Continental AG Expects Profitability Improvement in Q3 2024

Continental AG (ETR:CONG) announces expected profitability growth for Q3 2024 despite declining sales.

The German automotive and technology company forecasts better profitability compared to the previous quarter, driven by cost-saving measures and operational efficiencies, even as global vehicle production remains weak.

In a stock exchange filing, Continental indicated that global production of passenger cars and light trucks is set to decline by over 3% in Q3, with Europe and North America experiencing dips of more than 18% and nearly 10%, respectively. In contrast, China exhibits modest growth of about 4%, aided by local automakers gaining market share.

Given its reliance on the European market, Continental anticipates an overall production decline exceeding 10% due to regional slowdowns.

Stifel analysts noted, "We think ContiTech is likely to miss its margin target on weak light vehicle production and industrial demand while Tires is holding up well." Management acknowledged weak performance in Q3, but this downturn was expected and incorporated into their guidance. While the North American sector has been worse than anticipated, there have been positive signs from previously delayed product launches enhancing operational efficiency.

Continental is also progressing in renegotiating pricing agreements, expected to alleviate some cost pressures.

A critical aspect of Continental’s strategy is its internal cost-saving initiatives, including fixed-cost reduction programs and enhanced research and development efficiency. They expect continued support from R&D reimbursements as well.

These initiatives are projected to lead to improved profitability in Q3, despite anticipated overall sales declines. Looking ahead, Continental remains optimistic about stronger sales volume in Q4, crucial for achieving its financial targets.

Continental’s tire segment, challenged by a weak market for original equipment tires and increased Asian competition, has reported mixed results in Q3. OE tire sales have struggled, though the replacement tire market showed satisfactory performance through July and August, with expectations for September to align similarly. Commercial vehicle tire sales in Europe and North America have been low, but replacement volumes are stabilizing.

Continental forecasts modest tire business volume growth, yet flat sales prices and rising raw material costs pose challenges in Q4. In its ContiTech division, supplying industrial products, the company faces ongoing low demand, primarily in Europe and North America, with anticipated sales volume declines in the high single-digit percentages. Consequently, ContiTech’s earnings before interest and taxes (EBIT) margin for Q3 is expected to fall beneath full-year guidance.

Stifel analysts downgraded their adjusted EBIT forecasts by approximately 7% to 8.5% for 2024-2026, adjusting the price target down to €76 from €85 due to lower estimates.

Cost inflation remains a hurdle for the division, although positive material procurement developments have provided some relief.

In terms of cash flow, Continental expects positivity for Q3, supported by a €125 million cash inflow from Vitesco Technologies following an agreement on investigatory costs allocation. Furthermore, working capital improvements are anticipated, although cash outflows in the second half due to restructuring measures in the Automotive sector are expected.