Continental Budgets $2.4 Billion for Non-Auto Purchases

Continental AG, Europe’s second-largest maker of vehicle parts, is budgeting as much as 2 billion euros ($2.4 billion) for acquisitions at its industrial-equipment division to reduce dependence on the car industry.

“We want our non-automotive businesses to grow faster than the rest of the company,” Chief Financial Officer Wolfgang Schaefer said in a phone interview from New York. “To do that, we need to make acquisitions.”

Continental started using deals last year to reduce the effects of fluctuations in the car market. The Hanover, Germany-based company agreed in February to buy U.S. hose and conveyor-belt maker Veyance Technologies Inc. for 1.4 billion euros. Continental outlined a strategy in October for acquisitions to raise the non-automotive proportion of sales to 40 percent from 30 percent.

Free cash flow excluding acquisitions is likely to total at least 1.5 billion euros in 2015, compared with 2 billion euro last year, Hanover, Germany-based Continental said in an online presentation today. Net debt of 3 billion is expected to remain roughly steady this year, Schaefer said.

“If we find something attractive to buy, we’ll certainly be able to look at it closely, considering our strong cash flow, but you shouldn’t expect an announcement in the next few months,” the CFO said.

Oil Prices

Continental is set to benefit from lower oil prices leading to lower production costs in its rubber division and as cheaper fuel encourages car purchases. The company is also Europe’s second-biggest producer of tires.

“U.S. consumers react strongly to a lower fuel price, meaning they buy more cars, and more expensive models, and drive more miles, which of course is a tailwind for our industry,” said Schaefer. “The other tailwinds are raw materials prices at the rubber group, as well as lower costs during production at the factory.”

Oil, an important component in chemicals including the synthetic rubber used in tires, dropped for a seventh week to the lowest price in more than 5 1/2 years after officials from Saudi Arabia, the United Arab Emirates and Kuwait reiterated they won’t curb output to halt the decline. Continental predicted today that it will “securely confirm” its main profit margin this year at a double-digit percentage of sales.

“If the oil price stays where it is and Conti for 2015 has a neutral stance on commodity prices, one can expect a noticeable tailwind,” Marc-Rene Tonn, a Hamburg-based analyst at M.M. Warburg, said.

11% Margin

Adjusted earnings before interest and taxes in 2014 totaled more than 3.8 billion euros, or 11 percent of revenue, Continental said in a statement today. The margin figure and sales of 34.5 billion euros matched the company’s forecasts. Revenue this year is likely to rise 5 percent, it said.

Continental rose as much as 2.7 percent and was trading up 1.4 percent at 173.65 euros as of 4:18 p.m. in Frankfurt. The stock has gained 8.6 percent in the past 12 months, valuing the company at about 34.7 billion euros.

Automotive Technology

The manufacturer, which is also Europe’s second-biggest tiremaker, has followed German carmakers such as Volkswagen AG and Daimler AG into countries including the U.S. and China to reduce dependence on Europe, where demand is only slowly recovering from a two-decade low. The company is focusing on self-driving and emissions-reduction technology as well as in-car communication links to outpace global auto market growth.

The global car industry will expand by 2.3 percent this year to about 89 million light vehicles, and “with this, we want to once again securely confirm our double-digit adjusted-EBIT margin,” Chief Executive Officer Elmar Degenhart said in the statement. Continental is scheduled to present detailed earnings numbers on March 5.

The company also reported preliminary sales of 8.85 billion euro in the three months to Dec. 31 and adjusted Ebit of about 930 million euros.

Goldman Sachs this week cut its oil-price estimates as the members of the Organization of Petroleum Exporting Countries, which account for about 40 percent of the world’s supplies, stick to production plans. West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter.

“Europe in particular, as well as other regions, will get an economic boost from the lower oil price,” which will also propel growth in consumer spending, Schaefer said. “This time, rather than a drop in demand, it’s significantly higher supply that’s pressuring prices.”

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