FRANKFURT -- German automotive supplier Continental AG scored a forecast-beating 21.4 percent rise in first-half operating profit and predicted robust 2004 results, powered by brisk demand for its tires and electronics.
The world's fourth-largest tire maker said on Monday that earnings before interest and taxes (EBIT) increased to 484.4 million euros ($583.8 million), compared with 399.1 million a year earlier and a Reuters poll forecasting 424 million euros.
"All divisions exceeded our second-quarter profitability estimates," Morgan Stanley said, keeping its "overweight" rating on the stock.
Continental said operating profit may grow in 2004 despite an expected 120 million euros in costs to halt output at its inefficient U.S. tyre plant in Mayfield, Kentucky. It had previously forecast growth only excluding such special items.
It reaffirmed that group sales should increase as well this year at a pace similar to the first half.
"We have thus once again demonstrated our powerful ability to grow in a phase when the global automotive economy continues to be rather sluggish," Chief Executive Manfred Wennemer said in a statement.
The company dismissed market worries that its relatively cautious guidance indicated it could not maintain the strong performance into the second half.
"There is no specific reason why the second half of the year should be more difficult than the first half," Chief Financial Officer Alan Hippe told a conference call with analysts.
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Although peers such as Michelin have warned that a rise in raw material costs in the second half could outpace prices, Continental said tire price hikes should at least offset a hit of up to 120 million euros from higher commodity costs in 2004.
Hippe also cheered stockholders by saying the group was considering returning some of its spare cash to investors in the form of higher dividends or a share buyback if Continental could not find a value-enhancing investment.
Underlying profitability at its core passenger tire and CAS automotive systems divisions showed strong gains.
CAS posted a record operating margin of 9.8 percent in the second quarter, boosted by robust growth in sales of its high-margin electronic stability programme (ESP) systems, which help to prevent rollovers.
First-half group operating profit was hit, however, by a 98.9 million euro charge for suspending tyre production at the Mayfield plant, and Continental expected to book further restructuring charges of 10.5 million euros in each of the next two quarters.
Group net income improved 13.3 percent to 221.4 million euros, while group sales rose nine percent to 6.16 billion.
Excluding the charge, second-quarter operating profit rose 56 percent to 336.6 million euros, while sales rose 12 percent to 3.17 billion, beating the company's own guidance.
Wennemer had told Reuters in mid-June that second-quarter growth would be comparable to the 5.8 percent rise in sales and 34.5 percent operating profit gain in the first three months of this year.
Operating profit at Michelin, Europe's biggest tire company, jumped 20 percent in the first half, prompting the company last week to reaffirm guidance for visible improvement in full-year profitability, but it warned that demand would slow in the second half as raw materials costs rise.