Continental Reaffirms 2008’s 26.4 billion euro Sales Target

Continental AG has published second quarter financial results reaffirming the company’s 2008 sales projections of 26.4 billion euros, despite the “difficult environment.” Conti’s acquisitions mean group first half sales grew to 13.254 billion in comparison with 8.014 billion in 2007. Company management sought to project the most positive side of the story at a time when the German tyre and automotive supplier is battling to defend itself from an increasingly hostile 11.3 billion euro takeover bid initiated by ball bearing manufacturer, Schaeffler Group; and when tyre manufacturers in general are fighting hard to maintain profitability targets.

While Continental announced strong second quarter passenger and light truck sales, the news was not so cheery in the truck tyre department. Here first half sales fell to 685.4 million euros compared with 706.4 million during the same period in 2007. And what’s worse, second quarter operating income (around 30 million euros) came in 36.5 per cent less than expected, down 45.9 per cent year-on-year. This meant, for the second quarter, the company ran at an operating margin of 4.6 per cent. To put this in perspective the car tyre and ContiTech divisions achieved 13 and 12.3 per cent respectively.

Continental’s first half car and tyre division EBIT fell 12.7 per cent to 322.6 million euros compared with the same period in 2007, off the back of sales of 2.535 billion euros. Taking the second quarter in isolation Morgan Stanley points out that this segment was 8.5 per cent ahead of expectations and down just 9.7 per cent year-on-year.

Executive Board chairman Manfred Wennemer pointed out that an 84 million euro increase in raw material costs had primarily impacted the two tyre divisions. The Executive Board chairman also pointed out that the Passenger and Light Truck Tires division was able to post a double digit improvement in volume sales in The Americas region despite the weak market, and sales volumes in Europe were also higher than the previous year’s level.

“We anticipate that we will be able to offset a large portion of these cost increases in the tyre divisions, especially with mix improvements, improvements in efficiency and price increases during the remainder of the year,” said Wennemer: “In the automotive divisions, we are expecting to compensate for the rise in raw material costs by improving efficiency and passing on the cost increases to our customers.”

Financial analysts welcomed the results as generally better than expected – the recent profit warning at Michelin led some market observers to expect worse tyre sales and profitability results. MorganStanley described the financials as ‘benign’ and explained that this is positive because it allows everyone involved to focus on the implications of the Schaeffler bid.

‘Solid start’ to 2008

“Following a solid start in the first quarter and an impressive second quarter, we are expecting to post sales exceeding 26.4 billion euros as planned, although that target will be more difficult to achieve, especially in light of the significant cuts in production in the US,” said Continental executive board chairman Manfred Wennemer, adding: “Also, we confirm our goal to exceed the pro forma adjusted EBIT margin of 9.3 per cent achieved for the year 2007…”

Debt reduction is now the company’s next priority: “We are confident that we shall be able to reduce the level of debt this year. A help here will be the strong free cash flow, which at 469.5 million euros in the second quarter of 2008 alone is much higher than the good value for the same period last year (104.3 million euros),” Wennemer explained.

Compared with the first half of 2007, Continental reports that it increased research and development expenses increased by 115.7 per cent to 839.6 million euros (H1 2007: 389.2 million euros), corresponding to 6.3 per cent of sales (H1 2007: 4.9%). In the first half of 2008, 731.5 million euros (H1 2007: 336 million euros) was invested in property, plant, equipment and software, corresponding to a half-year capital expenditure ratio of 5.5 per cent (H1 2007: 4.2%).