Continental marginally downgrades growth outlook for fiscal 2018

German technology major Continental today revised its guidance for fiscal 2018, on the back of lower sales expectations, cost increases and warranty claims. However, despite these effects, the technology company continues to expect to grow faster than its relevant markets.

The revised sales guidance for fiscal 2018 including all expected negative exchange-rate effects amounts to about €45 billion (Rs 343,980 crore). In comparison to sales in 2017, it expects organic growth of more than 4 percent is anticipated, and the company is expecting an adjusted EBIT margin of more than 9 percent in 2018.

As per Continental the lower sales guidance for this year is a result primarily because of two developments. First, the original equipment business have fallen short of expectations, especially in Europe and China in the Automotive divisions, as well as in the ContiTech division. Second, weak demand in the tyre markets in both regions has led to lower sales expectations.

The development costs rose for the company’s Automotive Group due to the high order intake, which reached a record level of more than €20 billion (Rs 152,880 crore) in the first half of 2018.

The additional burdens resulted from start-up costs in the ContiTech division as well as from higher costs in the powertrain sector due to the transition to products and systems for hybrid and electric vehicles. The company has responded by initiating measures to cut production costs. Furthermore, it is adapting its planned investments to the lower sales expectations.

For the third quarter, the company is currently expecting sales of about €11 billion (Rs 84,084 crore) and an adjusted operating result (adjusted EBIT) of more than €700 million (Rs 5,350.8 crore) for the corporation as a whole. The fourth quarter will also be affected by these factors.

The company’s guidance for fiscal 2018 has been changed as follows:

Consolidated sales: about €45 billion (Rs343,980 crore) (previously: about €46 billion or Rs 351,624 crore). This includes negative exchange-rate effects of about €1 billion (Rs 7,644 crore). Sales guidance not including the negative exchange-rate effects: about €46 billion instead of about €47 billion (Rs 359,268 crore) as previously forecast.

Adjusted EBIT margin: more than 9 percent (previously: more than 10 percent)

Free cash flow before acquisitions (as well as before the outflow for the funding of the U.S. pension plans): about €1.6 billion (Rs 12,230 crore) (previously: about €2 billion or Rs 15,288 crore)

Sales in the Automotive Group: about €27.5 billion (Rs 210,210 crore) (previously: about €28 billion or Rs 214,032 crore). This includes negative exchange-rate effects of about €500 million (Rs 3,822 crore). Sales guidance not including the negative exchange-rate effects: about €28 billion instead of about €28.5 billion (Rs 217,854 crore) as previously forecast.

The adjusted EBIT margin of the Automotive Group is about 7 percent (previously: about 8.5 percent). Warranty claims will reduce the reported and the adjusted EBIT by a total of €150 million (Rs 1,147 crore).

Sales in the Rubber Group: about €17.5 billion (Rs 133,770 crore) (previously: about €18 billion or Rs 137,592 crore). This includes negative exchange-rate effects of about €500 million. Sales guidance not including the negative exchange-rate effects: about €18 billion instead of about €18.5 billion (Rs 141,414 crore) as previously forecasted.

The adjusted EBIT margin of the Rubber Group: more than 13 percent (previously: more than 14 percent).