Continental
Düsseldorf The year 2019 was already for Continental extremely difficult. The bottom line was that the automotive supplier posted a net loss of EUR 1.2 billion. Now the coronavirus is exacerbating the situation: Expected in the first quarter the DaxCorporation with a slump in the Chinese passenger car market of more than 30 percent. Three quarters of them are CEO Elmar Degenhart according to due to the corona virus,
Continental sees no recovery for this year and expects the global car sales market to decline by between two and five percent. The losses could be even greater. Because the prognosis does not yet include the effects of the coronavirus. The stock exchange reacted horrified to the numbers and the outlook: The stock dropped by up to 14 percent and was the biggest loser in the Dax,
The weakening Chinese car market had already given Conti a profit warning in July. The change in the automotive industry towards more software and electromobility forced the company to save. High depreciation pushed Continental deep into the loss zone.
Wolfgang Schäfer tries not to gloss over anything. “We expected more from this fiscal year,” said the CFO of Continental at the annual press conference, which was broadcast as usual via livestream. “It is absolutely not satisfactory for us.”
With this, Schäfer summed up how the automotive supplier is doing at the moment. Continental earns less, incurs more debt, has to close factories and lay off staff. At the same time, Conti must master the turnaround in electromobility, split off the Vitesco Technologies drive division and establish itself as a software company.
“We’re currently tackling everything,” said Continental CEO Elmar Degenhart: “The bottom line is that we’re clearly not satisfied with 2019.” The decline in global automobile production has meanwhile reached the dimensions of the crisis years of 2008 and 2009. “We are in a massive market crisis in times of a revolutionary technology transformation,” said Degenhart when presenting the annual balance sheet.
That was a huge challenge last year. Since the outbreak of the corona virus, the situation at Conti has now deteriorated dramatically. The corona virus is currently confusing the entire global economy. Plants have to be temporarily closed, supply chains are holed. The auto industry is particularly affected. Because hardly any industry is so dependent on the sales market and production location in China.
At Conti, the consequences of the virus epidemic have already opened deep holes in the supply chain. Bottlenecks exist for certain components. According to Degenhart, this affects electrical components such as capacitors or displays, which the supplier obtains primarily from China. Conti’s production was not completely shut down after the Chinese New Year in January. But it was drastically shut down to a level of around 30 percent.
In the case of critical components, the group takes unusual measures to keep the supply chains intact. “We have to take into account that components that are normally shipped by plane for a few weeks are now used to speed up deliveries,” said Degenhart. According to CFO Schäfer, relocating the transport routes would of course mean additional costs. Hundreds of employees in Europe, China and North America are working to master the situation.
Continental is now providing a first indicator of the effects of the corona virus on the supplier industry. The Dax group is therefore even planning to expand its savings program announced in September last year. The economic environment has deteriorated again, said Degenhart. “The corona virus makes a significant contribution to this. That is why we are currently reviewing an adjustment of the program. ”The first results can be expected in May, said the CEO.
Savings program after profit warning
Continental’s downward trend had begun in late July 2019 when the supplier had to issue a profit warning. The main reason for this was the weak Chinese passenger car market. The austerity program followed in September, and a month later Conti had to adjust its goodwill, i.e. the valuation of previous company takeovers, downwards. The bottom line is that Continental is in the red on paper.
The operating loss (EBIT) was a good 268 million euros last year. The EBIT margin slipped to minus 0.6 percent. Adjusting the numbers for the allowance doesn’t look much better. Adjusted profit dropped by almost 21 percent to EUR 3.2 billion while sales remained almost unchanged. The margin fell from more than nine percent in the 2018 financial year to 7.4 percent. The gearing ratio, i.e. the ratio of debt to equity, rose for the first time in ten years – from 9.1 to 25.6.
The core business with automotive components continues to cause problems. “The bottom line is that the 2019 result is not satisfactory, especially in the automotive sector,” says CEO Degenhart. The margin fell from seven to 4.4 percent year on year.
In the automotive sector, the Vitesco Technologies drive division is a particular headache for Conti-Management. On the one hand, the drive division had to shut down combustion technology in a period of 15 to 20 years and at the same time ramp up the production of components for electromobility, said Degenhart. This is a physical and economic effort.
No area is therefore affected as much by the savings program as the drive division. In the Bavarian town of Roding and in Newport News in the USA, the power plants are closed, and numerous jobs are canceled in Limbach Oberfrohna in Saxony.
The electric turn shakes Vitesco. Initially, a partial IPO was planned for the drive division. However, due to the deteriorating stock market environment, these plans had to be put on hold and Conti foregone billions of euros from the IPO. Instead, a spin-off is planned.
Since then, Vitesco boss Andreas Wolf has tried very hard to refute the impression of many market observers that Vitesco is a bad bank that Conti wants to get rid of. Wolf told the Handelsblatt earlier this yearthat he is in talks with potential investors to convince them to invest in the new company.
In mid-March, the Supervisory Board should vote on the Vitesco spin-off in an extraordinary meeting. After that, shareholders must vote at the Annual General Meeting on April 30. According to Vitesco boss Wolf, Vitesco is set to become an independent MDax group in autumn with sales of around nine billion euros.
The corona virus could now make this plan a spanner in the works and further cost-cutting measures in the drive area are necessary. “We will evaluate location by location again what the new situation means for them,” says Degenhart. We do not rule out further portfolio adjustments. ”
A conflict with employee representatives seems inevitable. Group works council Hasan Allak said that redundancies were unacceptable. “With a clear cut, no transformation can be carried out,” said Allak on Thursday in Hanover.
The number of employees at Conti has decreased by almost 2000 compared to 2018. Around 1,000 of them left the company as part of the savings program. It is the first time in ten years that the number of employees at Conti has decreased.
Weak outlook
At least financially, Continental is well positioned. The equity ratio is at least 37.3 percent. The company sits on a liquidity cushion of eight billion euros. Conti can use the money well. The group expects the passenger car market to decline again in 2020. In total, there are likely to be only 83 to 84 million cars worldwide – a good ten million fewer than in 2017. A significant decline in sales is expected, especially in the important market of China.
Despite the economically tense environment, investment pressure remains high. In 2019 alone, Conti invested almost seven billion euros in research and development, property, plant and equipment and software.
CFO Schäfer had announced that Conti will continue to target high capital expenditures. These are likely to occur primarily in the automotive sector, where the supplier will bundle its future growth areas for driver assistance systems, connectivity solutions and software products. Accordingly, the outlook is cautious. The EBIT margin should be between three and four percent in the current financial year. Only thanks to the traditional business with tires, which is still strong, does the forecast for the group as a whole not look so bleak. According to this, Conti will achieve a margin of 5.5 to 6.5 percent with sales of between 42.5 and 44.5 billion euros.
But: “All in all, Conti is completely rid of its long, filled role as star performer in the German auto industry,” judges Metzler analyst Jürgen Pieper. This suggests that Continental has finally said goodbye to its former sales target. Conti originally wanted to drive its sales above the € 50 billion mark in 2020.