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2022 Annual Report

Creating Value.
For a Better Tomorrow.

2022 Annual Report

 

Outlook for the Continental Group

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Forecast process

Each year, Continental forecasts the values of key performance indicators for the Continental Group for the new fiscal year. These include sales and the adjusted EBIT margin for the Continental Group and for the Automotive, Tires, ContiTech and Contract Manufacturing group sectors.

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 material prices and other cost factors 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 adjusted free cash flow. 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 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 2022, which we published in March 2022, was based on a noticeable recovery in the global production of passenger cars and light commercial vehicles, particularly in our core markets of Europe and North America. Our expectations did not include any effects of the potential impact of the geopolitical crisis caused by the war in Ukraine.

Our expectations took into account the anticipated impact of ongoing supply shortages, particularly for semiconductors, on production volumes in 2022. The shortage of semiconductors due to our suppliers working at full capacity was expected to limit growth in the first half of 2022 in particular. In the second half of the year, we expected the delivery situation to improve slightly.

We also expected significantly higher costs for the procurement of materials, energy and logistics as well as an increase in wages and salaries to weigh heavily on our earnings position in fiscal 2022.

Based on the above assumptions as well as on the exchange rates at the beginning of the fiscal year, we anticipated the following key financial figures for fiscal 2022:

  • We expected our Automotive group sector to achieve sales of around €18 billion to €19 billion. We expected the adjusted EBIT margin to be in the range of around 0% to 1.5%. This included higher procurement and logistics costs of around €1 billion as well as additional expenses for research and development in the Autonomous Mobility business area.
  • We expected our Tires group sector to achieve sales of around €13.3 billion to €13.8 billion and an adjusted EBIT margin of around 13.5% to 14.5%. This included the expected negative impact from higher procurement and logistics costs of around €1 billion.
  • We expected our ContiTech group sector to achieve sales of around €6.0 billion to €6.3 billion and an adjusted EBIT margin of around 7.0% to 8.0%. This included the expected negative impact from higher procurement and logistics costs of around €300 million.
  • In the Contract Manufacturing group sector, we anticipated sales of around €600 million to €700 million and an adjusted EBIT margin of around 0% to 1.0%.
  • We expected the Continental Group to achieve total sales in the range of around €38 billion to €40 billion and an adjusted EBIT margin of around 5.5% to 6.5% in 2022.
  • As in the previous year, amortization from purchase price allocations was again expected to total approximately €150 million and affect mainly the Automotive and ContiTech group sectors.
  • In addition, we expected negative special effects of around €150 million.
  • In 2022, we expected the negative financial result to be below €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%.
  • The capital expenditure ratio was expected to be below 7% of sales in fiscal 2022.
  • We were planning on adjusted free cash flow (before acquisitions and divestments) of approximately €0.7 billion to €1.2 billion.

Due to ongoing developments – particularly the war in Ukraine – the Executive Board supplemented the outlook as follows: In the event the geopolitical situation, in particular in Eastern Europe, remains tense or even worsens, it could result in lasting consequences for production, supply chains and demand. Depending on the severity of the disruption, this may result in lower sales and earnings in all group sectors as well as for the Continental Group compared to the prior year.

On April 21, 2022, we adjusted our outlook for fiscal 2022 due to the following factors:

  • Continental expected global production of passenger cars and light commercial vehicles to increase by between 4% and 6% year-on-year in 2022.
  • Negative effects from cost inflation for key inputs, especially for oil-based raw materials as well as for energy and logistics in Tires and ContiTech, had become significantly more material.

Assuming that, as the year progressed, exchange rates would not materially differ to those in the first quarter of 2022, the aforementioned factors meant that the following changes were made to the 2022 outlook:

  • Consolidated sales were expected to be around €38.3 billion to €40.1 billion, and the adjusted EBIT margin was expected to be around 4.7% to 5.7%.
  • For the Automotive group sector, Continental expected sales of around €17.8 billion to €18.8 billion and, as a result of the lower sales expectations, an adjusted EBIT margin in the range of around -0.5% to 1%. This still included higher procurement and logistics expenses of around €1 billion as well as additional expenses for research and development of around €100 million in the Autonomous Mobility business area.
  • For the Tires group sector, sales were expected to be around €13.8 billion to €14.2 billion, with an adjusted EBIT margin of around 12.0% to 13.0%. This adjusted EBIT margin range assumed a year-on-year increase in procurement and logistics costs of around €1.9 billion.
  • For the ContiTech group sector, Continental expected sales of around €6.3 billion to €6.5 billion and an adjusted EBIT margin of around 6.0% to 7.0%. The adjusted EBIT margin range assumed a year-on-year increase in procurement and logistics costs of around €600 million.
  • For the Contract Manufacturing group sector, sales of around €600 million to €700 million and an adjusted EBIT margin of around 0% to 1.0% were still expected.
  • Capital expenditure before financial investments was expected to total around 6% of sales.
  • Free cash flow of around €0.6 billion to €1.0 billion was expected before acquisitions and divestments in fiscal 2022.

As before, we again pointed out the tense geopolitical situation, in particular in Eastern Europe. In addition, we noted that further negative effects could arise as a result of the ongoing COVID-19 pandemic and the related supply situation.

In the quarterly statement for the first quarter of 2022, we confirmed our expectations for fiscal 2022 stated in the 2021 annual report in relation to amortization from purchase price allocation; negative special effects; negative financial result before effects from currency translation, effects from changes in the fair value of derivative instruments, and other valuation effects; and the tax rate.

