Tyres drive Continental group margin ‘surprise’

Continental AG may have delivered 948 million euros of adjusted pre-tax profits (EBIT) in the second quarter of 2012, compared with consensus expectations of 865 million euros, but the biggest surprise for analysts was said to have been the group margin figure. At 11.5 per cent this was nearly a percentage point (and therefore on the way to 10 per cent) higher than 10.6 per cent that was expected.

A second dimension to the apparent “surprise” was the fact that tyres drove the outperformance. According to an investor’s note published by Morgan Stanley on the subject on 2 August, Continental’s tyre adjusted EBIT was around 25 per cent ahead of consensus.

“We believe [the] driver of the record performance was a combination of: volume strength on the back of low Conti inventory in the channel and high exposure to outperforming Central European markets; very firm price/mix, helped by the lower inventory; decreasing raw material costs. With highly profitable winter tyre sales just kicking in, we expect second half 2012 to top the 17.7 per cent margin delivered in the first half,” the analysts surmised.

Furthermore Conti’s winter inventory is said to be “much lower” than peers. Finaly free cash flow of 247 million euros was “slightly better than consensus but net debt of 6.88 billion euros was in line,” according to the analysts.