Auto Industry Slump “Left Scars” on Conti’s Performance

Upon announcing its first quarter 2009 results, Continental AG stated that the slump in worldwide vehicle production has “left scars” on the company’s performance, with consolidated sales dropping “sharply.” The company reports its Automotive Group sales decreased in tandem with market developments, while the decline in Rubber Group sales was much less severe as to aftermarket sector sales account for a larger percentage of business. Despite the recent undertaking of the largest cost reduction programme in the company’s history, the highly negative sales trend helped push EBIT performance into the red.

“We acted resolutely in putting the brakes on spending but were unable to compensate for these enormous tremors in the market. However, we did succeed in keeping to the covenants agreed with our lenders,” said Continental Executive Board chairman, Dr. Karl-Thomas Neumann on April 29. “The business environment will remain very difficult in the second quarter as well. So, compliance with the agreed key financial figures will still pose a major challenge. In light of the slight improvement in market conditions in March, however, we are confident that we shall be able to meet this challenge successfully.”

Sales of 4.302 billion euros during the three months to March 31, 2009 represent a 35.2 per cent year-on-year decline. Before changes in the scope of consolidation and exchange rate effects, sales dropped by 33.0 per cent, These falloffs in sales were primarily attributable to severe slumps in Continental’s key markets: First-quarter vehicle production in Europe and North America plunged by 45 per cent, and was once again significantly below the volume for the previous quarter; production in the last quarter of 2008 had already declined by 28 per cent.

EBITA, at 249.5 million euros, was 71.8 per cent lower than last year’s first quarter result, while an adjusted EBIT of minus 46.6 million euros contrasted with the 581.9 million euros recorded a year earlier and was the equivalent to 1.1 per cent of adjusted sales (9.1 per cent in Q1 2008). Consolidated EBIT was down 621.7 million euros on the previous year to minus 165.0 million euros. The return on sales fell to minus 3.8 per cent from 6.9 per cent a year before. Net income attributable to the shareholders of the parent dropped from 166.8 million euros to minus 267.3 million euros, with earnings per share lower at minus 1.58 euros.

Rubber Group sales during the first quarter were down by 22.2 per cent year-on-year, to 1.7836 billion euros. Conti reports that its two tyre divisions in particular are facing severe overcapacities in Europe, and the German company notes that these “have to be adjusted to market conditions.” Although the group’s EBIT was more than halved from 254.9 million euros to 112.9 million, it still had a calming effect on the negative trend in consolidated EBIT, despite its heavy decline. Adjusted EBIT was 115.7 million euros, a drop of 54.6 per cent.

Commenting on the outlook for the company’s business, Dr. Neumann pointed out that in view of the continuing turbulence on the financial markets, the recession in many parts of the world and a lack of reliable underlying data, it was extremely difficult to forecast how the year would develop on the whole. “Considering the fact that we have complied with the covenants in the first quarter of 2009 and that business activities during the first three months have revived, we are assuming, as things look now, that we will be able to comply with our credit agreements throughout the remainder of the year as well, despite the adverse economic conditions”, he said. “Our uppermost goal remains that of reducing debt. We still anticipate substantial free cash flow in 2009. This will be fostered by the suspension of the dividend, substantial cuts in capital spending, and further reductions in fixed costs.”

“Based upon the latest information, we are expecting a clear revival in sales and operating results in the second quarter of 2009 compared to the very weak first quarter of this year. However, the plant closures announced for the Passenger and Light Truck Tires, Commercial Vehicle Tires as well as ContiTech divisions will result in restructuring expenses in the coming quarters. As a result of this and other factors, considerable deviations can thus still arise in comparison with last year’s figures”, Dr. Neumann added. He also repeated his announcement to provide a joint concept for the future cooperation between the Schaeffler Group and Continental within 100 days of April 29 at the latest. Future strategy, financing and extent of cooperation shall be covered by this concept.