Continental Results Exceed Expectations

Continental’s 2Q results have exceeded the forecasts of industry experts.
Compared with 2Q 2002, turnover was down 3.4 per cent to 2.825 billion Euro
(2.925 bn), but operating income rose 11.3 per cent to 216 million Euro
(194 m), against a forecast of 187 million Euro.

Of the four divisions, Car Tyres, Truck Tyres and Continental Automotive
Systems (CAS) all showed slight reductions in turnover compared with 2Q
last year, while ContiTech was up slightly. When it came to operating
income, however, Truck Tyres was the only sector to show a decrease, while
the best performance came from Car Tyres, which posted a 44.2 per cent
improvement.

The group’s operating margin was 7.6 per cent and, while the car tyre and
truck tyre divisions were slightly below this (6.7 and 7.4 per cent).
ContiTech and CAS achieved 8.5 and 9.0 per cent respectively. Industry
analysts were pleased at the figures, saying that the group is exhibiting
“improving internal dynamics and a favourable mix of businesses with some
growth and some cash flow contributors.”
As with other companies, currency values had a depressing effect on sales, estimated at having a negative effect of six per cent. Currency was one of the reasons that Conti’s CFO, Dr. Hippe, adopted a cautious approach to the outlook for the second half of the year. There is expected to be continued pressure from raw material costs for the tyre and rubber businesses, plus Continental is looking at restructuring its tyre business in North America.

Talks are on going between management and unions in an attempt to arrive at
a cost-cutting formula to achieve operational breakeven. There are two
ContiGeneral plants at Mayfield and Charlotte and there is speculation –
admittedly not confirmed by management – that, should no compromise
solution be found on cost savings, then more radical restructuring,
including the possibility of one of the factories closing, may be
necessary.

The final factor counselling caution from Continental’s management is an
expected slow down in the automotive industries in North America and
Europe. Despite having painted a picture of prudence and caution for the
remainder of the year, there is no doubt that the figures from Continental
show a very sound performance so far and, despite the relatively cautious
approach, Dr. Hippe was optimistic enough to say that annual operating
profits could “considerably exceed” the company’s stated target of 700
million Euro.