Continental Aims to Triple Returns With Tech-Focused CEO

(Bloomberg) -- Continental AG seeks to grow faster than its automotive peers and roughly triple profitability as Europe’s second-largest maker of vehicle parts pushes through a deep restructuring under new Chief Executive Officer Nikolai Setzer.

Continental is targeting an 8% to 11% adjusted earnings before interest and taxes margin in the medium term, the German manufacturer said Wednesday, up from its forecast for about 3% this year. It may buy companies, sell businesses and strike partnerships to achieve its goals.

“We will focus on our growth areas and future technologies with even more intensity and resources,” Setzer said in a statement. “We will ensure that those products that have already established leading positions in a saturated market environment will remain profitable.”

Continental is under pressure to change as the automotive industry shifts toward electric vehicles, which require fewer parts than gasoline and diesel-powered cars. Setzer, who joined Continental in 1997, was already on the management board under predecessor Elmar Degenhart, who sketched out an overhaul plan that includes shifting or eliminating as many as 30,000 jobs.

Continental said it’s planning to double down on the growing sectors of vehicle software, high-performance computers for cars, connected and autonomous driving, digital services for fleet and industrial clients and its tires and ContiTech businesses.

Continental rose as much as 5.5% in early Frankfurt trading, valuing the company at about 24 billion euros ($29 billion). That’s much less than the 37.5 billion euros the company aims to generate in sales this year.

The manufacturer said it will spin off its powertrain unit Vitesco next year. The move may help restore investor confidence that Continental can push through structural changes and focus on areas that are key for the industry’s shift toward electric mobility.

Last month, Continental had said it expects its profitability to shrink for the fourth time in the last five years. It had earlier predicted a margin of 5.5% to 6.5% but withdrew that forecast in April, citing the Covid-19 pandemic.

Continental hosted a series of briefings for investors in recent days to highlight its technological edge in areas from automotive software and automated driving to vehicle connectivity.

What Bloomberg Intelligence Says

Continental ended a week of investor presentations with a new midterm 8-11% Ebit target, which is above consensus for 2022 of 7.4% and relies on an ambitious recovery in auto demand, in our view. New CEO Nikolai Setzer is focusing on tech to achieve above-market growth for the company, without giving specific timelines, which makes sense given post-Covid-19 economic uncertainty. A further positive is the desire to spin off the powertrain business by the end of 2021.

-- Michael Dean, BI automotive analyst

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The company has decided against producing battery cells, much like its unlisted German peers Robert Bosch GmbH and ZF Friedrichshafen AG. It is supplying the high-performance computer and tires for Volkswagen AG’s ID.3 electric hatchback.

Focusing on the group’s most competitive assets in its sprawling operations will be key to convincing investors the planned transformation will pay off.

©2020 Bloomberg L.P.