Continental AG Scales Back 2013 Sales Forecast on Europe

Continental AG, Europe’s second-largest auto-parts maker, scaled back its sales forecast for this year as the region’s tire market isn’t recovering as expected and growth in Asia and the U.S. is expected to slow.

Continental now predicts revenue in 2013 will amount to about 34 billion euros ($45 billion), the Hanover, Germany-based company said in a statement today. That would be a 4 percent increase from 2012. The previous forecast was for sales to rise by 5 percent to exceed that total.

Second-quarter profit rose 2 percent, counter to analysts’ predictions of a drop, as higher deliveries and lower raw-material costs made up for the effects of a shrinking European car market. Continental, also the region’s second-largest tire producer, has partly bypassed the effects of six consecutive quarters of economic contraction by following German carmakers Volkswagen AG, Bayerische Motoren Werke AG and Daimler AG into growing markets such as China and the U.S.

“They are damping the expectations a little as the situation in Europe is likely to remain difficult for some time,” said Frank Biller, a Stuttgart, Germany-based analyst with LBBW. “The second quarter went quite well. Nearly all divisions slightly beat expectations,” said Biller who recommends buying the stock and has a price target of 125 euros.

Stock Falls

Continental fell as much as 3.2 percent to 114.60 euros, the steepest intraday decline since June 20, and was down 1.3 percent at 11:22 a.m. in Frankfurt. The stock has gained 33 percent this year in the biggest jump on Germany’s benchmark DAX Index, valuing the company at 23.4 billion euros.

Auto production in Europe will probably stabilize in the second half of 2013, while growth rates in the U.S. and China will probably decelerate, Chief Financial Officer Wolfgang Schaefer said in a telephone interview. A slightly reduced sales-growth forecast poses “little concern” as long as profit is sustained, which is probable because of lower spending on raw materials, he said.

“We’ve come back to a reasonable growth rate that we could translate into profit because of our cost discipline and the effort of the whole team,” Schaefer said.

Second-quarter earnings before interest and taxes rose to 883.2 million euros from 866.2 million euros a year earlier. Profit beat the 833.2 million-euro average of six analyst estimates compiled by Bloomberg. Sales advanced 4.3 percent to 8.54 billion euros.

No ‘Turnaround’

“Having gotten off to a difficult start in the current year, the company saw stronger development, as anticipated, in the second quarter, particularly in Europe,” Chief Executive Officer Elmar Degenhart said in a separate statement. “This should not, however, be viewed as a turnaround.”

Industrywide European car sales are set for a sixth annual contraction, with deliveries at about a two-decade low. The market may not bottom out this year, Schaefer said today in a Bloomberg Television interview. The CFO’s remarks were in line with comments by Renault SA CEO Carlos Ghosn, who said on July 6 that declines may continue into 2015.

Continental has maintained earnings with a focus on supplying auto manufacturers with high-technology parts such as safety sensors, emergency-braking systems and fuel-injection technology.

Margin Forecast

The second-quarter adjusted Ebit margin, which excludes mainly acquisition-related costs or gains, narrowed to 11.5 percent from a restated 11.8 percent in the 2012 period. Continental reiterated a forecast today that the full-year margin will amount to more than 10 percent of revenue. The figure in 2012 was 10.8 percent.

Net income in the quarter jumped 35 percent to 700.7 million euros, helped by lower income taxes.

Competitors Michelin & Cie. and Faurecia SA reported drops of more than 10 percent in first-half profit as automakers pushed prices lower because of slumping demand in Europe. The two French auto suppliers are cutting expenses in the region by shutting plants and eliminating jobs while planning expansion abroad.

Valeo SA, France’s second-biggest car-parts maker, rose to a 12-year high in Paris trading on July 30 after reporting an increase in first-half earnings of 3.8 percent because of carmakers’ demand for fuel-saving technology.

Rubber Costs

Lower raw-material prices including natural and synthetic rubber boosted Continental’s second-quarter profit by 80 million euros, Schaefer said. The full-year earnings boost from the reduced costs will amount to 300 million euros, he said.

The CFO reiterated that Continental may be ready for an acquisition of as much as 1 billion euros. No large purchase announcement should be expected in the coming months, he said. Continental has said it’s targeting companies outside Europe in industries other than carmaking to increase the share of sales from non-automotive businesses to 40 percent of total revenue from 30 percent currently.

Continental has yet to decide on the early redemption of two bonds sold in October 2010, Schaefer said. It may sell more debt this year for refinancing, he said.

The company raised 750 million euros from the sale of a bond in July to fund the early redemption of higher-interest debt. Continental also is scheduled to pay back another 1 billion euros of securities on Sept. 16, four years ahead of its maturity date.

The bond redemptions are part a broader effort by Continental to improve its financial profile as it works down debt stemming from its purchase of Siemens AG’s former VDO car-electronics unit in 2007. The strategy included refinancing a 4.5 billion-euro loan in January.

Net debt at the end of June narrowed to 6.01 billion euros from 6.88 billion euros a year earlier, Continental said today.