Continental Projects Profitability Improvement in Q3 Despite Decrease in Sales

Continental AG has announced its expectations for improved profitability in the third quarter of 2024, despite confronting challenges such as a decline in sales. The German automotive and technology firm anticipates better profitability than in the previous quarter, attributing this to cost-saving measures and enhanced operational efficiencies, even as global vehicle production continues to lag.

In a recent stock exchange filing, Continental indicated that global production of passenger cars and light trucks is projected to decline by over 3% in the third quarter, with Europe and North America expected to see declines exceeding 18% and nearly 10%, respectively. In contrast, China is experiencing modest growth of around 4%, supported by local automakers increasing their market share.

Given Continental’s heavy reliance on the European market, this regional downturn signifies an overall production decrease of more than 10% for the company. Analysts at Stifel have noted that while ContiTech is likely to fall short of its margin target due to weak light vehicle production and industrial demand, the Tires segment is faring better.

Management has acknowledged the weakness in the third quarter, which was anticipated and incorporated into its guidance. Although North American market conditions have been worse than expected, some positive momentum has emerged from delayed product launches earlier in the year, contributing to operational improvements. Furthermore, the company is making headway in renegotiating pricing agreements, which is expected to alleviate some of the cost pressures faced.

A key aspect of Continental’s strategy to enhance profitability involves internal cost-saving measures, such as fixed-cost reduction programs and initiatives to improve research and development efficiency. The company also expects further support from R&D reimbursements.

These elements, combined with ongoing price negotiations, are projected to result in better profitability in the third quarter, despite an anticipated decline in overall sales. Looking ahead, Continental remains optimistic about the entire year, expecting stronger sales volumes in the fourth quarter to help achieve its financial goals. The benefits from fixed-cost savings initiatives and R&D reimbursements will play a critical role in the company’s performance during the latter half of the year.

Continental’s tire business, which has faced pressures from a weak global market for original equipment tires and heightened competition from Asian manufacturers, recorded mixed results in the third quarter. While original equipment tire sales have struggled, the replacement tire market performed satisfactorily throughout July and August, with a similar trend expected in September. Although commercial vehicle tire sales in Europe and North America have been weak, replacement volumes are beginning to stabilize. Overall, Continental anticipates modest volume growth in its tire business, but flat sales prices and rising raw material costs may pose challenges in the fourth quarter.

In its ContiTech division, which supplies industrial products, the company is still contending with low demand, particularly in Europe and North America. This lack of demand is likely to lead to a significant drop in sales volumes. Consequently, ContiTech’s earnings before interest and taxes margin for the third quarter is anticipated to fall below the company’s full-year guidance.

Stifel has adjusted its forecasts, reducing the adjusted EBIT estimates for 2024-2026 and lowering the price target from €85 to €76 in light of these lower estimates. Cost inflation continues to be a hurdle for the division, although some positive developments in material procurement have offered some level of relief.

On the cash flow front, Continental expects a favorable outcome for the third quarter, aided by a €125 million cash inflow from Vitesco Technologies following an agreement on the allocation of investigation costs. Improvements in working capital are also projected. However, restructuring measures, particularly within the Automotive sector, are likely to lead to cash outflows in the latter half of the year.