FRANKFURT -- German automotive supplier Continental AG surprised investors with robust second-quarter profits and kept its full-year forecast despite news that the U.S. tire business would not meet its profit target this year.
The world's fourth-largest tire maker has long been one of Europe's best-performing auto stocks, as it benefited from shifting production to low-cost countries while riding a growing wave of demand for high-margin electronics such as the ESP stability program, which helps prevent rollovers.
"We reached the (full-year) goal of increasing sales and operating profit in the first half, and we will achieve similar results in the second half, so we're confident that Continental will post new records for the full year," Chief Executive Manfred Wennemer told Reuters in an interview. But Wennemer said its struggling U.S. passenger car tire business would not break even in the fourth quarter as planned due to sluggish demand in North America. He would not say when he expected it to.
While he said the business would clearly narrow its losses, he confirmed analysts' estimates that U.S. passenger car tires would post an operating loss of between 70 million and 150 million euros ($85-$182 million) for the full year.
"We have a situation that we didn't expect, but it isn't a catastrophe. We're in control of what is going on there, but we're not willing at present to say when we'll break even there," he said.
Wennemer said he didn't expect to find a replacement in the short term for passenger car tire chief Martien de Louw, who left the company following a dispute over strategy earlier this year.
The CEO added that he would run the group's worldwide business for at least a year, along with finance chief Alan Hippe, who is in charge of its money-losing U.S. operations.
"Overall Conti has presented another very solid quarter," said HVB analyst Rolf Woller, adding he expects the U.S. passenger car tire business to reach break even in two to three quarters.
VALUATION LAGS EARNINGS GROWTH
Earnings before interest and taxes (EBIT) vaulted to 405.6 million euros ($491 million), compared with 277.7 million a year ago and an average Reuters poll estimate of 374 million euros.
The second-quarter operating margin improved to 11.4 percent from 8.8 percent a year earlier.
The results were flattered, however, by a weaker base comparison figure, due to a restructuring charge last year at its Mayfield tire plant in the United States.
The latest quarter's results were also boosted by 27 million euros due to changes in its U.S. pension plans.
Net profit rose to 243.3 million euros from 123.8 million in 2004 and exceeded an average forecast of 224 million, while revenue for the quarter increased to 3.55 billion euros from 3.17 billion a year earlier, while edging past an average estimate of 3.52 billion.
Free cash flow in the second quarter dropped sharply, however, to 94.4 million euros from 251.9 million in the previous year.
Continental is 14th on the Automotive News ranking of top global suppliers with $9.3 billion in original equipment sales in 2004.