Continental AG Slumps After Second Profit Warning This Year

(Bloomberg) -- Continental AG shocked investors for the second time this year as disappointing sales in China and Europe forced the car-parts maker to cut its revenue forecast and spending on new technology weighed on profitability. The shares plunged the most since 2009.

The world’s second-biggest automotive supplier expects revenue of 46 billion euros ($53 billion) for the year, excluding currency effects, 1 billion euros lower than a previous target, the Hanover, Germany-based Continental said Wednesday in a statement. It also reduced its forecast for operating return on sales to more than 9 percent, down from a 10 percent target.

Continental AG Slumps After Second Profit Warning This Year

Continental’s second guidance cut this year highlights the pressures on automotive companies whose traditional business model is in flux. The manufacturer, which last month announced sweeping changes to keep pace with the industry’s transformation to electric and self-driving cars, said high costs developing new technology for its customers were weighing on its business. This switch from combustion engines to plug-in hybrid and electric cars also boosted spending demands, the company said.

Continental fell 14 percent to 159.95 euros at 3:50 p.m. in Frankfurt, the most intraday since February 2009. The stock was the worst performer in Germany’s DAX Index. The company’s 750 million euros of bonds due in September 2020 fell to 106 cents on the euro on Wednesday, the lowest since February 2014, according to data compiled by Bloomberg.

Continental AG Slumps After Second Profit Warning This Year

Issuing a profit warning so soon after an earlier forecast cut in April was a shock, Tim Schuldt, an analyst at Equinet, said by phone. The issues stem from both market-wide and home-grown conditions, he said.

Continental will cut costs further to adapt to the lowered guidance, Chief Financial Officer Wolfgang Schaefer said on a call with analysts. Most of these measure will occur in the third quarter, helping Continental regain its footing by the last three months of the year, when the operating margin should return to close to 10 percent, he said.

Asked why Continental reviewed its guidance just a few weeks after releasing earnings, Schaefer said the company had expected that business would pick up after weakness early in the quarter, “but it didn’t.”

China Slowdown

A number of carmakers, including Daimler AG and Fiat Chrysler Automobiles NV, have cut their expectations for the year after customers in China held back from purchasing new vehicles ahead of change in import tariff, hoping for lower prices. In addition, China’s car sales slumped for a second consecutive month in July as customers shied away from visiting showrooms amid a U.S.-China trade spat and an economic slowdown.

Continental also said it will no longer meet 2019 sales and profit guidance for its powertrain business, the unit that makes combustion engine parts, which it issued in 2017 as part of a planned separation of the business. It didn’t elaborate on the change for that unit’s outlook.

The company, which also makes tires, said lower sales in its rubber division contributed to its outlook cut that’s set to reduce the unit’s return on sales to 13 percent, down from 14 percent. Warranty claims in its automotive business also dragged, it said.

The tire business will remain “basically flat” this year, largely because of
weakness in pricing that are most pronounced in Europe and China, the CFO said.

The manufacturer last month joined a line of automotive companies in reshaping their business to become more agile amid record spending demands and new competitors vying for the sector.

©2018 Bloomberg L.P.