Forecast process
Each year, Continental forecasts the key performance indicators for the Continental Group for the new fiscal year. These include sales and the adjusted EBIT margin for the Continental Group as well as for the Automotive business areas (Autonomous Mobility and Safety, Vehicle Networking and Information, and Powertrain) and Rubber business areas (Tires and ContiTech). In addition, we provide information on the assessment of important factors influencing EBIT. These include the expected negative or positive effect of the estimated development of raw materials prices for the current year, the expected development of special effects and the amount of amortization from purchase price allocations. We thus allow the Continental Group’s expected EBIT to be estimated.
Furthermore, we give an assessment of the development of interest income and expenses as well as the tax rate for the Continental Group, which in turn allows the Continental Group’s expected net income to be estimated. We also publish a forecast of the capital expenditures planned for the current year and the free cash flow before acquisitions and certain exceptional effects, if any, such as the effects of transforming the Powertrain business area into an independent legal entity. Our forecast is based on our expectations regarding the most important production and sales markets in the new fiscal year.
We publish our forecast as part of our annual financial press conference and the publication of our annual report. It is continually reviewed over the course of the fiscal year. Possible changes to the forecast are described at the latest in the report for the respective quarter.
Comparison of the past fiscal year against forecast
Our forecast for fiscal 2020, which we published in March 2020, was based on the expectation that the global production of passenger cars and light commercial vehicles would decline for a third successive year. We expected global automotive production to decrease by around 2% to 5% year-on-year in 2020. For the global production of medium and heavy commercial vehicles, we expected a decline of between 10% and 15% for 2020 as a result of the reduced order intake. These estimates took into account the expected impact of the COVID-19 pandemic on production volumes in the first quarter of 2020. Our market forecast did not include further disruptions to production and the supply chain as well as demand as a result of the continuing spread of the COVID-19 pandemic, due to the fact that such disruptions could not be gauged.
Based on the production assumptions at the time, we expected our Automotive business areas to realize sales of around €25.5 billion to €26.5 billion for fiscal 2020 – net of changes in the scope of consolidation and assuming constant exchange rates – and an adjusted EBIT margin of around 3% to 4%.
We expected our Rubber business areas to achieve sales of around €17 billion to €18 billion – assuming constant exchange rates – and an adjusted EBIT margin of around 10% to 11% in fiscal 2020. In addition to the aforementioned production assumptions for the vehicle manufacturer business, the basis for this was our forecasts for the development of replacement-tire markets at the time. We expected a decline of 0% to 2% in global demand for replacement tires for both passenger cars and light commercial vehicles as well as medium and heavy commercial vehicles in 2020. We also anticipated a further weakening of the industrial business, which would affect our ContiTech business area. For our Tires and ContiTech business areas, we anticipated higher fixed costs, depreciation and amortization in 2020. We expected the intense competitive pressure, particularly in the European market, to continue amid rising wage costs. From our perspective at the time, raw material prices were likely to remain roughly unchanged in fiscal 2020 compared with the previous year.
We expected the Continental Group to achieve total sales – assuming constant exchange rates – in the range of around €42.5 billion to €44.5 billion and an adjusted EBIT margin of around 5.5% to 6.5% in fiscal 2020. For 2020, taking into account expenses relating to the Transformation 2019–2029 structural program, among other factors, we expected negative special effects to total around €600 million. Amortization from purchase price allocations was again expected to total approximately €200 million and affect mainly the ContiTech and Vehicle Networking and Information business areas. In 2020, we expected the negative financial result to be in the region of €200 million before effects from currency translation, effects from changes in the fair value of derivative instruments, and other valuation effects. The tax rate was expected to be around 27% in 2020. The capital expenditure ratio was expected to be around 7.5% of sales in fiscal 2020. In 2020, we were planning on free cash flow of approximately €0.7 billion to €1.1 billion, before acquisitions and before the effects of transforming the Powertrain business area into an independent legal entity.
On April 1, 2020, we announced that the ongoing COVID-19 pandemic, the resulting restrictions imposed by governments and authorities as well as production stops and other measures taken by customers and suppliers in response to the pandemic had led to significant adjustments and interruptions in key areas of the Continental Group. Due to the uncertainty regarding the duration of restrictions and given the difficulty in estimating the further consequences for production, supply chains and demand, the Executive Board of Continental AG decided to withdraw the outlook for fiscal 2020 contained in the 2019 annual report.
In the financial report for Q1 2020, we explained on May 7, 2020, that it had become more difficult to reassess the forecast for fiscal 2020 due to the ongoing COVID-19 pandemic, and that this could not be done with the usual level of detail and degree of accuracy. The effects of the containment measures, in particular the plant closures, were expected to have a negative impact on the Continental Group’s sales volumes, sales and earnings compared to the previous year. For 2020 as a whole, we expected the Continental Group’s sales volumes and sales to fall short of prior-year levels. In addition, we anticipated a year-on-year decline in adjusted EBIT in fiscal 2020. The decline in earnings was also expected to lead to a decrease in free cash flow in 2020 compared to the previous year.
In the half-year financial report, we confirmed on August 5, 2020, that the Continental Group’s expected sales volumes and sales would fall short of prior-year levels for 2020 as a whole. In addition, we anticipated a noticeable year-on-year decline in adjusted EBIT in fiscal 2020. The decline in earnings was also expected to lead to a considerable decrease in free cash flow in 2020 compared to the previous year.
