Continental’s 2008 net loss of EUR1.1bn was as good as could be expected given the harsh trading environment towards the end of the year, but debt burden is likely to become an increasingly pressing issue, an analyst has said.
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The net loss of EUR1.12bn for the full year in 2008, as a result of impairment charges, compared with a net profit of EUR1.02bn in 2007.
Global Insight analyst Tim Urquhart said in a note the company claimed the loss was due to the writedown relating to the powertrain and interior divisions, and the harsh market environment the company experienced in the fourth quarter. It also pledged to increase synergies and cooperation with its new owners, Schaeffler.
“The financial results were as to be expected given the harsh environment experienced in the global automotive industry towards the end of 2008,” he added.
“The company says that paying off debt is now a priority, a positive statement given the joint debt of around EUR21bn Continental and Schaeffler have as a result of leveraged buy-outs.”
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By GlobalDataContinental reported that it had booked the EUR1.23bn as a result of “the massively altered market conditions in the automotive industry, we are also making allowances for the fact that business in parts of the automotive group did not develop entirely as we originally expected following the acquisition of Siemens VDO.”
The company’s consolidated sales rose 45.8% year-on-year to 24,238.7bn, up from EUR16,619.4bn in 2007, with this sharp increase reflecting the acquisition of Siemens VDO that year.
The company also posted EBIT of EUR1.837bn euro, a 0.2% increase on 2007.
Urquhart noted the company has said that it also made inroads into paying off the debt that was incurred as a result of its leverage buy-out of Siemens VDO, with Continental reducing its indebtedness during the year by EUR373m to EUR10.483bn.
“This still leaves Continental and its new owners Schaeffler with a combined debt burden of around EUR21bn as a result of Continental’s buy-out of Siemens VDO and Schaeffler’s acquisition of Continental itself,” he wrote.
He said new owner Schaeffler believes there are definite synergies between the two companies as a result of Schaeffler’s expertise in bearings and mechanical engineering and Continental’s emphasis on electronics and automotive component modules.
“However, both companies need to find a way of combining their strengths quickly in order to ward off the worst effects of the current market and maintain cash flows in order to reduce indebtedness.”
Schaeffler currently controls more than 90% of the shares in Continental, although a shareholders agreement limits the smaller, privately owned company to a 49.9% share in Continental, with the rest being parked at the banks that underwrote Schaeffler’s leveraged takeover.
“Both companies have a combined level of debt of around EUR21bn, which seriously threatens the long-term sustainability of the business in an environment where automotive sales are going down and Continental’s share price has been decimated following the Schaeffler takeover.
Continental’s shares are now trading at around EUR13 in comparison to the EUR75 that Schaeffler paid in its successful takeover bid.
“Schaeffler has asked the German government for up to EUR4bn in credit guarantees and the banks may force the company’s owners, Maria-Elisabeth Schaeffler and her son Georg, to hand over control. This is the environment in which Continental is currently operating.”
Reducing debt is now Continental’s top priority, and the company has introduced a major cost saving initiative in order to reduces expenditure and attempt to maintain margins so it can increase earnings to pay down further debt. As a result the company is planning cuts to capital expenditure and research and development (R&D), although it must hope that these cuts do not undermine the competitiveness of its products, Urquhart said.
“The company is also looking to reschedule a EUR3.5bn tranche of debt that is due for repayment in August 2010, and initial talks have been positive, although getting significant concessions in the current environment will not be easy.
“However, Continental is also realistic about the current market environment and the company is forecasting a slump in first half sales. Continental is also not ruling out what it describes as “very large deviations” from the company’s 2008 financial performance which, in plain language, can be read as significantly increased losses for the full-year 2009.
“As a result it appears inevitable that Continental will have to engage in significant restructuring in 2009, which is likely to include large-scale job losses and plant closures as it attempts to maintain profitability in order to maintain debt repayment.”
