loss of confidence
Investors have used a massive loss of confidence. Investors find it hard to believe what the Conti leadership promises.
At the end of July there is still a spirit of optimism in Hanover. Conti boss Elmar Degenhart picks up a spade and shovels sand properly. The start of construction for the new corporate headquarters should make visible for all the world: The once-honest tire manufacturer has blossomed into a technology group with global ambitions.
Self-confidently, Degenhart turns to his guests. The new ContiHeadquarters for 1250 employees symbolize progress and the good perspectives that the workforce can expect. “Continental has been on a fast, profitable growth path for many years,” says Degenhart. “Now we can provide the necessary space in a modern headquarters,” he promises Conti-Boss.
Five weeks later the house blessing in Hanover is wrong, The future and the planned entry into the new corporate headquarters in 2021 is less talked about than ever before. Rather, the immediate present has alarmed the Continental Corporation. Because the company had completely misjudged the development of its own order situation, it set the second profit warning at the end of August within a few weeks. Particularly painful for the Dax Group: Investors have used a massive loss of confidence. Investors find it increasingly difficult to believe what the Conti leadership promises.
The upheavals on the capital market are reflected in the company: At the beginning of the week, the Group’s Executive Board responded to the imbalance with a clipped letter to their own top management, Degenhart and his colleagues take the second management level in the dutythat lost direction, at least in part.
Current club events
“On this wrong track we do not drive a meter further. This train stops right here and now, “write the eight board members in their letter. Half a dozen of the 27 business units no longer achieve their own goals, and personnel consequences can no longer be ruled out.
A nearly 10-year success story could take a sudden turn. After Elmar Degenhart took over the lead at Continental in 2009, there was only one direction in Hannover, namely upwards. Year on year, sales grew at a rapid rate. With an operating return of more than ten percent, Continental also left most car manufacturers behind.
The loss of confidence in the stock market is the last thing Degenhart and his colleagues can use right now. Because Continental is very soon dependent on the goodwill and the approval of investors. The supplier group wants the stock markets in the coming year with a partial listing of its drive division (“Powertrain”) tap.
Continental hopes for billions. The money is to flow into the two major megatrends of the automotive industry. Conti intends to invest in digitization and electrification. Other suppliers such as the former General Motors subsidiary Delphi have long since completed this separation.
The Conti board is aware of what the company is facing. “The coming months are very important for the successful future of our organization,” write the board members in their letter. By the end of the year, Powertrain will be split off as an independent company – an important intermediate step before a possible IPO. Internally, the letter has already made a few things after a few days. “The organization is now wide awake,” it says from corporate circles in Hannover.
Comment: The Continental board steals its responsibility with its brand letter
In the worst case, there will not be enough buyers for the Powertrain shares in the coming year – and the IPO would have to be canceled. “Continental’s long-standing success story has cracked with the two short-term profit warnings. Investors are wondering how it is possible for management to lose track of their own business prospects in such a short time, “says Winfried Mathes, corporate governance expert at Deka Investment.
The price of the Conti share is the seismograph of the crisis: When at the beginning of the year first rumors about the splitting and a possible IPO of the propulsion division made the rounds, the paper stood at 250 euros. Today, almost a third of the stock market value is lost. The second profit warning in August alone cost investors just under € 25.
The problem: “The Continental course also includes the powertrain portion,” says Frank Schwope, automobile analyst at the NordLB in Hannover. In the end, Conti could also cancel the IPO on its own – because the Powertrain division is no longer achieving the rating that the group had hoped for.
An IPO of Powertrain is not expected before the second half of 2019. The banks for the support of the IPO have not yet been mandated, it says in Frankfurt institute circles. This should be expected at the earliest at the end of the year or even in 2019.
However, Conti is expected to deliver good numbers after the two earnings warnings in the first half of 2019 to be “on the bulletin board”. Otherwise, investors would probably hold back. By the end of the current year, Bankers believe there is still enough work to delineate the numbers of the powertrain and put Powertrain on its own feet.
Investors hope for change
This is especially true for the subsidiaries of Continental abroad. As a rule, this work takes about a year. Most of the balance sheet will be used at the end of the year to make a clear cut. Accordingly, the hope of some investors that the Conti Executive Board is making the turnaround is correspondingly high. “I see the letter positively. Because it shows how seriously the management takes the current challenges and with what determination it wants to improve the situation, “says Christian von Engelbrechten, fund manager at Fidelity International.
Fundamentally, there has been little change: For example, the group calculates for the current year an operating return on sales (EBIT margin) of “more than nine percent”. Previously it was “more than ten percent”. In terms of sales, Continental now expects 45 billion euros instead of 46. For the current year analysts, who derive their forecasts from the balance sheets and statements of the management, expect a net profit of 2.9 billion euros. That would be just 100 million euros less than in the record year 2017.
According to the American investment bank Goldman Sachs The second profit warning does not cloud the “long-term good prospects” for the German automotive supplier. Gungun Verma of US investment bank Goldman Sachs sees Continental facing the global subcontracting industry and the toughest rival Valeo cheaper and thus more attractive. For Merrill Lynch analyst Kai Müller, Continental remains “favorite among European car suppliers”.
In the end, the owners will have to decide what Continental will do in the coming weeks – and the ownership is clearly regulated. 46 percent of the Conti shares are in the family Schaeffler, which is also determined by the eponymous Franconian automotive supplier. At the head of the Supervisory Board is former Linde CEO Wolfgang Reitzle, who is also unlikely to be particularly satisfied with the latest developments in Hanover.
The family Schaeffler on Thursday did not want to comment on the profit warning and the brand letter of the board. “No comment,” said a family spokesman. At Schaeffler, it was merely confirmed that a regular Supervisory Board meeting had been scheduled for the end of September. One topic: the contract extension for Elmar Degenhart and CFO Wolfgang Schäfer. Both board members, so reported from supervisory board circles, would still have the confidence of the owners.