2018E as at August 22, 2018
2018E as at August 22, 2018
Revision of Guidance for Fiscal 2018
Hanover, August 22, 2018. Lowered sales expectations, cost increases and warranty claims are decreasing the adjusted operating result (adjusted EBIT) in the third quarter of 2018. At present, sales of about €11 billion and an adjusted operating result (adjusted EBIT) of more than €700 million are expected for the corporation for the period from July 1 to September 30, 2018.
The aforementioned factors will also impact the fourth quarter, making it necessary to revise the guidance for 2018 as follows:
· Consolidated sales this year will amount to approximately €46 billion before exchange-rate effects. We previously expected a figure of around €47 billion. We currently estimate that exchange-rate effects will negatively impact sales by about €1 billion in 2018. Previously the impact was estimated at more than €1 billion. After this revision, the adjusted operating result (adjusted EBIT) will be more than 9%. More than 10% was previously forecast.
· In the Automotive Group, we expect to achieve sales of approximately €28 billion before negative exchange-rate effects, instead of about €28.5 billion as had been previously forecast. We currently estimate that exchange-rate effects will negatively impact sales in the Automotive Group by about €0.5 billion in 2018. The adjusted EBIT margin for the Automotive Group will be about 7% in 2018. Previously, around 8.5% had been forecast. Warranty claims will reduce the reported and the adjusted EBIT by a total of €150 million.
· In the Rubber Group, we expect to achieve sales of around €18 billion before negative exchange-rate effects, instead of about €18.5 billion as was previously forecast. We estimate that exchange-rate effects will negatively impact sales in the Rubber Group by about €0.5 billion in 2018. The adjusted EBIT margin for the Rubber Group will be more than 13% in 2018. More than 14% was previously forecast.
· We are reducing the guidance for free cash flow before acquisitions and before the outflow for the funding of the U.S. pension plans from about €2 billion to around €1.6 billion in 2018.
· The other elements of the guidance issued on August 2, 2018, remain unchanged, namely the impact from higher raw material costs amounting to more than €50 million, the negative financial result of less than €180 million, the tax rate of approximately 25%, the negative special effects of €50 million, the amortization from purchase price allocations of approximately €180 million, and the capital expenditure ratio before financial investments of around 7%.
Furthermore, for Powertrain the figures estimated in April 2017 for 2019 sales (€10 billion) and EBIT (€850 million) will no longer be achieved. They will be updated and revised in the course of the carve out of the division.
The financial report for the first nine months of 2018 will be released on November 8, 2018.
“Adjusted EBIT” and “EBIT” are defined in the Glossary of Financial Terms on pages 38 and 39 of the 2017 Annual Report, which is available at www.continental-ir.com.
As announced on April 18, 2018, exchange-rate and inventoryvaluation effects impacted earnings by around €150 million in the first half of 2018. This related mainly to the Tire division.
Due to these effects, the forecast for the Rubber Group’s adjusted EBIT margin in 2018 was lowered from around 15% to more than 14% on April 18, 2018. For the corporation, this also resulted in the forecast for the adjusted EBIT margin being lowered from around 10.5% to more than 10%.
On July 18, 2018, Continental announced the realignment of the corporate structure. As part of this reorganization, the Powertrain division will be transformed into an independent group of legal entities by the beginning of 2019. This transformation will lead to estimated operational costs of approximately €350 million. The majority of these costs will be incurred in 2018 and 2019. In addition, this is expected to result in negative tax effects totaling about €100 million, which will be incurred primarily in 2019. This has no effect on the outlook for the Continental Corporation’s adjusted EBIT margin for 2018.
In the Interior division, we expect a positive special effect of about €160 million, which is attributable to the founding of OSRAM Continental GmbH.
Owing to the change in U.S. tax laws, it was possible for the corporation to fund most of the plan assets for pensions in the U.S.A. while benefiting from tax breaks. This will result in a one-off outflow of liquidity of about €165 million in 2018, including the associated tax refunds. The pension obligations reported for the corporation will therefore be reduced and the corresponding plans nearly fully funded.
Based on our market assumptions and provided that exchange rates remain constant in comparison to 2017, we still anticipate an increase in the Rubber Group’s sales to around €18.5 billion and an adjusted EBIT margin of more than 14%. Under the same conditions, for the Automotive Group we still anticipate sales to increase to approximately €28.5 billion with an adjusted EBIT margin of around 8.5%
This still results in sales of around €47 billion for the Continental Corporation for 2018, assuming constant exchange rates in comparison to 2017. In the first half of 2018, exchange-rate effects had a negative impact on sales of €932 million. If the current level of exchange rates persists until the end of the year, this could have a negative effect on consolidated sales of more than €1 billion.
For the Rubber Group, every U.S. $10 increase in the average price of crude oil equates to a negative annual gross effect on EBIT of around U.S. $50 million. The average price of North Sea Brent was around U.S. $54 in 2017 and U.S. $71 in the first half of 2018. As a result, we expect costs for carbon black and other chemicals to increase by more than 10% compared to the average prices in 2017. For butadiene, a base material for synthetic rubber, we are increasing our forecast for the average price for the year from U.S. $1.51 per kilogram to U.S. $1.60 per kilogram. The average price for the year for natural rubber is currently expected to be below the previous year’s level (2017: U.S. $1.67 per kilogram for TSR 20). We are lowering our forecast from U.S. $1.60 per kilogram to U.S. $1.44 per kilogram. For 2018 on the whole, we anticipate a negative impact of more than €50 million in the Rubber Group due to the price increase for oil and rising prices for synthetic rubber, after we had previously expected effects from raw-material price trends to be nearly balanced for the Rubber Group.
In 2018, we still expect the negative financial result before effects from currency translation, effects from changes in the fair value of derivative instruments, and other valuation effects to be less than €180 million. Owing in part to the tax breaks from the funding of the U.S. pension plans in 2018, the tax rate will be approximately 25% (after previous assumption of under 30%).
Due to these effects (current negative special effects in an amount of €100 million, carve-out costs for Powertrain, and a positive special effect for Interior), we expect negative special effects totaling €50 million for the corporation in 2018. Amortization from purchase price allocations, resulting primarily from the acquisitions of Veyance Technologies (acquired in 2015), Elektrobit Automotive (acquired in 2015), and the Hornschuch Group (acquired in 2017), is still expected to total approximately €180 million and to affect mainly the ContiTech and Interior divisions.
In fiscal 2018, the capital expenditure ratio before financial investments is still forecast to increase to around 7% of sales. Approximately 60% of capital expenditure will be attributable to the Automotive Group and 40% to the Rubber Group. For 2018, we are planning on free cash flow of approximately €2 billion before acquisitions and before the outflow for the funding of the U.S. pension plans.
In 2015, Continental compiled a medium-term forecast in addition to the targets for the current year. This comprises the corporate strategy, the incoming orders in the Automotive Group and the mediumterm targets of the Rubber Group. Accordingly, we want to generate sales of more than €50 billion and a return on capital employed (ROCE) of at least 20% in 2020. These medium-term targets were confirmed again after the review in 2017.