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Continental AG Aiming for Annual Sales of EUR25 Billion


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HANOVER – October 30, 2008: Continental AG, Hanover, is aiming for sales of EUR25 billion for fiscal 2008 and will reduce net indebtedness as planned. On Thursday in Hanover, the international automotive supplier also confirmed its goal of an EBIT margin of about 8.5% as corrected on September 13. This margin figure is before the adjustment for amortization and depreciation resulting from the Siemens VDO purchase price allocation as well as restructuring and integration expense. The fourth quarter, however, holds uncertainties due to the declining economy. In response to the substantial deterioration in the market situation, the company has initiated an extensive cost-saving program in addition to ongoing restructuring projects.

"In the first half of the year, the weak market situation in North America was compensated by the favorable economic conditions in Europe and Asia. In the last quarter, however, there were drastic signs of slowing in all markets, whereby the dramatic declines in Europe in particular have negatively affected us. This trend will probably become even stronger, continuing far into 2009," said Continental Executive Board chairman Dr. Karl-Thomas Neumann.

"With its high efficiency and a strategy of continuous restructuring processes, Continental is well prepared for the difficult challenges ahead. Nonetheless, we have initiated additional programs to cut costs. For instance, in the Automotive Group we will reduce the number of temporary workers, greatly lengthen the plant holiday shutdown period at the end of the year by using the existing work time accounts, and, depending on the location and the order situation, deviate downwards from the 5-day-week until further notice. Furthermore, we are putting investments that are not urgent on hold," said Dr. Neumann.

Consolidated sales for the first nine months of 2008 rose by 60.6% to €19,146.0 million (Q1-Q3 2007: €11,920.5 million). This increase resulted both from organic growth and from changes in the scope of consolidation, especially from the acquisition of Siemens VDO. Exchange rate changes had an offsetting effect.

Consolidated EBIT before amortization of intangible assets from PPA and before depreciation of tangible assets from PPA (only Siemens VDO) was up in the first nine months of 2008 compared with the same period of last year by €138.3 million, or 10.2%, to €1,494.9 million (Q1-Q3 2007: €1,356.6 million), and was equivalent to 7.8% (Q1-Q3 2007: 11.4%) of sales. Before special effects, it increased by €167.2 million or 11.9% to €1,569.6 million (Q1-Q3 2007: €1,402.4 million). The adjusted return on sales amounted to 8.2% (Q1-Q3 2007: 11.8%). EBIT was down €262.5 million on the previous year to €1,075.1 million, a decrease of 19.6% (Q1-Q3 2007: €1,337.6 million). The return on sales fell to 5.6% (Q1-Q3 2007: 11.2%).

Net income attributable to the shareholders of the parent was down 56.0% to €363.5 million (Q1-Q3 2007: €825.2 million), due mainly to the increased interest expense, with earnings per share lower at €2.24 (Q1-Q3 2007: €5.63).

The increase in raw material prices had a negative impact of approximately €205 million on the Corporation in the first nine months of 2008 compared with the prices for the first nine months of 2007. This affected primarily the Rubber Group.

Looking at the banking crisis, CFO Dr. Alan Hippe, vice chairman of the Executive Board and head of the Rubber Group, stressed the solid financial position of Continental. "As of September 30, 2008, Continental had at its disposal liquidity reserves of nearly €1 billion as well as unused approved credit lines in volumes exceeding €2 billion."

He also pointed out that in the third quarter of 2008, conversion rights were exercised extensively under the convertible bond issued in May 2004 for €400 million. "The outstanding amount decreased from €377.1 million to €28.1 million, contributing to a reduction in net indebtedness. We paid the bond back in full on October 23, 2008. This, together with our cash flow, will enable us to substantially reduce our net indebtedness in 2008 as planned."

At €10,807.1 million, the net indebtedness of the Corporation on September 30, 2008 was €49.3 million lower than on December 31, 2007. The gearing ratio amounted to 146.0%.

In the first three quarters of 2008, free cash flow stood at €123.8 million (Q1-Q3 2007: €61.6 million), up €62.2 million on the same period of 2007. At -€509.7 million, net interest expense increased by €446.1 million in the first nine months of 2008 compared with the same period of last year (Q1-Q3 2007: -€63.6 million). Interest expense rose year-on-year by €424.2 million to €566.5 million. In addition, exchange rate effects totaling €34.8 million, for the most part with no effect on cash, had a negative impact in 2008.

Compared with September 30, 2007, research and development expenses increased by 110.1% to €1,212.5 million (Q1-Q3 2007: €577.0 million), corresponding to 6.3% of sales (Q1-Q3 2007: 4.8%). €1,041.3 million of that sum was attributable to the Automotive Group (Q1-Q3 2007: €420.3 million), corresponding to 8.7% (Q1-Q3 2007: 8.4%) of sales. The Rubber Group accounted for €171.2 million (Q1-Q3 2007: €156.7 million), corresponding to 2.4% (Q1-Q3 2007: 2.3%) of sales.

In the first three quarters of 2008, €1,123.1 million (Q1-Q3 2007: €560.4 million) was invested in property, plant, equipment and software, corresponding to a capital expenditure ratio after nine months of 5.9% (Q1-Q3 2007: 4.7%). €763.3 million (Q1-Q3 2007: €272.4 million) of this sum, corresponding to 6.4% (Q1-Q3 2007: 5.4%) of sales, was attributable to the Automotive Group. The Rubber Group invested €348.5 million (Q1-Q3 2007: €286.5 million), which is equivalent to 4.9% (Q1-Q3 2007: 4.1%) of sales.

As of September 30, 2008, Continental's employees numbered 146,496, a decrease of 5,158 compared with the end of 2007. The sale of the electric motors activities reduced the workforce by 4,557.

When looking at the core business areas, Executive Board chairman Dr. Neumann pointed out that in the Automotive Group, which he heads, special effects including restructuring expenses in the Interior division had reduced earnings by more than €100 million in the first nine months, compared with about €24 million in the same period of 2007. Dr. Neumann also explained that, under the motto "Empowered", there is an extensive program running in the Powertrain division: "With this program, we are solving entirely insufficient cost structures, production matters as well as problems in research and development that go much deeper than we initially thought."

For the Rubber Group which he heads, the vice chairman of the Executive Board Dr. Hippe stressed that without the raw material increases in the first nine months, the group would have achieved an EBIT of some €1 billion and would have thus clearly outperformed 2007. "Despite the high costs for raw materials, we achieved an EBIT margin of 11.1% in the period from January to September. This clearly shows that in the Rubber Group, we have very firm footing. Nonetheless, we will look into further cost cutting measures and scrutinize all of our investments. It is evident that this newly formed corporate group with its self contained position, supported primarily by its business with the end customer, is well equipped for the difficult challenges ahead and will create value in the long term." In 2008, earnings of the Rubber Group will be impacted by greater raw material costs of about €270 million compared with 2007.