Investing.com -- Continental AG (ETR:CONG) on Wednesday said it expects its profitability to improve in the third quarter of 2024, despite facing challenges such as a decline in sales.
The German automotive and technology company is forecasting better profitability compared to the previous quarter, driven by cost-saving measures and operational efficiencies, even though global vehicle production remains weak.
In a stock exchange filing dated Wednesday the company said that global production of passenger cars and light trucks is expected to fall by more than 3% in the third quarter, with Europe and North America showing declines of over 18% and nearly 10% respectively.
China, however, is bucking the trend, with a modest growth of around 4%, further boosted by Chinese automakers gaining market share.
For Continental, whose business is heavily reliant on the European market, this regional slowdown means an overall production decline of more than 10%.
“We think ContiTech is likely to miss its margin target on weak light vehicle production and industrial demand while Tires is holding up well,” said analysts at Stifel in a note.
Management flagged that the third quarter has been weak, but this downturn was anticipated and factored into its guidance. While the North American market has been worse than expected, there has been some positive momentum from delayed product launches earlier in the year, which have contributed to operational improvements.
Additionally, Continental is making continuous progress in renegotiating pricing agreements, which is expected to help offset some of the cost pressures the company has faced.
A major component of Continental’s strategy for improving profitability has been its internal cost-saving measures.
These include fixed-cost reduction programs and initiatives to improve research and development efficiency. The company also anticipates further support from R&D reimbursements.
These factors, along with ongoing price negotiations, are expected to result in better profitability in the third quarter, even though overall sales are expected to decline.
Looking at the full year, Continental remains optimistic, expecting stronger sales volumes in the fourth quarter to help meet its financial targets.
The company continues to benefit from its fixed-cost savings initiatives and R&D reimbursements, which will be key to its performance in the latter half of the year.
Continental’s tire business, which has faced challenges from a weak global market for original equipment tires and increased competition from Asian players, saw mixed results in the third quarter.
While OE tire sales struggled, the replacement tire market showed satisfactory performance through July and August, with September expected to follow a similar trend. Commercial vehicle tire sales in Europe and North America have been weak, but replacement volumes are starting to stabilize.
Overall, Continental expects modest volume growth in its tire business, but flat sales prices and increasing raw material costs will present some headwinds in the fourth quarter.
In its ContiTech division, which supplies industrial products, the company continues to grapple with low demand, particularly in Europe and North America.
This weak demand is likely to push sales volumes down by a high single-digit percentage. As a result, ContiTech’s earnings before interest and taxes margin for the third quarter is expected to fall below the company’s full-year guidance.
“Overall, we cut our adj. EBIT sequence by c7%/8.5%/8% for 2024-2026E, which puts us +0.5%/0.5%/-3% relative to current VisibleAlpha consensus. Our price target decline to €76 (from €85) on lower estimates,” Stifel said.
Cost inflation remains a challenge for the division, although some positive developments in material procurement have helped to offset this.
On the cash flow front, Continental expects a positive outcome for the third quarter, buoyed by a €125 million cash inflow from Vitesco Technologies following an agreement on the allocation of investigation costs.
Working capital improvements are also anticipated. However, restructuring measures, particularly in the Automotive sector, are expected to drive cash outflows in the second half of the year.