Continental Achieves Adjusted Annual Targets in 2019 and Focuses on a Healthy Mobility Ecosystem

• Sales up slightly at €44.5 billion (2018: €44.4 billion)
• Market growth: about -6 percent; organic sales growth: -2.6 percent
• Adjusted operating result: €3.2 billion (2018: €4.1 billion); adjusted EBIT margin 7.4 percent (2018: 9.3 percent)
• Operating result (-€268 million) and net income (-€1.2 billion) negative due to non-cash write-downs already reported
• Free cash flow before acquisitions and carve-out effects: €1.3 billion (2018: €1.9 billion)
• Proposed dividend: €4.00 per share (2018: €4.75)
• Market outlook for 2020: global passenger car production expected to decline for a third successive year (-2 to -5 percent)
• Examination of additional measures to enhance competitiveness in view of the deteriorating environment; initial findings expected in May 2020
• Guidance for fiscal 2020: consolidated sales of around €42.5 to €44.5 billion; adjusted EBIT margin of around 5.5 to 6.5 percent

Hanover, March 5, 2020. In a sharply deteriorating market environment, Continental achieved its adjusted targets for fiscal 2019, as the technology company announced on Thursday at its annual press conference in Hanover. According to preliminary figures, the DAX company’s sales in the past fiscal year were €44.5 billion (2018: €44.4 billion), while the adjusted EBIT margin was 7.4 percent (2018: 9.3 percent). That corresponded to an adjusted operating result of €3.2 billion (2018: €4.1 billion). While global automotive production declined by about 6 percent in 2019 according to the latest estimates, Continental’s organic sales development in the same period was down 2.6 percent, thus outperforming its markets.

At the same time – as reported at the end of October 2019 – diminished market expectations in particular required non-cash write-downs in the amount of €2.5 billion. The impairment testing of recognized goodwill as required by accounting standards led to a reported operating result of -€268 million (2018: €4.0 billion) and net income of -€1.2 billion (2018: €2.9 billion).

Despite challenging conditions and a high level of capital expenditure, Continental achieved sound cash inflow before financing activities in the past fiscal year. Free cash flow before acquisitions and the effects of transforming the Powertrain division into an independent legal entity amounted to €1.3 billion.

With this basis and in view of Continental’s strong and healthy balance sheet structure, the Executive Board is proposing a dividend of €4.00 (2018: €4.75) per share for fiscal 2019.

Looking back over the past year, Continental’s chairman of the Executive Board, Dr. Elmar Degenhart, said: “Continental continues to outperform its markets even in challenging times.” He added: “Last year the entire automotive industry suffered a clear downturn. In operational terms we put in a respectable performance overall, but ultimately the 2019 result, particularly in the automotive business, was not satisfactory.” At the same time, he pointed out that, in a challenging situation, the dividend proposed to shareholders is only slightly lower than last year’s.

Market outlook 2020: global passenger car production to decline for a third successive year

For 2020, Continental does not anticipate any recovery in the economic environment. The company expects global production of passenger cars and light commercial vehicles in 2020 to decrease for the third year in a row. It is likely to decline by 2 to 5 percent year-on-year. These estimates take into account the impact of the coronavirus on production volumes, as can be determined to date. Continental currently expects global production to decrease by more than 10 percent year-on-year in the first three months of this fiscal year. In China, the decrease is likely to be at least 30 percent in this period. The market forecast does not include possible further disruptions to production and the supply chain as well as demand as a result of the continuing spread of the coronavirus. Such disruptions cannot be gauged at the current time.

“The economic environment will remain challenging in 2020,” explained Wolfgang Schäfer, Continental’s CFO. He added: “In addition to the declines in production, the globally interconnected automotive industry will be impacted by turbulence arising from the coronavirus epidemic, trade conflicts that remain unresolved, drastically more stringent emission regulations in Europe and the rapid digitalization of business processes and products.”

Guidance for 2020: declining sales growth in shrinking markets

The 2020 fiscal year got off to a subdued start, as expected, owing to continuing market uncertainty. On the basis of assumptions about trends in its markets and industries, Continental anticipates consolidated sales for 2020 of around €42.5 to €44.5 billion and an adjusted EBIT margin of around 5.5 to 6.5 percent. Sales in the new Automotive Technologies group sector together with the former Powertrain division are expected to amount to around €25.5 to €26.5 billion, with an adjusted EBIT margin of around 3 to 4 percent. Sales in the Rubber Technologies group sector are forecast to total around €17 to €18 billion, with an adjusted EBIT margin of around 10 to 11 percent.

