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Continental AG Raises 2012 Forecasts as Supply Costs Fall

Continental AG (CON), Europe’s second largest auto-parts maker, raised forecasts for revenue and profitability this year after a decline in raw-material costs and growth in sales helped second-quarter profit.

Revenue will rise more than 7 percent to exceed 32.5 billion euros ($39.8 billion), while adjusted earnings as a proportion of sales will beat the 2011 figure, Hanover, Germany- based Continental said in a statement today. That compares with previous targets of boosting sales 5 percent to more than 32 billion euros and matching the 2011 profit margin.

The manufacturer, which is also Europe’s second-biggest tiremaker, is selling more electronic products to luxury-auto manufacturers such as Bayerische Motoren Werke AG and Volkswagen AG (VOW)’s Audi unit, the top two in the industry. The strategy is protecting Continental from a drop in Europe’s car market, which may fall to a 17-year low in deliveries in 2012.

“All in all, it was a very good set of numbers” with adjusted earnings and cash flow beating estimates, demonstrating “very good underlying earnings quality,” Daniel Schwarz, an analyst for Commerzbank AG in Frankfurt with a buy recommendation on Continental stock, said by phone.

Adjusted Earnings

Second-quarter earnings before interest, taxes and financial effects from the 2007 acquisition of Siemens AG (SIE)’s VDO unit rose 26 percent to 948.3 million euros, led by a 40 percent jump at the rubber-products division, Continental said. Unadjusted Ebit increased 30 percent.

Revenue rose 8.7 percent to 8.19 billion euros. Net income jumped 65 percent to 520.3 million euros. The adjusted-Ebit margin increased to 11.7 percent of sales from 10 percent a year earlier. The full-year margin in 2011 was 10.1 percent.

“Our international orientation plays a major role in our current success,” Chief Financial Officer Wolfgang Schaefer said in a phone interview. “This allows us to more than compensate for the weak European market.”

Continental rose as much as 2.3 percent to 75.49 euros, the highest intraday price since April 27, and was trading up 1.5 percent at 10 a.m. in Frankfurt. The stock has gained 56 percent this year, valuing the company at 15 billion euros.

Market Forecasts

For the second half of the year, Schaefer said he assumes that “market dynamics will generally continue.” The U.S. market will probably continue growing, although at lower rates, while “South America was weak in the first half but will pick up, and China is still showing good growth rates especially for the international manufacturers producing locally,” he said. Europe’s market will “remain at low levels.”

The component maker expects to return to Germany’s benchmark DAX Index (DAX) in September. Continental was dropped from the 30-company gauge after family-owned industrial-bearing manufacturer Schaeffler AG gained control of more than 90 percent of the stock in a takeover effort in 2008.

Schaeffler has since reorganized the holding and currently owns 49.9 percent of Continental stock directly, with another 10.38 percent maintained by B. Metzler Seel. Sohn & Co. and M.M. Warburg & Co. on behalf of the Herzogenaurach, Germany-based company.

“We are fulfilling the necessary criteria in trading volumes and free float” to regain a place on the DAX, Schaefer said today.

Raw Materials

Continental scaled back its forecast for raw-material cost effects by 60 percent today, saying they will add 100 million euros to spending this year. The company estimated in May that the effect of higher rubber and rare-earths prices would amount to a combined 250 million euros.

The manufacturer is working on reducing debt, which was pushed up in the acquisition of VDO, to 6.5 billion euros at the end of 2012, Schaefer said, reiterating an earlier target. Net debt as of June 30 totaled 6.88 billion euros. Continental’s credit ratings are below investment grade.

The company has ruled out larger acquisitions, though it’s looking for smaller assets to expand the ContiTech division, which produces tubes and conveyor belts, to gain more independence from the automotive industry.

Continental is teaming up with Seoul-based SK Innovation Co. to develop and manufacture battery systems for electric automotive powertrains. The partners want to become the leading global provider of lithium-ion battery packs with deliveries starting in 2015. Continental already supplies Audi with electric-drive components for the carmaker’s compact Q5 hybrid sport-utility vehicle.

The German component maker is also providing parts for the renewed version of Volkswagen’s best-selling Golf compact model, which will reach showrooms before the end of the year.

Demand for safety applications, such as emergency braking systems, as well as powertrains to comply with more stringent emission regulations and information technology, has been growing, Schaefer said.

“We’ve been getting tailwinds from focusing on future technology trends,” Schaefer said.

To contact the reporter on this story: Dorothee Tschampa in Frankfurt at dtschampa@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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