Continental issues second financial warning this year

August 22, 2018 14:15 CET
UPDATED: Aug. 22 16:10 CET – new story

FRANKFURT — Continental cut its 2018 sales and margin guidance, citing lower revenues, higher costs for developing hybrid and electric car technologies, and unspecified warranty claims.

A more pronounced customer shift away from sedans, weaker demand for tires, and problems ramping up production of complex 48 volt and hybrid system vehicles, led to the downgrades, Continental said a statement on Wednesday.

“There was a strong underestimation of the production methods needed to produce hybrid electric vehicles and 48 volt systems,” Chief Financial Officer Wolfgang Schaefer said.

Analysts at Evercore ISI said there did not appear to be a broader read-across for the sector. “Conti’s guide down looks largely company specific,” Chris McNally said in a note.

But the warning comes as Daimler and Volkswagen , as well as rival supplier Valeo, also cut profit expectations, blaming tariffs and the onset of new emissions tests for denting demand.

Schaefer said a lack of feedback from Continental’s customers made it hard for the supplier to determine whether the slump in demand was tied to the introduction of the new Worldwide Harmonized Light Vehicle Test Procedure (WLTP) in Europe.

Continental expects revenue of 46 billion euros ($53 billion) for the year, excluding currency effects, 1 billion euros lower than a previous target. It also reduced its forecast for operating return on sales to more than 9 percent, down from a 10 percent target.

The supplier is due to publish third-quarter results on Nov. 8.

On Aug. 2, Continental said it expected a strong final quarter in 2018 based on guidance that had already been lowered in May.

The company said its original equipment business had fallen short of expectations, especially in Europe and China in the Automotive divisions, as well as in the ContiTech division where costs rose due to the transition to hybrid and electric vehicles.

Weak demand in the tire market has also led to lower sales expectations, it said.

The adjusted earnings before interest, tax and depreciation (EBIT) margin for the Automotive Group will be about 7 percent in 2018, rather than a forecast 8.5 percent, Continental said.

The auto industry is struggling to adapt vehicles to meet the new WLTP procedure, which takes effect in the EU starting in September. The new standards have already caused a slowdown in sales for carmakers including Volkswagen, which has rented space to store some of the 250,000 vehicles that may be caught up in testing delays.

In July, Continental announced a broad restructuring and said it would list its Powertrain unit as early as mid-2019 in response to far-reaching shifts in the auto industry towards electric and self-driving technologies.

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