Monday, February 26

Continental Under Pressure to Find EV Path After Stumbles

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(Bloomberg) — Continental AG will face investors Monday looking for convincing signs that the company is on course to turn around its struggling automotive unit.

The German company has announced thousands of job cuts and may pursue asset sales to shore up flagging returns at its biggest division that’s trailing peers. At an investor meeting in Hanover, Continental is under pressure to make a break from various missteps that have wilted its market value by 40% in the past five years.

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“The profitability of the autos business is the key issue,” said Stifel analyst Alexander Wahl, adding that his clients also expect updates from Continental executives on possible divestments and future margins. “If they stay very opaque, I’m not sure how well that will sit with investors.”

Continental 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. Now that the battery is taking over, their “Vorsprung durch Technik” is evaporating.

Continental Chief Executive Officer Nikolai Setzer is trying to stem a slide in profitability — the company reported negative free cash flow in four of the past six quarters — with cost savings and portfolio changes. He’s weighing selling automotive assets including the autonomous mobility business, Bloomberg reported in October.

Any strategy pivot will require the backing of the powerful billionaire Schaeffler family that’s currently reshaping its auto-parts empire. The clan behind Continental and Schaeffler AG is trying to buy the half of Vitesco Technologies Group AG it doesn’t already own in a €3.8 billion deal.

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High upfront investments needed in areas like software and automated driving are dragging on Continental’s automotive division, UBS analysts led by David Lesne said in a note last month. They also cited a lack of visibility on future returns given intensifying competition.

Continental targets a 6% to 8% adjusted Ebit margin for the unit in the medium term, from -0.2% last year. The company will have to announce more streamlining at Monday’s event to reach that goal, Bloomberg Intelligence analysts Gillian Davis and Michael Dean said in a note.

The manufacturer 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.

Read more: Continental to Exit Plant With 900 Workers Over High Costs

There is reason for optimism. Continental’s shares have gained roughly a quarter 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.

Selling investment-heavy assets like the autonomous driving or user experience business — which produces displays for car interiors — would make Continental leaner and probably more profitable, the UBS analysts said.

The company’s investor day, they said, should not just confirm financial targets but provide “further details on how we get there.”

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