Continental AG cuts outlook on higher costs, warranty claims

FRANKFURT (Reuters) - German automotive supplier Continental AG CONG.DE cut its 2018 sales and margin guidance, citing lower revenues, higher costs for developing hybrid and electric car technologies, and unspecified warranty claims, sending its shares down 14 percent.

FILE PHOTO: Flags of German tyre company Continental are seen before the annual news conference in Hanover, Germany March 2, 2017. REUTERS/Fabian Bimmer/File Photo

The Hannover, Germany-based company said on Wednesday a more pronounced customer shift away from sedans, weaker demand for tyres, and problems ramping up production of complex 48 volt and hybrid system vehicles, led to the downgrades.

“There was a strong underestimation of the production methods needed to produce hybrid electric vehicles and 48 volt systems,” Chief Financial Officer Wolfgang Schaefer said.

Analysts at Evercore ISI said there did not appear to be a broader read-across for the sector.

“Conti’s guide down looks largely company specific,” Chris McNally said in a note.

But the warning comes as Daimler DAIGn.DE and Volkswagen VOWG_p.DE, as well as rival car supplier Valeo VLOF.PA, also cut profit expectations, blaming tariffs and the onset of new emissions tests for denting demand.

Schaefer said a lack of feedback from Continental’s customers made it hard for the auto supplier to determine whether the slump in demand was tied to the introduction of the new Worldwide Harmonised Light Vehicle Test Procedure (WLTP).

Continental said it expected consolidated sales of about 46 billion euros (£41.6 billion) and an adjusted operating margin of more than 9 percent this year.

Its shares dropped to a nine-year low as the company had previously forecast consolidated sales of about 47 billion euros and an adjusted operating margin of more than 10 percent.

The firm is due to publish third-quarter results on Nov. 8.

On Aug. 2, Continental said it expected a strong final quarter in 2018 based on guidance that had already been lowered in May.

The company said its original equipment business had fallen short of expectations, especially in Europe and China in the Automotive divisions, as well as in the ContiTech division where costs rose due to the transition to hybrid and electric vehicles.

Weak demand in the tyre market has also led to lower sales expectations, it said.

The adjusted earnings before interest, tax and depreciation (EBIT) margin for the Automotive Group will be about 7 percent in 2018, rather than a forecast 8.5 percent, Continental said.

The auto industry is struggling to adapt vehicles to meet the new WLTP procedure, which takes effect from September.

The new WLTP standards have already caused a slowdown in sales for carmakers including Volkswagen, which has rented space to store some of the 250,000 vehicles that may be caught up in testing delays.

In July, Continental announced a broad restructuring and said it would list its Powertrain unit as early as mid-2019 in response to far-reaching shifts in the auto industry towards electric and self-driving technologies.

($1 = 0.8744 euros)

Additional reporting by Christoph Steitz; Editing by Kirsten Donovan and Mark Potter