We published a new, detailed outlook for fiscal 2020 in the financial report as at September 30, 2020, on November 11, 2020. This outlook was prepared on the basis of the production assumptions mentioned in the economic report at the time and, in particular, under the expectation of no further significant effects related to the pandemic. Under these assumptions, we expected the Continental Group to achieve sales of around €37.5 billion and an adjusted EBIT margin of around 3% for fiscal 2020.
Sales in the Automotive business areas were expected to be around €22.0 billion in total, and the adjusted EBIT margin around -1.5%. Sales in the Rubber business areas were expected to be around €15.5 billion, and the adjusted EBIT margin around 10.5%.
Special effects could not be estimated in detail at the time, mainly due to the ongoing restructuring measures. However, we anticipated that they would have a noticeable impact on the reported EBIT and the net income attributable to the shareholders of the parent. The capital expenditure ratio was expected to be around 6.3% of sales. In addition, a positive free cash flow before acquisitions and before the effects of transforming the Powertrain business area into an independent legal entity was expected, although this would be significantly lower than in the previous year.
On December 16, 2020, we announced an increase in the adjusted EBIT margin for our Rubber business areas to more than 11.0% as part of our Capital Market Days. This change also led to an increase in the adjusted EBIT margin for the Continental Group to around 3.5%. We also quantified the negative special effects at more than €1.6 billion, the capital expenditure ratio at around 6.0% of sales, and free cash flow before acquisitions and before the effects of transforming the Powertrain business area into an independent legal entity at more than €0.5 billion.
Continental achieved consolidated sales of €37.7 billion and a consolidated adjusted EBIT margin of 3.5% in fiscal 2020. The Automotive business areas generated sales of €22.1 billion and an adjusted EBIT margin of -1.5%. The Rubber business areas generated sales of €15.6 billion and an adjusted EBIT margin of 11.3%.
Negative special effects for fiscal 2020 amounted to €1.9 billion.
The negative financial result before effects from currency translation, effects from changes in the fair value of derivative instruments, and other valuation effects amounted to €183.7 million in the reporting year, which was below our forecast of around €200 million from March 2020.
Income tax expense in 2020 amounted to tax income of €11.3 million. The tax rate adjusted for the permanent effects of the goodwill impairment was 2.4%.
The capital expenditure ratio fell to 5.9% in 2020. Free cash flow before acquisitions and before the effects of transforming the Powertrain business area into an independent legal entity amounted to €1.1 billion in 2020.
Order situation
The order situation in our Automotive business areas – Autonomous Mobility and Safety, Vehicle Networking and Information, and Powertrain – was considerably weaker in 2020 due to the effects of the COVID-19 pandemic. Altogether, the three business areas acquired orders for a total value of roughly €27 billion for the entire duration of the deliveries. These lifetime sales are based primarily on assumptions regarding production volumes of the respective vehicle or engine platforms, the agreed cost reductions and the development of key raw materials prices.
The replacement-tire business accounts for a large portion of the Tires business area’s sales, which is why it is not possible to calculate a reliable figure for order volumes. The same applies to the ContiTech business area, which has six business units operating in various markets and industrial sectors, each in turn with their own relevant factors. Consolidating the order figures from the various business units of the ContiTech business area would thus be meaningful only to a limited extent.
Outlook for fiscal 2021
As mentioned on page 111 of the report on expected developments, we expect a noticeable recovery in the production of passenger cars and commercial vehicles in 2021, both in our core markets and globally. To a lesser extent, this also applies to the replacement-tire markets and the industrial business.
This outlook takes into account the current expected impact of the ongoing COVID-19 pandemic on production volumes in 2021. The current shortage of semiconductors due to our suppliers working at full capacity will limit growth in the first quarter of 2021 in particular. At the same time, increased costs will be incurred in the supply chains. In the second half of the year, we expect the delivery situation to return to normal. The planned spin-off and subsequent listing of Vitesco Technologies during the second half of 2021 has not been taken into account in the disclosures.
Based on all of the above assumptions as well as on the exchange rates at the beginning of the fiscal year, we expect the following key financial figures for fiscal 2021.
We expect our Automotive business areas – Autonomous Mobility and Safety, Vehicle Networking and Information, and Powertrain – to achieve sales of around €24.0 billion to €25.0 billion. We expect the adjusted EBIT margin to be in the range of around 1% to 2%. This includes increased supply chain costs as well as additional research and development expenses in the Autonomous Mobility and Safety business area.
We expect our Rubber business areas – Tires and ContiTech – to achieve sales of around €16.5 billion to €17.5 billion and an adjusted EBIT margin of around 11.5% to 12.5%. This includes the expected negative impact of higher raw material costs.
We expect the Continental Group to achieve total sales in the range of around €40.5 billion to €42.5 billion and an adjusted EBIT margin of around 5% to 6%.
For 2021, taking into account expenses relating to the Transformation 2019–2029 structural program, among other factors, we expect negative special effects to total around €600 million.
As in the previous year, amortization from purchase price allocations will again be expected to total just under €200 million and affect mainly the ContiTech and Vehicle Networking and Information business areas.
In 2021, we expect the negative financial result to be in the region of €220 million before effects from currency translation, effects from changes in the fair value of derivative instruments, and other valuation effects. The tax rate is expected to be around 27% in 2021.
The capital expenditure ratio is expected to be around 7% of sales in fiscal 2021.
In 2021, we are planning on free cash flow of approximately €0.9 billion to €1.3 billion, before acquisitions and before the effects of transforming the Powertrain business area into an independent legal entity.