UPDATE 2-Continental hikes margin outlook as car demand recovers

Thu Jul 31, 2014 8:45am EDT

* Q2 adj EBIT up 2.6 pct to 1 bln euros, in line with f'casts

* Targets EBIT margin about 11 pct vs about 10.5 pct in March

* Says lower raw material costs help lift profits

* EBIT growth outpaces sales thanks to cuts, rubber sales

* CFO says no large acquisitions planned in coming months (Adds comments from CFO on Russia, price pressure, M&A)

By Andreas Cremer and Jan Schwartz

BERLIN, July 31 (Reuters) - German auto parts and tyre maker Continental AG raised its full-year profit margin forecast for the second time in five months, after a recovering European car market drove a rise in second-quarter earnings.

Continental is benefiting from a push by carmakers to use more driver-assistance systems and emission-cutting technologies as well as a rebound in demand for cars in Europe.

In the second quarter of 2014, demand for passenger cars in Europe rose 4 percent, figures from Germany's VDA automotive industry association showed.

Continental is now targeting a margin of about 11 percent, on the basis of adjusted earnings before interest and tax (EBIT), after raising guidance to at least 10.5 percent in March from a previous 10 percent, the Hanover-based company said on Thursday.

But analysts said the new guidance may not reflect the company's full earnings potential.

"Conti is typically regarded as being conservative in its guidance," analysts at Citigroup said in a note, adding that the market expected a full-year operating margin of 11.5 percent. Citigroup has a "buy" rating on Continental shares.

Group adjusted EBIT rose 2.6 percent in the second quarter to 1 billion euros, in line with the consensus forecast in a Reuters poll of analysts.

EBIT growth outpaced sales, which fell 0.15 percent during the quarter, thanks to lower raw material costs and stronger profitability at its rubber division.

SHIFT IN MOMENTUM

Chief Financial Officer Wolfgang Schaefer said Continental had not received demands for price cuts from Daimler, Volkswagen and BMW, which have intensified cost cuts amid weakening emerging economies, slowing growth in China and a sputtering German home market.

But a shift in economic momentum in emerging markets, exacerbated by tensions in the Middle East, Russia and Ukraine, would hit sales and intensify currency headwinds, the company said.

Instead of exchange rate effects of 700 million euros, Continental now expects a negative effect of about 1 billion euros ($1.3 billion), limiting full-year profit to about 34.5 billion euros, compared with March guidance of about 35 billion.

Schaefer said he expected demand in Russia to remain subdued in coming months, adding that Russia accounted for less than 1 percent of Continental's revenue.

Shares in Continental were trading 1.6 percent lower at 162.1 euros by 1200 GMT, underperforming Germany's benchmark DAX index which was down 1.2 percent.

Continental also said it acquired the remaining 50 percent of exhaust technology specialist Emitec from Britain's GKN , allowing it to offer complete exhaust-gas treatment systems.

The company gave no financial details of the deal, which comes after Continental bought U.S. rubber firm Veyance Technologies for 1.4 billion euros in February.

Schaefer on Thursday downplayed the prospect of further deals to spur growth. "Do not expect us to announce another large acquisition in the coming months," he told Reuters.

($1 = 0.7466 Euros) (Additional reporting by Edward Taylor; Editing by Jonathan Gould and Tom Pfeiffer)

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