Continental AG
Automotive supplier Continental expects shrinking margins.
DüsseldorfWith extreme caution, the auto parts supplier Continental into the just started year. Because of the worldwide Slowdown in car sales The Hanover-based company now calculates a further decline in operating return on sales (EBIT margin, adjusted).
In 2019, the yield is expected to be in a range of between eight and nine percent, such as Continental announced on Monday morning. In the past year, the automotive supplier achieved a return of 9.2 percent, in 2017 it was still more than ten percent.
“The party is over,” a Conti manager commented on the recent development in the global automotive market. In the first six months of 2019, the supplier group is preparing for further declines. Only in the second half of the year is there a slight improvement from a Continental perspective.
Conti has become extremely cautious, not only in terms of returns, but also in terms of sales. The group predicts growth for this year at 45 to 47 billion euros (2018: 44.4 billion). This would increase sales in a range between 1.4 and 5.9 percent.
Current club events
In the view of Continental, the declining market trend is expected to continue unchanged in the first half of 2019. “The reasons are above all the continue weak demand in China, the trade dispute between the US and China, as well as lower call numbers as a result of the WLTP conversion in Europe. Add to that general Brexit uncertainty“, Commented Continental CFO Wolfgang Schäfer the market outlook.
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In the second half of the year, the company expects slight market growth again. A weaker first and a better second half of the year should then balance each other out: “For the financial year 2019, we expect a production volume of passenger cars and light commercial vehicles to be on a par with the previous year,” added Schäfer. This stagnation in global sales development is the fundamental basis of Conti’s annual forecast.
After the bad experiences of the past year, Continental is also changing its financial reporting. Due to the poor sales development, the Hanoverian group had to retract its forecast for 2018 in summer within two weeks. At that time, investors reacted accordingly and ensured a massive decline in the price of the Conti share.
For this reason, Continental does not want to publish individual figures anymore from this year on, but rather to publish a spread. The Group thus avoids subsequent corrections as in the previous year, which had led to the sensitive price losses.
CFO Schäfer justifies this change in financial reporting. It has become much more difficult to pinpoint the development of an “increasingly volatile market environment”.
“In phases of such profound technological change in the automotive industry as is currently the case and an increasingly ambiguous, uncertain economic environment, accurate forecasts suggest an accuracy that they simply can not have anymore,” continued Schäfer. The publication of yield and turnover intervals is customary in the automotive industry.
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In the final quarter of 2018, Continental largely met market expectations. In the fourth quarter, Continental generated sales of around € 11.25 billion, which was at the same level as in the same quarter of the previous year.
The adjusted operating result in the last three months of 2018 is around 1.1 billion euros, the adjusted operating margin at around 9.7 percent.
After the two profit warnings from Conti from the summer, no special surprises were expected on the financial markets anymore. The final quarter was supported by strong sales with winter tires and good market development in non-automotive industry business.
“We have achieved a solid result, we have reached our adjusted annual targets,” said CEO Elmar Degenhart to the preliminary results for 2018. The downward trend in the automotive markets had in the fourth quarter “as feared” again sharpened.
“This combined with the profound changes in our industries slows our pace of growth,” he added. Digitization and electrification and the associated immense capital expenditure create additional uncertainty in the vehicle industry.
Despite the difficult situation on the global car markets, Continental is continuing to prepare a partial listing of its powertrain segment. As of January 1, Continental completed the legal separation of the division with more than 40,000 employees. By the middle of the year, the new legal entity is to be prepared for a possible partial listing.
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This step is part of one of the biggest organizational changes in the company’s history. The realignment sees the formation of a holding structure under the new umbrella brand “Continental Group”. It is supported by three pillars: These include “Continental Rubber”, “Continental Automotive” and “Powertrain”.
“Our realignment is the answer to the profound changes in the automotive industry and the associated challenges,” said Degenhart. Continental would offer great growth potential through new technologies, larger customer orders and new opportunities in software solutions and services. “We are realigning our organization early on to the technological challenges and changing market needs,” he added.
The earnings outlook caused a great disappointment on the stock market: the Conti share initially lost 3.2 percent in early Frankfurt trading, but then recovered again. “The optimism of the auto suppliers from the beginning of the year will be gone quickly after these Conti numbers,” commented auto analyst Arndt Ellinghorst of the investment house Evercore ISI the numbers from Hanover.
Other suppliers are likely to follow similar negative forecasts this week. “This is a very sobering view.”