Transformation 2019–2029 structural program: assessment of additional measures

The Transformation 2019–2029 structural program is Continental’s answer to the global decline in the automotive industry, the disruptive technological transition in the drive system sector, and the ever swifter digitalization of products and business processes. “2020 will be a transition year in our structural transformation. Our structural program and our new organizational structure will bring significant progress in the medium term,” said Degenhart.

At the same time, he pointed to the deterioration in the global economic environment that has occurred since the structural program was announced in September 2019. The absolute decrease in the production of passenger cars and light commercial vehicles has now reached the level seen in the crisis years of 2008/09. This is being worsened further by the current spreading of the coronavirus and the corresponding reduction in production in China.

“The uncertainty in the industries that are relevant for us is growing rapidly. An economic recovery will take longer than anticipated,” said the CEO, adding: “That is why we are currently looking into how we can effectively respond to a weakening overall situation and its impact in the medium term, with further measures that go beyond our current structural program. Above all, we are at present pursuing two goals that are crucial for our success: continuously rising productivity and our sustainable competitiveness.” As matters currently stand, the company expects to have initial findings from this process in May 2020 and will provide further information in due course.

Continental referred to the possibility of additional adjustments when it announced its structural program at the end of September 2019, and did not rule out further projects if the effect of the measures defined at the time turned out to be insufficient to achieve the profit targets set.

Degenhart: “Continental made the necessary preparations at an early stage to weather the uncertainties ahead”

With regard to the medium and long-term challenges facing the global automotive industry, Degenhart is confident: “Continental and its industries are currently undergoing a profound transformation. It affects everything that makes up our business, from products and processes to business models and structures. We are facing major challenges; but what I see above all for Continental are enormous opportunities.” Continental has, he said, established a sound technological position and strong balance sheet at an early stage. “We are much better prepared for difficult conditions than we were before the last downturn in the automotive industry. We have a clear plan for our future success,” said Degenhart.

Focus on profitable growth areas

A significant part of this plan consists of focusing all efforts on strengthening profitable growth areas. These include assisted, automated and connected driving; the implementation of new vehicle architectures and connectivity of cars with the help of new, high-performance computers; the business with software and data based on intelligent products made of plastic, rubber or electronics; as well as the industrial and end-customer business. The clear priority for the deployment of capital is profitable growth. This goes hand in hand with a further strengthening of the corporate culture. The key elements of this will be Continental’s company values, increasingly decentralized decision-making responsibility and future-oriented employee training. “Suppliers like Continental make an important contribution to a healthy mobility ecosystem that offers protection to the environmental, economic and social climate all at once,” said Degenhart.

Continental is continuing to invest heavily in the mobility of the future

In the last fiscal year, Continental continued to undertake a high level of capital expenditure. “We are investing billions in the mobility of tomorrow. Only a small number of companies around the world can do that in these challenging times. At the same time, we have substantially stepped up our cost discipline in all areas,” explained CFO Wolfgang Schäfer.

In fiscal 2019 alone, Continental invested around €6.7 billion (2018: €6.3 billion) in research and development, as well as in property, plant and equipment, and software.

Continental is in a solid financial position

As at December 31, 2019, Continental’s liquidity reserves totaled €8.0 billion (2018: €6.3 billion), consisting of cash and cash equivalents of €3.3 billion (2018: €2.8 billion) and committed, unutilized credit lines of €4.7 billion (2018: €3.5 billion). “Continental has solid finances. So we are well prepared for the coming years,” said Schäfer, adding: “In 2019 we achieved very good terms for our four bond issues and our revolving credit line. The improvements are the result and a further reflection of our fundamentally solid balance sheet structure.” Continental is one of the first companies in the industry to incorporate into its new revolving credit line criteria that reward sustainable business practices.

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Number of software and IT experts expected to rise by 10 percent by the end of 2022

The mobility of the future is mainly about electronics, software and sensor systems. Continental’s automotive business already achieves 70 percent of its sales with these products. Soon it will be 80 percent. With new functions, the amount of software in the vehicle will rise tenfold in the next 10 years. “Continental will benefit from this software boom,” said Degenhart.

Continental has more than 51,000 engineers working on the new trends and technologies, of whom more than 20,000 are software and IT experts. By the end of 2022, Continental plans to increase their number to 22,000. More than 900 staff currently work in artificial intelligence (AI) alone. By 2022, the plan is for 1,900 Continental staff to be versed in AI. To drive forward software projects around the clock, Continental relies on globally distributed software expertise centers in Asia, Europe and the U.S.A. The global Continental team comprised more than 241,000 employees (2018: more than 243,000) in 59 countries and markets at the end of the year.

