Continental Faces Tough Auto Unit Overhaul in Slowing Market
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Continental AG declined as the company embarks on a deep overhaul of its underperforming auto components business in a slowing vehicle market.
The manufacturer forecast an operating margin of 6% to 7% this year, slightly below analyst expectations. While returns are set to improve, Continental said March 7 global auto output will likely be flat and warned of higher personnel costs that will weigh on earnings.
“Markets are turning sideways,” CEO Nikolai Setzer told Bloomberg Television. “We have to get costs down in order to further improve our margins in 2024.”
Continental last month said it’ll cut more than 7,000 jobs in its auto unit, some 3.6% of its global workforce, while pooling sites in Germany and elsewhere. European auto stalwarts including Robert Bosch GmbH and ZF Friedrichshafen are also scrutinizing their portfolios in a bid to boost returns amid rising uncertainty and costly investments in the shift to electric cars.
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Continental fell as much as 5.5%, the steepest intraday decline since April. The stock has dropped around 8% this year.
The company has long targeted improvements in its auto components business, where margins rose to 1.9% last year on better supply chains and lower freight costs. Returns in the auto group are set to rise to between 3% and 4%.
Global car production is expected to be roughly flat this year, the company said, after rising 10% last year. Higher costs for wages and salaries of around 500 million euros ($545 million) will weigh on earnings this year with around half of these costs attributable to the auto group.
While its auto unit has fallen behind rivals, Continental’s businesses making tires and industrial hoses are performing well. The company on March 7 also proposed raising its dividend to 2.20 euros a share.
In addition to the job cuts, Continental is carving out its user-experience business, with the company’s Chairman Wolfgang Reitzle in December saying the company was “ready for anything” to fix its auto unit.
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Continental expects to spend 500 million euros this year on one-off expenses to strengthen the portfolio’s competitiveness, with carve-outs at ContiTech and the auto unit each costing a “low triple-digit” million figure, Chief Financial Officer Katja Garcia Vila said. Group adjusted free cash flow is expected to fall to as low as 700 million euros as a result.
Continental has been besieged by a range of issues beyond its restructuring and profitability push. European Union authorities raided the company in January over suspected price fixing with other tire makers.
It also has faced a series of compliance and security problems, including the theft of company and customer data in a 2022 cyberattack as well as quality-control issues with industrial and automotive hoses.
