From Tire Review

Continental recently released its second quarter 2019 financial report. A few highlights from the report are below.

The global production of passenger cars and light commercial vehicles was down about 7% compared to the same quarter of the previous year. In contrast, consolidated sales, at about €11.3 billion (approx. $12.7 billion), were 1% lower than in the same quarter of the previous year.

Organic sales growth in the second quarter, adjusted for changes in the scope of consolidation and exchange-rate effects, was down 3.7% in the same period. Adjusted EBIT in the second quarter amounted to €868 million ($962.6 million). This equates to a margin of 7.8% (10.2% per year).

For the current fiscal year, global production of passenger cars and light commercial vehicles is expected to decrease by about 5% year-on-year.

“The current market environment is highly challenging. The key automotive markets of Europe, North America and particularly China are declining,” said Continental’s CEO Dr. Elmar Degenhart. “We are responding to the declining market by ensuring rigorous cost discipline and enhancing our competitiveness.”

Degenhart said he is concerned, however, about the massively increasing pressure on industry locations such as Germany, where energy, tax and social costs are comparatively high. In addition, he said that the automotive industry is currently undergoing a fundamental, dramatically accelerating and partly disruptive transformation worldwide. The company’s Supervisory Board has discussed these challenges, and the company’s management has outlined a strategy for Continental to maintain its financial strength in the long term, increase its competitiveness and safeguard its viability. The resulting need for action is currently being discussed, according to Continental.

Powertrain Business Update

The Executive Board has already decided on the next steps for Continental’s powertrain business, which in the future will trade under the name Vitesco Technologies. In response primarily to the tightening of political targets, this business operates in an increasingly disruptive market environment, the company says. It is now undertaking necessary adjustments to the portfolio and will in the future concentrate more closely on the business with electric mobility.

“We are aligning our powertrain operations consistently toward this since the market is clearly moving in this direction. We benefit from the fact that we have long been a technological leader with broad systems experience in this area,” said Degenhart.

At the same time, Continental has ended considerations of entering into the production of solid-state battery cells. Until now, the company had not yet made a final decision in this regard. The DAX company had always ruled out taking up the production of modern-day lithium-ion cells. After intensive analysis, Continental concluded that it would not invest in the production of battery cells. The technological direction of energy storage for electric mobility is being determined in particular by political targets. The expansion of electric mobility must now occur at an accelerated rate with the help of lithium-ion battery cells. According to Degenhart, the cell production market for the automotive industry is thus going to be divided up among suppliers at a much earlier stage on the basis of this established technology, which is one of the reasons for the decision which has now been made.

The rapidly changing market is accompanied by falling demand for combustion engines, which has prompted Continental to cease further expansion of its hydraulic components business. This includes the business in injectors and pumps for gasoline and diesel engines, as well as other components. This decision means that existing orders will be fulfilled, but new orders will play an increasingly marginal role.

In addition, Continental is analyzing its business with components for exhaust-gas aftertreatment and fuel supply systems due primarily to intensive price pressure as well as the high degree of dependency on the further market development.

‘Solid’ Second Quarter

“At present, our business is being influenced by the slowdown in global automotive production. With a slight drop in our sales in the second quarter, we were to some extent able to avoid the effects of the negative developments in our markets,” said Continental’s CFO Wolfgang Schäfer, commenting on the second quarter of 2019. He added: “For the second half of the year, we do not expect the headwind to ease.” The company does not currently envisage a market upturn in the short to medium term.

That is why it recently lowered its market expectations for the current year. Continental now anticipates that, year-on-year, the production of passenger cars and light commercial vehicles will be down 2% in the U.S.A., 3% in Europe, and 10% in China. Overall, the company is assuming that global vehicle production will fall by about 5% in 2019.

In the second quarter of 2019, the net income attributable to the shareholders of the parent was down 41% to €485 million (approx. $538 million) after €822 million (approx $911 million) in the same period of the previous year.

The Rubber Group generated total sales of €4.5 billion (approx. $5 billion) in the second quarter of 2019, which equated to growth of 2.5% compared with the same period of the previous year. Organic growth in the same period came to -1.8%. The adjusted EBIT margin of the Rubber Group was 12.3% in the second quarter of 2019.

In the second quarter of 2019, Continental invested €785 million (approx. $871 million) in property, plant and equipment, and software. In the same period, the technology company’s research and development expenses amounted to €917 million net (approx. $1 billion), corresponding to 8.1% of consolidated sales. The figure for the same period of the previous year was 7.6%.