Conti to Focus on Debt Reduction

Continental AG reports the company is drawing what it calls ‘further necessary consequences for the closing fiscal year 2008’ following an extensive analysis of the substantial negative development that has taken place in the automotive industry in the six weeks to December 10. At the same time, the company is adapting operational measures for 2009 to the industry’s predictably poor economic environment. A cost-cutting programme, said by Conti to be in the ‘high three-digit millions range’ has been initiated; this programme includes the postponement of investments as well as the stretching of expenditures in the area of research and development.

“Our customers have cut their production in the fourth quarter much more than had been expected,” said Continental Executive Board chairman Dr. Karl-Thomas Neumann after a meeting of the company’s Supervisory Board on December 10. “In total, 1.5 million fewer vehicles than planned will be built this quarter in the US and Europe alone. This corresponds roughly to the entire decrease in production in the first three quarters in these regions and affects nearly all vehicle manufacturers. Nonetheless, based on the latest figures we have for fiscal 2008, we feel that an EBIT margin of 7.5 per cent to 8.0 per cent can still be achieved, before amortisation and depreciation resulting from the purchase price allocation (PPA) as well as restructuring and integration expense.”

CFO Dr. Alan Hippe, vice chairman of the Executive Board and head of the Rubber Group, stressed that Conti’s Executive Board continues to consider reducing debt a key priority: “If we refrain from dividend payments, there would be a considerable contribution to debt reduction in fiscal 2008 and 2009. Such a move would thus also contribute to the stabilisation of our financial situation. Based upon the dividend of two euros per share paid out for 2007, this would relieve result in a relief of some 338 million euros per year.”

Dr. Neumann pointed out that, in view of the drastic drop in car sales predicted for 2009, which will see, particularly in Western Europe and North America, sales down to levels last seen in the early 90s, there is a risk that goodwill impairment up to about 1 billion euros will have to be posted for Conti’s Automotive Group on the 2008 balance sheet. “A key goal is still to again strengthen the equity ratio as much as possible. In this connection, we are looking into all other conceivable options,” Dr. Neumann stated.

The company’s cost-cutting programme announced in early November, emphasised Dr. Neumann, is the largest of its kind in the company’s history: “In the second half of 2008, we already hit the brakes hard, making noticeable and painful cuts in all areas for 2009 in order to be amongst the winners when the markets recover,” he said. “In some cases, we postponed or stopped extensive investment plans. Moreover, in talks with our customers we have stretched or restructured expenditures in research and development wherever possible. This has lowered our investment costs for the coming year by roughly a half a billion euros compared to our original intentions and adjusted the R&D expenditure by 200 million euros as well.”

Hippe pointed out that, thanks to the continuing strong business development in the company’s Rubber Group, Continental will have a substantial free cash flow in 2008 on the whole. In addition to these funds, the sale of company units undertaken to date (including the EMD business to Brose) and the extensive conversion of the convertible bond maturing in May 2011 is noticeably helping reduce the net financial indebtedness despite the adverse market climate.

“In the next two years we are also expecting to reduce net financial indebtedness, as we assume that free cash flow will remain in the three-digit millions range despite the very difficult market environment predicted for 2009. Should we refrain from dividend payments, financial liabilities would go down even faster,” Dr. Hippe stressed. “Nonetheless, Continental must also adapt its financial structure to the new situation as a consequence of the adjustment to its operational activities.” In closing, Dr. Hippe added that at present, Continental has substantially more than 3 billion euros in liquidity.