Conti: Q1 sales, earnings declines will continue into Q2

HANNOVER, Germany — Continental A.G. reported double-digit drops in earnings and sales for the quarter ended March 31 as the COVID-19 pandemic slowed demand, but company management said the impact likely will be even greater in the second quarter.

Overall, Continental reported first-quarter fiscal pre-tax operating income fell 51% to $480 million on 11% lower sales of $10.9 billion, with operations in China playing a central role in the decline.

The company's tire unit reported a 36.6% drop in pre-tax operating income to $166.2 million on 12.2% lower sales of $2.76 billion. Conti cited an 11.7% drop in volume, ramping-down costs and costs associated with underutilization of factories for the earnings decline.

While the first quarter results were startling, Continental management said the second quarter is expected to be the weakest quarter of fiscal 2020 because the full economic impact of the coronavirus pandemic is being felt in Europe and North America — where Conti normally generates three-fourths of its revenue — during the first weeks of the period.

"We will feel the financial impact of the coronavirus pandemic even more strongly in the second quarter," Conti CEO Elmar Degenhart said, noting that both Europe and North America have been hit particularly hard by the effects of the coronavirus pandemic since the end of March, while vehicle production in China is stabilizing again.

Taking this distribution of revenue into consideration, Mr. Degenhart underscored Continental's intention to increase the proportion of its consolidated sales generated in Asia to 30% in the medium term.

In the tire segment, revenue declined on "significant" drops in consumer OE business and consumer and commercial replacement sectors. The operating ratio fell two-plus points to 19%.

In its comments on the results, Conti noted that global sales volumes of replacement tires for passenger cars and light commercial vehicles in the quarter fell by around 16% versus 2019, with the slump exacerbated by "particularly weak" demand in China, where the virus first broke out.

Preliminary data show that sales volumes in China fell by around 35% in the reporting period, Conti said. In Europe and North America, the pandemic and the containment measures did not cause demand for tires to fall until the final weeks of the reporting period.

In Europe and North America, replacement market sales of passenger and light commercial vehicle tires fell by around 13% and 9%, respectively in the quarter, based on preliminary data.

In the second quarter, by contrast, Conti said it expects global sales volumes of replacement tires for passenger cars and light commercial vehicles to fall 30% or more, with the declines in Europe and North America even worse --- over 40% and 45%, respectively.

In China, Conti is assuming demand will stabilize at the level of the previous year in the second quarter.

Regarding commercial vehicle tires, Conti said preliminary data show replacement market shipments fell 13% in the quarter, again heavily impacted by Chia, where volumes were down about 36%. it expects

In Europe and North America, the effects of the pandemic on the commercial tire sector have not yet been noticeable, Conti said, with Europe on par with 2019 and North America slightly ahead.

In the second quarter, however, Conti said it expects replacement demand for truck/bus tires to fall by more than 30% in Europe and over 15% in North America. In China, demand is expected to stabilize slightly below the previous year's level as the containment measures are gradually eased.

Overall the decline in this sector could be over 20% in the second quarter.