January 14, 2019 / 7:27 AM / 4 days ago

Continental warns weaker markets, electric shift to hit margins

FRANKFURT (Reuters) - German automotive supplier Continental AG (CONG.DE) will cut costs to compensate for a drop in profitability this year due to a downturn in car markets and the industry’s costly shift from combustion engines towards electric vehicles.

FILE PHOTO - The logo of Continental AG, a German automotive manufacturing company specialized in tyres, brakes and car safety products, is pictured on a rim at the company's stand during the Hannover Fair in Hanover, Germany, April 25, 2016. REUTERS/Wolfgang Rattay/File Photo

The group said on Monday it expected an adjusted operating (EBIT) margin of 8-9 percent this year, down from an estimated more than 9 percent in 2018, disappointing analysts.

“As feared, the decline of the automotive markets intensified significantly once again in the fourth quarter,” Chief Executive Elmar Degenhart said.

“This, combined with the profound changes in our industries, is reducing our growth rate.”

Continental’s warning on margins comes after rival Kuka (KU2G.DE) lowered its operating profit guidance and carmakers Ford (F.N) and Jaguar Land Rover [TAMOJL.UL] announced sweeping job cuts in response to falling demand.

Last year, Continental’s adjusted EBIT margin came in at 9.2 percent, according to preliminary figures released on Monday.

“Flat margin as the high end of the guidance, especially when factoring in non-recurrence of around 200 million euros (£178.4 million) of one-off charges in 2018, highlights concerns on auto margins coming under further pressure in 2019,” analysts at Jeffries said.

Jeffries has a ‘hold’ rating on Continental’s shares.

Continental also said it expected consolidated sales of 45 billion to 47 billion euros in 2019, in line with analysts’ expectations and compared with 44.4 billion in 2018.

Shares in the parts maker, which will release 2018 results on March 7, fell 2.2 percent in early trade, but later recovered and were up 0.8 percent by 1439 GMT.

Chinese auto industry association CAAM said on Monday that domestic sales fell 13 percent in December, leading to a 2.8 percent drop for the full year, the first annual contraction since the 1990s.

“If fewer cars are being produced then there is less need for our products,” Continental’s Chief Financial Officer Wolfgang Schaefer told Reuters, adding that the company would continue to adjust costs to account for lower automotive production.

Continental's Schaefer said he was acutely aware that shareholders were entitled to an "absolutely stable dividend" following a year when the company's shares fell 46 percent, underperforming the blue-chip DAX .GDAXI index which lost 18.3 percent in 2018.

Despite volatile markets, Continental continues to make preparations for floating its Powertrain unit, but not at all costs, Schaefer said.

“We do not want to give it away. If we believe that the valuation does not reflect what the asset is worth, we will not go ahead. We are not under pressure,” Schaefer said.

Reporting by Edward Taylor, Christoph Steitz, Editing by Mark Potter/Susan Fenton

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