The figures published by Continental for the first nine months of the year confirm the company’s revised earnings and cash flow forecast for the current fiscal year. In the third quarter, the technology company headquartered in Hanover generated sales of €10.8 billion. In the same period, adjusted EBIT reached €772 million. This equates to an adjusted operating margin of roughly 7 percent. After nine months, free cash flow adjusted for acquisitions and funding of the U.S. pension plans was approximately €370 million (Q3: €74 million). The adjusted free cash flow is still expected to reach around €1.6 billion by the end of the year.
“We maintained our recently revised targets despite the considerably depressed market environment,” said Dr. Elmar Degenhart, CEO of Continental, as he assessed the business figures that were presented today in Hanover. “Production of passenger cars and light commercial vehicles declined significantly in the third quarter, particularly in Europe and China,” explained Degenhart. “China and Europe combined now account for over half of global vehicle production. Given the weak market environments in both regions, our moderate growth in sales is therefore reassuring. The same applies to our order intake for automotive electronics. At just under €30 billion after nine months, it is almost on par with the previous year’s exceptionally high level and reinforces our strategic alignment,” he added.
The Automotive Group reported organic growth of 1.7 percent, which is 4 percentage points more than the market and global vehicle production, the latter of which fell by around 2.5 percent according to preliminary data. If this negative trend accelerates in the fourth quarter, the Dax-listed company believes that this could pose a certain risk when it comes to achieving its projected consolidated sales target for fiscal 2018 of around €44.5 billion after exchange-rate effects.
When asked about the current position of the technology company, Degenhart said, “As announced, we have introduced extensive measures to boost efficiency across all areas of the company. These measures include optimizing our supply chain and production processes and conducting a thorough review of our costs.” He emphasized the following point in this regard: “Our customers the world over value our products and solutions because they are making mobility increasingly safer, cleaner and more intelligent. The agility and flexibility that our new organizational structure is set to provide will allow us to improve our successful position even further.”
Turning his attention to the automotive industry, Degenhart underlined the tremendous technical challenges of our times. Digitalization, automation, connectivity and electrification, each in their own right, are the biggest upheavals that our industry has faced in a history dating back more than 100 years. Particularly with regard to the current debate surrounding future CO2 targets, the matter now at stake is reconciling climate protection and the competitiveness of one of Europe’s most important industries in a reasonable manner. “Environmentally friendly and connected mobility has the potential to provide our societies with some sizable opportunities. The business models for this will only be successful in the long term if they prove successful in free competition. Consumers should still be free to choose the most efficient solution tomorrow.”
Continental’s growth continues in spite of declining production figures in Europe and China
The technology company achieved sales of €10.8 billion in the third quarter. This amounts to reported sales growth of just under 1 percent. The company’s organic sales growth, i.e. adjusted for changes in the scope of consolidation and exchange rates, was 2.1 percent.
In the quarter under review, the adjusted operating result (adjusted EBIT) reached €772 million. The adjusted operating margin was about 7 percent. “Adjusted EBIT for the third quarter was up slightly on our forecast from the end of August,” said CFO Wolfgang Schäfer.
This can be explained by the fact that not all expenses for provisions and warranty cases that were announced on August 22, 2018, were incurred in the third quarter. Some of them were carried forward beyond the end of the quarterly reporting period. “For the year as a whole, we are still expecting an adjusted EBIT margin of more than 9 percent,” said Schäfer, underscoring the company’s guidance.
Adjusted EBIT in the past quarter was around €80 million lower than the reported EBIT figure (EBIT margin: 7.9 percent). This is on account of the positive effect that the establishment of the joint venture with Osram had on reported EBIT, as announced in the first half of 2018.
“The market environment is becoming increasingly difficult. In the last quarter, we saw the first substantial decline in global vehicle production in almost ten years,” said Schäfer, assessing the current market situation. In the third quarter, production of passenger cars and light commercial vehicles was down by 5 percent year-on-year in China and by 6 percent in Europe. In North America, however, vehicle production rose 2 percent. By way of an explanation for the market downturn in Europe, Schäfer said: “Decreased demand in Germany, the U.K. and Turkey as well as the effects from the transition to the new exhaust-gas test procedure WLTP resulted in a decline in production figures in Europe. We are unable to put a figure on the precise effect of the WLTP.”
Continental assumes that the market environment will remain weak in the last quarter of this year. For the fourth quarter the company still anticipates a decline in production rates, and for the year as a whole now expects a sideways trend in overall global production of passenger cars and light commercial vehicles.
In the past quarter, the Automotive Group increased its sales by 1 percent on the previous quarter, despite a decline in global automotive production. Organic growth amounted to 1.7 percent. Sales during this period totaled €6.4 billion. The adjusted operating margin was 4 percent (previous year: 7.8 percent).
The Rubber Group generated total sales of around €4.4 billion in the third quarter, which equated to a slight increase in sales compared with the same period of the previous year. Organic growth for the third quarter of 2018 came to 2.7 percent. Commenting on the positive trend in winter tire business, Schäfer said: “Thanks not least to the top performance of our winter tires and their repeatedly outstanding test results, we are again expecting to surpass last year’s record sales volumes in Europe in 2018.”
In the first nine months of the year, Continental’s capital expenditure on property, plant and equipment, and software totaled over €1.9 billion. This put the capital expenditure ratio at 5.9 percent (previous year: 5.5 percent). The technology company’s research and development expenses amounted to more than €2.5 billion net, corresponding to 7.6 percent of consolidated sales. The figure for the same period of the previous year was 7.2 percent.
As at the end of the third quarter of 2018, Continental had more than 244,000 employees. This is over 9,000 more employees than at the end of last year. Nearly three-fourths of this increase can be attributed to the reinforcement of the global research and development team and increased production volumes in the Automotive Group. Roughly one-fourth of the additional staff was hired in the Rubber Group. These employees will be deployed primarily for the expanded production operations and the growing sales unit.
Click here for the financial report (PDF, 4.5 MB) as at September 30, 2018 of the Continental corporation.