Bloomberg News

Continental AG Sees Slower 2013 Growth on Carmaking Woes

January 14, 2013

Continental AG (CON), Europe’s second- largest maker of auto parts, said sales and profitability growth may slow in 2013 as the region’s market contraction causes unpredictability for the global car industry.

Continental forecast sales will rise about 5 percent this year, compared with an increase of about 7 percent in 2012. Adjusted earnings before interest and taxes will “remain above 10 percent” of revenue, versus a 10.7 percent margin last year, the Hanover, Germany-based company said in a statement today.

“We shall very likely not quite be able to hold to our tempo in the successful year 2012,” as global car production may increase by about 2.5 percent to a “mere” 82 million vehicles this year, Chief Executive Officer Elmar Degenhart said in the statement. There is “still a great deal of uncertainty regarding the course of passenger car production and other of Continental’s key sales markets.”

Europe’s car market was probably at the lowest in almost two decades last year, according to the region’s main industry lobby. Automotive executives are forecasting a sixth consecutive contraction for 2013. That contrasts with a possible acceleration in auto sales growth this year in China that the country’s carmakers association predicted on Jan. 11.

Revenue Forecast

Revenue at Continental last year totaled about 32.7 billion euros ($43.8 billion), the company said. That compares to Continental’s forecast of 32.5 billion euros and the 32.8 billion-euro average of 25 analyst estimates compiled by Bloomberg. Sales will exceed 34 billion euros in 2013, it said. The company, which is also Europe’s second-largest tiremaker, is scheduled to publish complete figures for 2012 on March 7.

“The uncertainty that Conti is talking about and the unwillingness to commit to at least flat margins raises question marks over 2013,” Erich Hauser, an analyst at Credit Suisse in London, said in a report to clients. The forecast “is pretty conservative for a company that just did 10.7 percent margins and that will benefit from raw material tailwinds in 2013.”

Continental fell as much as 1.7 percent and was trading down 0.6 percent at 84.55 euros as of 2:46 p.m. in Frankfurt, the lowest since Nov. 29, based on closing prices. The stock has surged 47 percent over the past 12 months, valuing the company at 17 billion euros.

European Decline

Declining demand in Europe and slower expansion rates in the U.S. may hamper Continental’s growth this year, Chief Financial Officer Wolfgang Schaefer said today in a phone interview. The tire division is also unlikely to be helped by a decline in raw-material prices a second year, after lower supply costs at the unit helped earnings in 2012, Schaefer said.

“The first quarter will certainly be difficult,” with industrywide auto production in Europe due to decline 12 percent to 4.6 million vehicles, he said.

The company has sidestepped the effects of the region’s sovereign-debt crisis by following Volkswagen AG (VOW) and other German carmakers into growing markets such as the U.S. and China. The addition of products such as safety sensors, emergency-braking systems and fuel-injection technology over the past decade has given the manufacturer a wider range of high- value parts. Rubber prices in 2012 fell from record highs in February 2011, though ended December at 15 percent higher than at the start of last year.

Faster Growth

Schaefer estimated in October that global car production in 2013 will increase by 2 percent to 3 percent, with demand for technology to improve fuel efficiency and upgrade in-car communications helping Continental’s sales grow faster.

The company was restored to Germany’s benchmark DAX Index (DAX) on Sept. 24 following a 45-month absence after industrial- bearing maker Schaeffler AG, the company’s biggest investor, gradually reduced its holding, enabling more shares to trade freely. A day after Continental’s DAX return, Schaeffler sold another 10.4 percent stake in Continental for 1.6 billion euros to reduce debt. The Herzogenaurach, Germany-based company still owns 49.9 percent of Continental’s stock.

Continental is also reducing borrowings, which soared because of the 2007 acquisition of the VDO component business from Siemens AG. (SIE) To that end, the parts maker is working to refinance a syndicated loan maturing in April 2014, scaling back the total “slightly” to 4.5 billion euros, it said in December. The company, which had net debt of 6.8 billion euros at the end of September, is looking to reduce interest costs with the new loan agreement.

“We already came very close to meeting many of our medium- term financial targets in 2012,” and “we shall further reduce our indebtedness in the current year,” CEO Degenhart said in today’s statement.

To contact the reporter on this story: Chris Reiter in Berlin at creiter2@bloomberg.net

To contact the editors responsible for this story: David Risser at drisser@bloomberg.net; Chad Thomas at cthomas16@bloomberg.net


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