Continental is evaluating asset sales including a potential sell-off or change of ownership for its user experience unit, as the supplier seeks to turn around its key automotive unit.
The company will carve out the unit, which makes instrument panels and displays for vehicles. This will open up the options of a potential sale, a joint venture or an initial public offering.
Additional measures announced at a capital markets day on Monday include shrinking the number of the auto unit’s 82 research sites to help cut R&D expenses to 11 percent of sales in two to three years and less than 10 percent in three to five years, from an expected 12 percent this year.
Continental is also exploring options for how to restructure further business activities in the automotive division worth 1.4 billion euros ($1.52 billion) in consolidated sales this fiscal year, it said without providing details.
The moves will help the auto unit "become better, faster and more agile," Chief Financial Officer Katja Garcia Vila said.
Continental's main businesses are making tires, the automotive division, which comprises user experience as well as software safety features and autonomous driving technology, and a third arm producing digital technologies for autos and other sectors called ContiTech.
'Best owner'
The autos division will remain within Continental, the supplier's CEO Nikolai Setzer said on Monday amid speculation about a wider restructuring at the supplier. A review of the unit revealed that Continental is the best owner for the business as the industry shifts to EVs, Setzer said.
"The automotive business is with us, it stays with us," he said during a call with reporters. "We see strong growth potential, strong upside potential," he said. The unit is "a strong pillar and contributor to the company," Setzer said.
UBS analysts had flagged the auto division’s high investments ahead of Monday's meeting and said divestments would make Continental leaner and probably more profitable.
Bloomberg previously reported that Continental is weighing selling its user experience and autonomous mobility businesses.
Tightened targets
Also on Monday, Continental said it was targeting an 8 to 11 percent adjusted margin on earnings before interest and taxes (EBIT) and 44 billion to 48 billion euros ($47.8 to $52.2 billion) in total sales in the next 2 to 3 years, rising to 51 billion to 56 billion euros in 3-5 years. The automotive unit is supposed to provide as much as half of that.
Its 2023 outlook forecasts an adjusted EBIT margin of 5.5 to 6.5 percent on sales of 41 billion to 43 billion euros.
Continental said it will likely end the year with just below 7 billion euros in sales at ContiTech; around 14 billion euros in tires; and 20 billion in its automotive division. The company expects an adjusted earnings margin close to 7 percent at ContiTech; at or above 13 percent in the tires division; and near 2 percent in the automotive division.
Job cuts, factory closure
Continental previously announced thousands of job cuts to reduce expenses by around 400 million euros annually starting in 2025.
The supplier has been facing higher expenses for materials, labor, energy and logistics in its home market Germany, and in July announced plans to exit one of its factories there.
It’s also working through investigations about its role in the 2015 diesel-emissions cheating scandal, the fallout from a cyberattack and quality control failures in its industrial-hoses unit.
Any major strategy pivot will require the backing of the powerful billionaire Schaeffler family that is currently reshaping its auto-parts empire. The clan behind Continental and Schaeffler is trying to buy the half of Vitesco Technologies Group it does not already own in a 3.8-billion-euro deal.
Continental, whose market value has shrunk some 40 percent in the past five years, is among German industry stalwarts facing a wrenching transition to a cleaner economy.
The changes are particularly painful for the country’s automotive sector, which thrived because it perfected making combustion-engine cars, with hundreds of local parts makers supplying gearboxes, fuel injectors and crankshafts.
Optimism
There is reason for optimism. Continental’s shares have gained 25 percent this year on improving supply chains and initial headway fixing the automotive unit.
In the past quarter, the company reported positive free-cash flow and raised the outlook for operating profitability at the tires division. That business has long been a reliable generator of cash and profit, sparking calls that management should focus on it for the future.
The company has reported negative free cash flow in four of the past six quarters.
Continental ranks ninth on the Automotive News Europe list of top 100 global suppliers, with automotive sales of $25.4 billion in 2022.
Reuters and Bloomberg contributed to this report
