Conti to Implement Cost Reduction Programmes

In light of slowing world markets, as highlighted by the company’s latest quarterly financial figures, Continental is cutting back production at a number of its facilities. Amongst the measures to be introduced to this effect are a shortening of the working week, a prolonged end of year shutdown period, and a reduction in the number of temporary employees on the company’s payroll.

“Continental is well prepared for the difficult challenges ahead,” said Executive Board chairman Dr. Karl-Thomas Neumann. “Nonetheless, we have initiated additional programmes to cut costs. For instance, in the Automotive Group we will reduce the number of temporary workers, greatly lengthen the plant holiday shutdown period at the end of the year by using the existing work time accounts, and, depending on the location and the order situation, deviate downwards from the five-day-week until further notice. Furthermore, we are putting investments that are not urgent on hold,”

Continental generated third quarter sales of 5.892 billion euros, an increase of 50.8 per cent over the same period in 2007. Car tyre sales accounted for 1.326 billion euros of sales, and truck tyres 386 million in sales. For the nine months of the current year, total company sales stand at 19.146 billion euros. This represents an increase of 60.6 per cent. Analysts at Morgan Stanley, financial advisor to Continental AG in relation to the Schaeffler Group acquisition, report total quarter sales to be one per cent below expectations, although passenger car and truck tyre sales were both above their estimate figures, by 5.49 and 9.35 per cent respectively.

Commenting on Conti’s results in light of global trends, Dr. Neumann said: “In the first half of the year, the weak market situation in North America was compensated by the favourable economic conditions in Europe and Asia. In the last quarter, however, there were drastic signs of slowing in all markets, whereby the dramatic declines in Europe in particular have negatively affected us. This trend will probably become even stronger, continuing far into 2009.”

The company’s operating margin for the third quarter was 5.8 per cent, substantially lower than the 11.7 per cent from a year ago and less than Morgan Stanley’s estimate of 7.2 per cent. EBITDA for the quarter came to 2.4 billion euros, annualising to 3.2 billion euros. For the nine months of 2008 consolidated EBIT before amortisation of intangible assets from PPA and before depreciation of tangible assets from PPA (only Siemens VDO) was up compared with the same period of last year by 138.3 million euros, or 10.2 per cent, to 1,494.9 million euros, and was equivalent to 7.8 per cent of sales (in the corresponding quarter of 2007 it was equal to 11.4 per cent of sales). Before special effects, it increased by 167.2 million euros or 11.9 per cent to 1,569.6 million euros. The adjusted return on sales amounted to 8.2 per cent (11.8 per cent in quarters one to three of 2007). EBIT was down 262.5 million euros on the previous year to 1,075.1 million euros, a decrease of 19.6 per cent. Return on sales fell from 11.3 per cent in the first nine months of 2007 to 5.6 per cent this year.

Net income (ex-extras) for the quarter was 125 million euros, a decrease of 54.2 per cent on the same period last year. The result fell well short of Morgan Stanley’s estimated quarterly income of 185 million euros. For the nine months of 2008 to date, net income attributable to the shareholders of the parent was down 56.0 per cent to 363.5 million euros, an occurrence Conti says is due mainly to the increased interest expense, with earnings per share lower at 2.24 euros.

The increase in raw material prices had a negative impact of approximately 205 million euros on Conti during the first nine months of 2008 compared with the prices for the first nine months of 2007. This affected primarily the company’s Rubber Group.

Looking at the current banking crisis, CFO Dr. Alan Hippe, vice chairman of the Executive Board and head of the Rubber Group, stressed that Continental has a solid financial position. “As of September 30, 2008, Continental had at its disposal liquidity reserves of nearly 1 billion euros as well as unused approved credit lines in volumes exceeding 2 billion euros.”