In the half-year financial report, we adjusted our expectation for negative special effects due to circumstances that had arisen during the course of the year. We therefore expected negative special effects of around €650 million for the fiscal year. We left all other financial figures for fiscal 2022 unchanged.

Comparison of forecasts for the group sectors of Continental for fiscal 2022

Comparison of forecasts for the group sectors of Continental for fiscal 2022

All figures take into account the exceptions and definitions specified in each case in the comparison against forecast.

In the quarterly statement for the third quarter of 2022, we continued to expect production of passenger cars and light commercial vehicles to increase by 4% to 6% year-on-year.

For the tire-replacement business, we expected global demand to weaken by 1% to 3% for the year as a whole.

Although the industrial business was showing signs of weakening, particularly in Europe, we continued to expect year-on-year growth for 2022 as a whole, especially in North America and China. We expected negative effects from cost inflation for key inputs as well as for energy and logistics to continue in the fourth quarter of 2022. With respect to the key financial figures, we made the following changes:

  • We narrowed our estimated range for adjusted free cash flow for fiscal 2022 to around €600 million to €800 million.
  • In addition, due to further impairment losses, we expected negative special effects of around €1.2 billion for fiscal 2022.
  • We expected the tax rate before the permanent effects of goodwill impairment to be above 40% in 2022.

All other parts of the outlook remained unchanged.

Owing to our operating performance in the fourth quarter, we achieved the adjusted expectations for fiscal 2022 as follows:

  • The Continental Group generated sales of €39.4 billion and an adjusted EBIT margin of 5.0%.
  • The Automotive group sector generated sales of €18.3 billion and an adjusted EBIT margin of -0.2% in 2022.
  • The Tires group sector generated sales of €14.0 billion and an adjusted EBIT margin of 13.1%.
  • The ContiTech group sector generated sales of €6.6 billion and an adjusted EBIT margin of 4.7%.
  • The Contract Manufacturing group sector generated sales of €0.7 billion and an adjusted EBIT margin of 0.4%.
  • Total consolidated expense from special effects amounted to €1.0 billion in 2022.
  • Amortization from purchase price allocations was €149.7 million.
  • In the year under review, the negative financial result amounted to €151.2 million before effects from currency translation and before effects from changes in the fair value of derivative instruments, and other valuation effects.
  • Income tax expense for fiscal 2022 amounted to tax expense of €444.6 million. The tax rate was 47.6%.
  • The capital expenditure ratio was 6.2%.
  • Adjusted free cash flow was €199.7 million in 2022 and therefore below our forecast range of €600 million to €800 million in the quarterly statement for the third quarter of 2022.

Comparison of key forecast elements for the Continental Group for fiscal 2022

Comparison of key forecast elements for the Continental Group for fiscal 20222

All figures take into account the exceptions and definitions specified in each case in the comparison against forecast.

Order situation

The order situation in our Automotive group sector continues to be impacted by ongoing uncertainty due to the low availability and possible temporary shortages of semi-conductors and other semifinished products. In total, orders amounting to around €23 billion were acquired in fiscal 2022 (PY: €19 billion). This figure includes expected sales over the entire duration of the delivery, known as lifetime sales. These are based primarily on assumptions regarding production volumes of the respective vehicle or engine platforms, the expected and agreed cost adjustments, and the development of key raw material prices.

The replacement-tire business accounts for a large portion of the Tires group sector’s sales, which is why it is not possible to calculate a reliable figure for order volumes.

The same applies to the ContiTech group sector, which has business areas operating in various markets and industrial sectors, each in turn with their own relevant factors. Consolidating the order figures from the various business areas of the ContiTech group sector would thus be meaningful only to a limited extent.

Outlook for fiscal 2023

As mentioned on page 101 of the report on expected developments, we anticipate a continued recovery in the global production of passenger cars and light commercial vehicles in 2023, particularly in our core markets of Europe and North America.

This outlook takes into account the current anticipated impact of certain ongoing supply shortages, particularly for semiconductors, on production volumes in 2023.

Significantly higher costs for materials, wages and salaries as well as energy and logistics – amounting to around €1.7 billion – are again expected to weigh heavily on our earnings position in fiscal 2023.

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 2023:

  • We expect the Continental Group to achieve sales in the range of around €42 billion to €45 billion and an adjusted EBIT margin of around 5.5% to 6.5%.
  • We expect our Automotive group sector to achieve sales of around €20.5 billion to €21.5 billion. We expect the adjusted EBIT margin to be around 2% to 3%. This includes higher costs for materials, wages and salaries as well as logistics of around €1 billion.
  • We expect our Tires group sector to achieve sales of around €14.5 billion to €15.5 billion and an adjusted EBIT margin of around 12% to 13%. This includes the expected negative impact from higher costs for wages and salaries as well as energy and logistics of around €400 million.
  • We expect our ContiTech group sector to achieve sales of around €6.8 billion to €7.2 billion and an adjusted EBIT margin of around 6% to 7%. This includes the expected negative impact from higher costs for materials, wages and salaries as well as energy of around €300 million.
  • In the Contract Manufacturing group sector, we anticipate sales of around €400 million to €600 million and an adjusted EBIT margin of around 0%.
  • As in the previous year, consolidated amortization from purchase price allocations is again expected to be below €150 million and affect mainly the Automotive and ContiTech group sectors.
  • In addition, we expect negative special effects of around €150 million.
  • In 2023, we expect the negative financial result to be around €350 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%.
  • The capital expenditure ratio is expected to be around 6% of sales in fiscal 2023.
  • In 2023, we are planning on adjusted free cash flow of approximately €0.8 billion to €1.2 billion.