HANOVER, Germany — Despite double-digit growth by its tire business unit, Continental A.G. suffered a 39.8% drop in pre-tax operating income, as external factors heightened inflationary trends and compounded rising operating costs.
Conti's EBIT for the quarter ended March 31 fell to $493 million on 8.2% higher sales of $10.4 billion. As a result, the operating ratio fell nearly four points to 4.7%. Net income dropped 45.3% to $275 million.
Conti management cited external factors, such as Russia's war with Ukraine, a re-surging coronavirus pandemic, electronic component shortages and cost increases in procurement and logistics as major challenges it's facing.
These factors and others had "drastic effects" on already high energy prices, strained logistics chains and commodity markets, CEO Nikolai Setzer said, which compelled management to take various steps to minimize the impact on earnings.
Among the actions taken: diversifying raw material sources at an early stage, building up security stocks and reorganizing its value chain in the electronics sector. Conti also is working with its customers to share the burden of increased costs.
"Price increases in procurement and logistics affected us significantly in the first quarter," Setzer said. "Despite this considerable headwind, we achieved a good result in the tire business. For Automotive, we are confident that the measures taken will result in improved earnings over the course of the year."
In the tire sector, which accounts for nearly 36% of corporate sales revenue, EBIT jumped 24.1% to $634.8 million on 20.1% higher sales of $3.7 billion. The operating margin edged up a half-point to 17.1%.
The tires sector recorded increased sales volumes in both car and commercial-vehicle tires replacement businesses. Inventory valuation had a positive effect of around $225 million on earnings due to increased acquisition and production costs.
For the full year, Conti said it expects tire unit sales to be slightly higher than those forecast earlier this year, but the operating margin likely will be a point or so lower than projected, at 12% to 13%. Conti cited a 90% increase in procurement and logistics costs, to over $2 billion, for the lower earnings forecast.