Continental says profitability will improve in Q3 despite lower sales by Investing.com

Investing.com — Continental AG (ETR: ) said Wednesday that it expects its profitability to improve in the third quarter of 2024, despite facing challenges such as declining sales.

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

In a stock market filing, the company said global production of cars and light trucks is expected to fall more than 3 percent in the third quarter, with Europe and North America posting declines of more than 18 percent and nearly 10 percent, respectively. .

China, however, is bucking the trend with modest growth of around 4%, boosted further by the market share gains of Chinese manufacturers.

For Continental, whose business relies heavily on the European market, this regional slowdown means a global production drop of more than 10%.

“We believe ContiTech may miss its margin target on weak light vehicle production and industrial demand, while Tires holds up well,” analysts at Stifel said in a note.

Management signaled that the third quarter was weak, but this decline was anticipated and factored into its guidance. Although the North American market was worse than expected, there was positive momentum from delayed product launches at the beginning of the year, which contributed to operational improvements.

In addition, Continental is making continued progress in renegotiating pricing agreements, which is expected to help offset some of the cost pressures the company is facing.

A major component of Continental’s strategy to improve profitability has been its internal cost-saving measures.

These include programs to reduce fixed costs and initiatives to improve R&D efficiency. The company also anticipates additional support from research and development reimbursements.

These factors, along with ongoing price negotiations, will result in better profitability in the third quarter, even though overall sales are expected to decline.

Looking at the full year, Continental remains optimistic, expecting higher sales volume in the fourth quarter to help meet its financial targets.

The company continues to benefit from its fixed cost savings initiatives and research and development reimbursements, which will be key to its performance in the second half of the year.

Continental’s tire business, which has been challenged by a weak global market for original equipment tires and increased competition from Asian players, posted mixed results in the third quarter.

While OE tire sales struggled, the replacement tire market showed a satisfactory performance in July and August, and September is expected to follow a similar trend. Sales of commercial vehicle tires in Europe and North America were weak, but replacement volumes are beginning to stabilize.

Overall, Continental expects modest volume growth in its tire business, but flat selling prices and rising raw material costs will present some headwinds in the fourth quarter.

In its ContiTech division, which supplies industrial products, the company continues to face weak demand, particularly in Europe and North America.

This weak demand will likely push sales volumes into the high single digits. As a result, ContiTech’s earnings before interest and taxes for the third quarter are expected to fall below the company’s guidance for the full year.

“In general, we cut our adj. EBIT Sequential by c7%/8.5%/8% for 2024-2026E, which puts us +0.5%/0.5%/-3% from the current VisibleAlpha consensus. Our target price drops to €76 (from €85) on lower estimates,” Stifel said.

Cost inflation remains a challenge for the division, although some positive developments in material procurement have helped offset this.

In terms of cash flow, Continental expects a positive result for the third quarter, supported by a cash flow of 125 million euros from Vitesco Technologies, following an agreement on the allocation of investigation costs.

Improvements in working capital are also anticipated. However, restructuring measures, particularly in the automotive sector, are expected to lead to cash outflows in the second half of the year.