Continental promises stronger second half as cost-cutting measures sink in

By Victoria Waldersee and Andrey Sychev

BERLIN (Reuters) -Continental delivered better-than-expected results on Wednesday and said the second half of the year would be even stronger as cost-cutting and restructuring measures underway at the German car parts supplier began to pay off.

The company lowered its sales outlook to 40 billion to 42 billion euros ($45.87 billion) and said it expected to land at the lower end of that corridor but anticipated stronger margins in the quarters ahead because of planned costs cuts of around 100 million euros.

Still, executives warned investors of slower demand weighing on sales prospects, with Chief Financial Officer Olaf Schick describing the weak market in Europe as "a bit dramatic" and saying China was growing slower than previously thought.

The company was looking to boost the proportion of its sales in China to local Chinese customers, executives said, in line with a wider industry trend of fencing off business in the country to shield against possible trade barriers.

"PROMISING EARLY SIGNS"

The company's profit margins improved across all divisions, with adjusted earnings before interest and taxes up 40.6% from last year to 704 million euros ($768.35 million).

Still, Continental lowered its sales outlook and cut its margin forecast in the automotive sector to 2.5-3.5% from 3-4% previously, citing weak demand in Europe.

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.

The shares were up 5.3% from Tuesday's close, topping Germany's blue-chip DAX index.

"RAYS OF HOPE"

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

Wednesday's results were a "mix of some rays of hope", analysts at Bernstein Research said, pointing to high order intake in the automotive division.

On Monday, Continental said it was considering a spin-off and subsequent listing of its automotive unit on the Frankfurt stock exchange, with an executive board decision expected in the fourth quarter.

The move would effectively halve Continental's revenue and carve out the automotive part of its tyre and plastics business ContiTech.

For months, the company has hinted at major changes in the division, whose portfolio ranges from brakes to sensors and assistance systems, after struggling for several years with low profitability.

However, CEO Nikolai Setzer had said at a capital markets day in December that the automotive business would stay within the company, and that only the user experience unit was being made independent.

($1 = 0.9166 euros)

(Reporting by Andrey Sychev and Victoria Waldersee; Editing by Rachel More, Clarence Fernandez, Sonali Paul and Sharon Singleton)