Conti ‘On Course’ for 2008 Targets

The first three months of the year have provided Continental AG with results that indicate the company is on course to achieve its 2008 sales and operating targets – this is the word from the company on April 29, following the public release of its quarter figures. “Despite the in part unsatisfactory trends on the tyre markets, we have clearly exceeded our expectations for the corporation on the whole. A help here was the satisfactory development of car production on the whole, particularly in Europe and Asia,” said Continental Executive Board chairman Manfred Wennemer. “Backed by the solid results for the first three months, we are confident that we will achieve our targets for the year. We will counter further rises in raw material prices with price increases, improvement in our product mix and further enhanced efficiency.”

Consolidated sales for the corporation as a whole during the first three months of 2008 rose 67.5 per cent over the same period last year to 6.64 billion euros. Conti reports this increase is the result of both organic growth and from changes in the bases of consolidation, especially from the company’s acquisition of the VDO unit. Exchange rate changes are reported to have had an offsetting effect. “In order to make our operational performance more transparent despite the effects of the VDO acquisition, we are indicating in particular the effect of amortisation, with no effect on cash, of intangible assets from PPA (purchase price allocation). With the depreciation of tangible assets from the purchase of Siemens VDO, also with no effect on cash, the negative impact for 2008 will amount to 522.0 million euros,” explained Wennemer.

EBITDA, at 884 million euros, was up 44.1 per cent on the corresponding quarter of 2007, and the quarter’s EBIT of 456.7 million euros increased 4.56 per cent over last year’s result. Net income attributable to shareholders of the parent however decreased 38.3 per cent to 166.8 million euros, due mainly, says Conti, to the high interest burden, with earnings per share lower at 1.03 euro.

Executive Board member Dr. Karl-Thomas Neumann pointed out that there are no comparative figures for the first quarter 2007 for the three new automotive divisions. “In addition, when evaluating the key figures, a series of effects must be taken into account: For instance, in the first three months of 2008, we invested 352.1 million euros in property, plant, equipment and software, which is more than twice as much as the 160.1 million euros spent in the same period last year, due primarily to the purchase of VDO. The capital expenditure ratio rose accordingly from 4.0 per cent to 5.3 per cent, and we expect this value for the year on the whole as well.

“These investments ensure our growth in future markets,” stressed Dr. Neumann. “In addition, compared with March 31, 2007, research and development expense was up 124.2 per cent to 415.2 million, euros representing 6.3 per cent of sales after 4.7 per cent in 2007. Again, the main reason for the increase was the purchase of VDO. Here, we are safeguarding our innovative strength in technology.”

According to CFO Dr. Alan Hippe, the VDO purchase also had a substantial affect on Continental’s key financial figures. “Our net interest expense amounts to some 158 million euros. At minus 206.8 million euros, net interest expense rose by 190.2 million euros in the first three months of 2008 compared with the same period of last year, due in particular to the financing of the VDO purchase. However, this includes approximately 49 million euros in exchange rate effects, in part with no effect on cash,” explained Dr. Hippe. “In the first quarter of 2008, free cash flow at minus 316.7 million euros was down by 196.9 million euros on the first quarter of 2007. This decrease resulted primarily from the significant rise in investments and the higher level of working capital, which was 172.2 million euros higher in the first quarter of 2008 than in the first quarter of 2007. We are confident that we will reduce working capital significantly as the year progresses.”

Dr. Hippe also pointed out that, at 11.22 billion euros, net indebtedness was 364.7 million euros higher than at year-end 2007, and 9.90 billion euros higher than in March 31, 2007. “This is a normal seasonal increase. The gearing ratio thus rose to 162.3 per cent. At the end of the year, we expect a significant reduction of our debt,” he stressed. “However, compared with December 31, 2007, we have reduced short-term indebtedness by 824.5 million to 2,429.7 billion euros. At the end of March, cash and cash equivalents amounted to 967.7 million euros. At the balance sheet date, there were unused credit lines exceeding 2.5 billion euros.”

When looking at the divisions, Executive Board chairman Wennemer pointed out that a 38 million increase euros in raw material costs had impacted primarily the company’s two tyre divisions: “Without this effect, EBIT for the two divisions would have been at the same level as the previous year. It will take some time before the price increases implemented will have an effect on earnings. One must also take into account that, due to the long Easter holiday weekend in March, there were three fewer working days in the first quarter compared to 2007. Furthermore, the earlier vacation period has affected the purchasing behaviour of the end users,” explained Wennemer.

The company’s Passenger and Light Truck Tires division achieved quarter sales of 1,202.9 million euros, up 4.8 per cent, and EBIT was 142.8 million euros compared with 157.4 million euros in 2007. The Commercial Vehicle Tires division had sales of 328.3 million euros, a decrease of 4.7 per cent on the previous year, with EBIT at 12.4 million euros (28.2 million in 2007).

“Nonetheless, the Passenger and Light Truck Tires division has already been able to largely offset the decrease in EBIT in the first quarter of 2008 with the seasonal increase in business in April. Another contributing factor was the good business trend in the Americas region. In the Commercial Tires division, we implemented measures to again significantly improve the margin.”