry also complains about a rash introduction from their point of view of the new consumption and emissions tests according to the so-called WLTP standard. Because not all models have been approved under the new WLTP standards for road traffic, automakers are reducing their production.
Automotive industry under pressure
Especially Volkswagen makes use of it – a significant customer for the neighbor of Lower Saxony Continental. Also on WLTP, Conti had hoped that the effects would weaken from month to month. As it turns out now, this bill does not work out.
The auto industry has come under pressure due to the trade dispute between the US and China. Some companies have therefore already lowered their outlook and suggest more cautious tones, such as the DaimlerCorporation. In addition, there are now initial signals that the previously strong Chinese domestic market is growing much weaker than expected.
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Particularly unfortunate for Continental: The Powertrain division is to be made fit for a partial listing next year. The sector is developing worse than expected, which should deter potential investors. “We were a little too optimistic in the powertrain business,” said CFO Wolfgang Schäfer.
According to analysts, the profit warning was disappointing. “Perhaps the sharp price decline partly reflects the uncertainty of the market participants regarding the upcoming restructuring of Continental AG,” said Frank Schwope, automotive analyst of NordLB in Hannover. However, there are also positive signals from Continental. The very low level of debt leaves room for takeovers in the billions.
Chris McNally of Evercore ISI sees the profit warning as more of a problem for a single company and not for the entire automotive industry. Conti has problems with the tire business, with warranty claims and high exchange rate fluctuations. Problems “that can not be directly transferred to other companies”. The stock market reaction is McNally right. With a minus of 13 percent, Continental is the clear day loser. BMW (-1.5 percent), Daimler (-1,8) and Volkswagen (-2.6) got off much easier.