HANNOVER (dpa-AFX) - The automotive supplier and tire manufacturer Continental is still in a state of upheaval. The Hanover-based company is struggling with major problems in its automotive supply division, and speculation about a radically different positioning of the traditional corporation is running rampant. At the Capital Markets Day on Monday (December 4), CEO Nikolai Setzer must now confess how the company should proceed. Parts of the direction of travel are already known, but investors and analysts are likely to be hoping for a major change in view of the share price performance in recent years.
THIS IS WHAT DRIVES CONTI:
At the previous Capital Markets Day in December 2020, Setzer issued medium-term return targets and growth prospects for the divisions at the time. However, the automotive supply division fell short of the targets. The target margin for the business with electronics, brakes, interior fittings and autonomous driving technology, among other things, should be six to eight percent in the medium term. The management defines the medium term as a period of three to five years.
The coronavirus pandemic, the subsequent shortage of chips and parts and the energy price crisis resulting from the Russian war against Ukraine have had a significant negative impact on results in recent years, and Conti posted operating losses in the automotive supply business in the years 2020 to 2022.
Although the major negative factors are more or less a thing of the past, things are still looking bleak so far this year. In the first nine months, the Automotive division posted an operating margin before special items of just one percent, with two to three percent budgeted for the year as a whole.
The new head of the division, Philipp von Hirschheydt, has already started to make cuts. A mid-four-figure number of jobs in administration are to disappear, reports speak of around 5500 positions. This should reduce annual costs by 400 million euros as early as 2025. The automotive supply business most recently had just under 103,000 employees. Von Hirschheydt also wants to take a closer look at investments. Analysts have long accused the Group of having too high an investment ratio.
The question now is how Conti will fill its ambitions in its largest division with life and when the Hanover-based company intends to reach its target range. The lucrative tire business sometimes had to co-finance the necessary investments in the automotive business. This displeases investors because the tire division alone would be able to achieve more and there is a lack of real cost synergies between the divisions.
Manager Magazin" recently reported that Supervisory Board Chairman Wolfgang Reitzle is therefore considering splitting up the company. According to the report, the future Conti could consist primarily of the tire business and the plastics technology division Contitech and significantly reduce dependencies on automotive supplies. CEO Setzer is said to be more and more in favor of this idea.
A first taste of "less car, more rubber" can already be seen at Contitech: The division with customers in the automotive industry is on the checklist for strategic options - i.e. sale, partnerships or spin-off. From now on, Contitech will focus primarily on other industrial customers. The division manufactures hoses and cables, among other things, but also supplies the mining industry with conveyor belts, for example.
Officially, the Group has been saying for some time that the management is taking a close look at the portfolio to see what it can do best itself and what might be better off in a different structure. Setzer is now likely to be more specific here. In any case, Conti is tinkering with its plant network due to the move away from combustion engines and advances in electronics. The Gifhorn site, for example, will gradually cease production by the end of 2027.
In December 2020, Setzer also set an organic growth rate of seven to eleven percent on average as a medium-term target for the automotive business. Software and technology for autonomous driving in particular should provide a boost. In 2019, Conti generated sales of 18.9 billion euros with the automotive supplier division, in 2020 only 15.3 billion euros due to the Covid crisis. So far this year, revenue of 20 to 21 billion euros has been targeted.
For the Group as a whole, Setzer had forecast medium-term growth of five to eight percent on average in 2020 and an operating profit margin of eight to eleven percent.
WHAT ANALYSTS SAY:
According to Romain Gourvil from Berenberg Bank, the conditions for a significant improvement in the automotive supply business are in place. After years of disappointing development in the division, he is becoming increasingly confident about the upward trend in the margin. Restructuring and more efficient investments as well as a decreasing investment intensity should help to compensate for inflationary pressure and lower global vehicle production.
According to the industry expert, the tailwind from price increases is running out in the tire business. However, the important tire replacement business should have reached the end of a painful phase of destocking among customers.
Following the latest quarterly figures, JPMorgan expert Jose Asumendi wrote that the biggest lever for the margin in automotive supply is a reduction in the investment ratio. He expects a two-stage recovery in profitability: initially, the margin should increase slightly over the next two years, but remain below four percent. More momentum is then expected from 2027.
The experts surveyed by the Bloomberg news agency expect the Conti Group's sales to grow from just under 41.9 billion euros this year to 47.4 billion euros in 2026 over the next three years. That would be an average annual increase of 4.2 percent. The operating result should increase from 2.5 billion euros this year to almost 4 billion euros in 2026, meaning that the operating margin would be around 8.4 percent in the future.
HOW THE SHARE IS DOING:
Conti is now miles away from its record high of 257 euros in January 2018, with a share price of around 70 euros. At that time, the drive division was still part of the Group, which now operates under the name Vitesco and is itself listed on the stock exchange. Even if investors mentally add the Vitesco share price, for which the automotive supplier Schaeffler is offering over 94 euros in its takeover bid, they still only come to just under 89 euros. In September 2021, shareholders received one Vitesco share for every five Conti shares at the spin-off.
Conti's market value has now melted down to a good 14 billion euros. At the beginning of 2018, it peaked at over 50 billion including Vitesco. In 2023, however, the share price has increased by a good quarter. This puts the Group in tenth place in the leading Dax index. However, the share was already worth around 112 euros in November 2021 after the Vitesco spin-off.
The largest shareholder is the Schaeffler industrial family, which has held around 46% of the shares since an unsuccessful takeover attempt in 2008 and therefore effectively has the say at Annual General Meetings./men/tav/mis