Continental Achieves 3Q EBIT of 413.4 million euros

Continental AG’s Rubber Group led the way in total group pre-tax profits (EBIT) of 413.4 million euros in the third quarter of 2009, with EBIT for the first nine months of this financial year totalling 662.1 million euros. The impressive profits, made from group sales of 5.337 billion euros in the third quarter (third quarter 2008: 5.892 billion euros) are widely seen as opening the door for Continental’s previously discussed 1 billion euro capital increase/ refinancing negotiations – “to be concluded no later than end of 1st quarter of 2010.” However, it wasn’t all good news and special effects of around 1.36 billion, and in particular a goodwill impairment of 875.8 million in the Automotive Group cannot be ignored.

Financial analysts appeared surprised by Continental third quarter EBIT (413 million euros) that was 50 per cent higher than the market consensus expectations. Less thank two weeks ago Deustche Bank, for example, predicted the company would only achieve 258 million euros, saying that these figures “should confirm the group’s recovery.” Reflecting on the official results, Morgan Stanley put the sharp increase in profits down to “surprises at the passenger car tyre business (winter tyres) and Chassis & Safety profit.”

*Adjusted EBIT: Before amortization of intangible assets from PPA and taking into account changes in the scope of consolidation and special effects.

Rubber group margin almost 20 per cent higher than same time last year

Despite what Conti representatives called “tenaciously intractable market conditions,” the Rubber Group clearly out-performed non-tyre and non-rubber parts of the business. The Rubber Group finished the first nine months with adjusted EBIT of 726.6 million euros, not far off the comparable period last year (766.6 million euros). In fact when you take the fact that sales were down over last year into account, segment margin of 12.6 per cent actually beat last year’s 10.7 per cent.

After nine months, the Passenger and Light Truck Tires division achieved adjusted EBIT of 538 million euros, of which 241.4 million was recorded in the third quarter. Despite relentlessly tailspinning sales driven by market conditions, Commercial Vehicle Tires closed the first nine months in the black, with adjusted EBIT of 19.2 million euros. The third quarter reportedly contributed a crucial 32.5 million euros to that. ContiTech posted adjusted EBIT of 169.3 million euros for the first nine months, 70.5 million from the third quarter.

Again these figures impressed the analysts: “Passenger car tyres’ EBIT…was nearly double our 131 million forecast. Margin of 19.5 per cent is a hugely impressive result versus our 11 per cent estimate,” Morgan Stanley wrote in an investor’s note. Their take is that winter tyre sell-in must be “very strong.” And to this end the bank warned against oversupply and any consequent price deflation: “Looks like a huge channel-loading exercise that may not bode well for winter tyre pricing unless the weather cooperates. Conti is betting on a big winter.”
 
‘Hugely impressive’ margin and winter tyre sell-in drove profitability/allows for capital increase

Following the positive news, Continental representatives said the company is currently looking into various options for the repayment or refinancing of tranche B of our loan facility, due in August 2010, with the goal of substantially improving the capital structure as well. To this end, the company is planning to implement a capital increase of between 1 billion and 1.5 billion euros no later than the end of the first quarter of 2010. Parallel to that and also no later than the end of the first quarter, the company is planning to complete negotiations on the refinancing of the 3.5 billion euros of debt due in August 2010.

“The third quarter bears witness to a sustained major improvement in our operations. The progress made is the result of successful restructuring and a slight recovery in the markets. At the same time, with wide-ranging one-off effects we have tackled weighty risks to our bottom line. The combination of these two aspects bodes well for us in refinancing our indebtedness and in improving our capital structures, both of which endeavours we intend to conclude by the end of the first quarter of 2010, at the very latest,” said Dr. Elmar Degenhart, chairman of the Continental executive board, commenting on the figures.

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