Continental is bundling control units in high-performance computers with new functions

In the future, around 10 control units will do the work of up to 100 of the control units seen in current cars. Continental is consolidating diverse sets of functions in these high-performance computers on the basis of its own software and algorithms as well as applications from software partners. “Only a small number of systems suppliers are able to consolidate the huge amounts of software involved for the car of the future and synchronize it all. Continental is one of them, and has already won several major contracts in this area from major car manufacturers around the world,” explained Degenhart.

Continental already supplies high-performance computers for series production

Continental is already supplying its high-performance computers for new vehicles being mass produced in large numbers. These computers from Continental enable a high degree of vehicle connectivity. This includes the ability to install new functions as well as safety updates, which are downloaded via a wireless connection. They are also powerful enough to enable entirely new applications in the car. “More is clearly becoming less. Our new vehicle computers are reducing complexity and raising driving convenience to new levels, particularly for electric vehicles. With our systems, the vehicle becomes an active part of the Internet. This is pioneering work, putting us at the forefront when it comes to software expertise for connected cars,” explained Degenhart.

Experts at Continental predict that 2030 vehicle models will have 50 times the available processing power of their current counterparts. This processing power is essential, as it allows the software in the car to be updated on a continual basis. This means that complex functions can be adapted in line with evolving customer wishes and more demanding requirements.

In the car of the future: displays and cameras as well as intelligent surfaces

High-performance vehicle computers will also pave the way for entirely new control concepts in the vehicle interior. Displays and cameras as well as intelligent and adaptable surfaces will be combined seamlessly with active haptic feedback in the future. This means vehicles will feature large curved glass surfaces consisting of various displays – including touch displays – stretching across the full width of the vehicle. These will be complemented by interactive control elements built into the surface, so they are invisible until they are needed.

With the help of printed electronics, Continental will be able to implement entirely new control concepts in the car of the future. Printed electronics make it possible to integrate ultra-thin sensors, LEDs and other electronic components into a wide variety of surfaces and materials. These technologies, which are currently in development at Continental, enable numerous other applications to be realized in other industries as well. For instance, brand manufacturers could use intelligent packaging featuring Continental technology to clearly differentiate their high-quality products from cheap copies. In this way, consumers can then digitally verify the authenticity of the product using their smartphone.

Consistently high order intake for advanced driver assistance systems

The key to future assisted and automated driving lies in Continental’s powerful sensor systems, software and electronics. With sales of €2 billion in 2019, the company holds a leading position in the field of assisted and automated driving. Continental will continue to achieve significant growth with these safety technologies, which are key prerequisites for driverless driving. Last year alone, order intake in this area amounted to around €4 billion. From a technical standpoint, Continental, with its extensive product and expertise profile, is one of the few providers worldwide already capable of enabling highly automated driving on freeways. As a systems provider, Continental can supply all necessary components from a single source.

With the aid of software, Continental is reinventing the tire

In 2019, Continental produced a total of more than 142 million passenger car tires globally, making it one of the top three car tire manufacturers worldwide. Tires from Continental will become increasingly intelligent going forward, for example by providing the driver with reliable information not only on the temperature and pressure, but also on the depth of the tire tread. It will also be possible to detect and flag damage at an early stage, thus ensuring a longer tire life and minimizing downtime. With the Conti C.A.R.E. system, tires and rims can even adjust the tire pressure of their own accord. The result is greater comfort, a higher level of safety, longer tire life, shorter downtimes and lower energy use. This smart combination of rubber, sensor systems and software opens up new, high-growth business models for Continental, particularly when it comes to operators of vehicle fleets and shared mobility systems.

In fiscal 2019, the Automotive Group (which existed until the end of 2019 and consisted of the Chassis & Safety, Interior and Powertrain divisions) was not entirely immune to the sharp decline in the automotive sector. While global automotive production dropped by about 6 percent, reported sales in the same period fell by 1.2 percent to €26.5 billion (2018: €26.9 billion).

Organic sales decreased by 3.3 percent. The reported operating result was -€2.1 billion (2018: €1.9 billion), with a margin of -7.9 percent (2018: 7.0 percent). The main reason for this
was the diminished market expectations that were already reported at the end of October 2019, which resulted in non-cash write-downs in the amount of €2.5 billion. Before amortization, changes in the scope of consolidation, and special effects, the adjusted operating result was 4.4 percent (2018: 7.0 percent).

The Rubber Group (which operated under this name until the end of 2019, consisting of the Tires and ContiTech divisions) generated total sales of €18 billion last year, which was equivalent to sales growth of 2.3 percent compared with the previous year. Organic growth came to -1.5 percent. The adjusted EBIT margin of 12.4 percent (2018: 13.6 percent) corresponded to an adjusted operating result of €2.2 billion (2018: €2.4 billion). With organic growth of -0.2 percent, the tires business in particular held its own in a declining environment.

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Please find here all information at a glance: Annual Press Conference 2020

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