Continental lowers outlook on weak Europe despite higher Q2 earnings

Continental lowered its sales outlook and cut its margin forecast, citing weak demand in Europe.

The German supplier delivered better-than-expected results for the second quarter, a sign that cost cutting is paying off.

Profit margins improved across all divisions, with adjusted earnings before interest and taxes up 41 percent from last year to €704 million ($768 million), Continental said on Aug. 7. Adjusted EBIT margin rose to 7 percent, from 4.8 percent in the same period last year.

Still, Continental lowered its sales outlook and cut its margin forecast in the automotive sector to 2.5 to 3.5 percent from 3 to 4 percent.

The supplier said it sees group revenue of as much as €42.5 billion this year, down from as much as €44 billion, as automakers in Europe cut production. It sees the European car market contracting as much as 6 percent this year.

Analysts at Citi said the improvement in the second quarter was "positive" and that the adjusted 2024 outlook was "not as bad as feared."

"This could underpin promising early signs on 2025," Citi said, pointing to further cost-cutting measures expected next year.

Continental has been fighting to keep costs in check and restructure in the face of a tumbling market capitalization and weak auto demand. Its share price has halved since June 2021, taking its market value to €11.3 billion euros.

The company said on Aug. 5 that it may spin off its automotive unit, which employs about 100,000 people and makes products including brakes and automated driving systems.

The unit has been struggling with significant investment requirements amind falling demand as the industry shifts to electric and software-defined vehicles.

The spinoff would leave it with the more profitable tires and ContiTech industrial divisions that together account for roughly half of group sales. ContiTech makes products including conveyor belts, industrial hoses and specialized vehicle interiors.

The automotive division's margin climbed to 2.4 percent in the second quarter, from minus 0.5 percent in the same period last year, after Continental cut costs and renegotiated prices with customers.

Next steps for the auto division include increasing the share of business from Asian customers, achieving savings of more than €150 million this year and reducing production costs by 1 percent of sales by the end of 2025, according to an investor presentation published on Aug. 7.

Suppliers are under pressure as automakers temper production to adjust to slowing demand for electric vehicles. ZF Friedrichshafen plans to eliminate about a quarter of its workforce in Germany by 2028 to deal with the EV shift.

Reuters and Bloomberg contributed to this report