Continental Demonstrates Earnings Resilience and Confirms Sales and Earnings Forecast for 2014
- Net income up 14.1% to €1.8 billion after nine months
- Sales rise by nearly 3% to €25.6 billion
- EBIT at €2.4 billion after three quarters
- Non-recurring expenses to strengthen future profitability of Powertrain division total €334 million
- Forecast for free cash flow before acquisitions raised to €1.8 billion
The Continental Corporation demonstrated its earnings resilience again in the first three quarters of 2014, with net income increasing at an above-average rate of 14.1% year-on-year to €1.8 billion. Earnings per share climbed to €8.99 after €7.88 in the same period of the previous year. At the same time, the international automotive supplier, tire manu-facturer and industrial partner confirmed its forecast for the current fiscal year after a solid third quarter.
"We are keeping our sights set firmly on our target for the adjusted EBIT margin, which we raised to around 11% after the first half of the year, and we even consider it realistic that we may slightly exceed this level at the end of the year. Sales are expected to total approximately €34.5 billion this year, despite the negative exchange rate effects of €650 million that we recorded in the first nine months," said Dr. Elmar Degenhart, chairman of Continental's Executive Board, at the presentation of the figures for the first three quarters on Tuesday. "However, the development of the exchange rates relevant to us is currently unlikely to change significantly by the end of the year."
Before changes in the scope of consolidation and exchange rate effects, consolidated sales were up 4.7% year-on-year after the first three quarters. On an unadjusted basis, the increase came to 2.7%. Consolidated sales thus amounted to €25.6 billion. Special effects as well as other non-recurring expenses to strengthen Powertrain's profitability and reduce future risks totaling €334 million were incurred in this division in the third quarter, mainly in connection with the Hybrid Electric Vehicle (HEV) business unit. As a result, EBIT declined slightly by 2.7% year-on-year to €2.4 billion as at September 30. This is equivalent to a margin of 9.6% after 10.1% in the same period of the previous year.
Adjusted EBIT however climbed by 4.4% year-on-year to almost €3 billion in the first three quarters. At 11.5%, the adjusted EBIT margin was up slightly on its level of 11.3% from the first nine months of 2013.
The Continental Corporation reduced its net indebtedness by more than €1.6 billion year-on-year to €2.4 billion as at September 30. Compared to December 31, 2013, net indebtedness decreased by €363 million. The gearing ratio thus improved to 36.2% at the end of the third quarter. As at September 30, 2014, Continental had liquidity reserves of over €6 billion in total, comprising cash and cash equivalents of around €2 billion and committed, unutilized lines of credit of over €4 billion. Continental improved its free cash flow by €527 million to €941 million after the first three quarters.
"Because for the most part the special effects do not impact cash and because our systematic efforts to reduce working capital are continuing to bear fruit, we are raising our forecast for free cash flow before acquisitions for the year as a whole from more than €1.5 billion to more than €1.8 billion," announced CFO Wolfgang Schäfer, adding: "This means that the free cash flow is almost high enough to cover both the dividend distributed this year in the amount of €500 million and the expenses of €1.4 billion for the Veyance acquisition." Schäfer also indicated that the pending antitrust authorizations for the Veyance acquisition are still expected in the fourth quar-ter.
Net interest expense fell by €415 million year-on-year to €216 million in the first nine months. This decrease is due in particular to the utilization in the previous year of the option for the early re-demption of the four bonds issued in 2010 and their partial refinancing with considerably lower-interest bonds issued in the second half of 2013. "For 2014 as a whole, we now anticipate net in-terest expense of around €300 million," said Schäfer.
Continental reported income tax expense totaling €371 million in its statement of income for the first three quarters. This corresponds to a tax rate of 16.6% after 12.6% in the same period of the previous year. Income tax expense was impacted in particular by the recognition of deferred tax items totaling almost €260 million in the U.S.A. and in Germany. These had not been recog-nized previously and can now be utilized due to the positive development of earnings. Continen-tal had already posted a comparable effect in 2013 in relation to the utilization of loss carry for-wards in the U.S.A. For 2014 as a whole, we anticipate a tax rate of around 20%.
In the Powertrain division, non-recurring expenses of approximately €334 million were recog-nized in the third quarter of 2014. More than three quarters of these expenses are non-cash items. Roughly one quarter of the expenses were not corrected in the adjusted EBIT of the Divi-sion.
"In taking this step, we are recognizing the losses on existing contracts as well as reducing future risks. In view of the increasing competition in the development and production of battery cells for the automobile industry, we and our Korean partner SK Innovation no longer see any economic basis in the medium-term for the business operations in our joint venture. For this reason, the existing activities and investments have already been reduced considerably," explained Degenhart.
"This has resulted in an adjustment to the carrying amount of the investment in the joint venture amounting to €78 million. In addition, there were further carrying amount adjustments for assets in the HEV business unit (€58 million) and expenses in connection with an order for diesel injec-tors. This also prompted us to check pumps based on technologies from the time before the Siemens VDO acquisition, primarily in the diesel sector," commented Schäfer, explaining how the non-recurring special effects in the Powertrain division in the third quarter break down.
In the first three quarters, Continental's capital expenditure on property, plant and equipment, and software amounted to €1.3 billion. This results in a capital expenditure ratio of 5.1% after 5.4% in the same period of the previous year. In comparison to the first nine months of the pre-vious year, Continental increased its research and development expenses by 10.4% to ap-proximately €1.6 billion. This is equivalent to a ratio of 6.4% of sales after 5.9% one year previ-ously.
As at the end of the third quarter, Continental had 189,361 employees, around 11,600 more than at the end of 2013. This increase was attributable to higher volumes, acquisitions and expansion of research and development in the Automotive Group and additional production capacity, sales channels and acquisitions in the Rubber Group.
The Automotive Group generated sales of €15.5 billion in the first nine months of the current year. At 7.9%, the adjusted EBIT margin was exactly at the previous year's level of 7.9%.
In the first three quarters, the Rubber Group generated a slight increase in sales to almost €10.2 billion and once again achieved an adjusted EBIT margin that was higher than the previous year's level of 17.0% at 17.8%. Owing to the further decrease in raw material prices, we now anticipate a positive impact of €180 million for the Rubber Group rather than the previously forecast €160 million.
Continental Reifen Deutschland GmbH
Continental develops intelligent technologies for transporting people and their goods. As a reliable part-ner, the international automotive supplier, tire manufacturer and industrial partner provides sustainable, safe, comfortable, individual and affordable solutions. In 2013, the corporation generated sales of approximately €33.3 billion with its five divisions, Chassis & Safety, Interior, Powertrain, Tires, and ContiTech. Continental currently employs around 189,000 people in 49 countries.