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            january 21, 2020

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Continental AG draws consequences from significant downturn in the industry


Continental AG, Hanover, is drawing further necessary consequences for the closing fiscal year 2008 following an extensive analysis of the substantial negative development in the automotive industry in the last six weeks. At the same time, operational measures for 2009 are being adapted to the predictably poor economic environment in the industry. A cost-cutting program in the high three-digit millions range is in force, including the postponement of investments as well as the stretching of expenditures in the area of research and development.
"Our customers have cut their production in the fourth quarter much more than had been expected: In total, 1.5 million fewer vehicles than planned will be built this quarter in the US and Europe alone. This corresponds roughly to the entire decrease in production in the first three quarters in these regions and affects nearly all vehicle manufacturers. Nonetheless, based on the latest figures we have for fiscal 2008, we feel that an EBIT margin of 7.5% to 8.0% can still be achieved, before amortization and depreciation resulting from the purchase price allocation (PPA) as well as restructuring and integration expense," said Continental Executive Board chairman Dr. Karl-Thomas Neumann after a meeting of the company's Supervisory Board on Wednesday in Hanover.
CFO Dr. Alan Hippe, vice chairman of the Executive Board and head of the Rubber Group, stressed that the Executive Board continues to have its eyes firmly set on reducing debt: "If we refrain from dividend payments, there would be a considerable contribution to debt reduction in fiscal 2008 and 2009. Such a move would thus also contribute to the stabilization of our financial situation. Based upon the dividend of €2 per share paid out for 2007, this would relieve result in a relief of some €338 million per year."
Dr. Neumann pointed out that, in view of the drastic drop in car sales predicted for 2009 down to the level of the early 90s, especially in Western Europe and North America, there is the risk  that goodwill impairment up to about €1 billion will have to be posted for the Automotive Group on the 2008 balance sheet. "A key goal is still to again strengthen the equity ratio as much as possible. In this connection, we are looking into all other conceivable options," Dr. Neumann stressed.
Dr. Neumann drew attention to the fact that the cost-cutting program, which was announced early in November in addition to ongoing restructuring measures, is in the meantime the largest of its kind in the history of the company: "In the second half of 2008, we already hit the brakes hard, making noticeable and painful cuts in all areas for 2009 in order to be amongst the winners when the markets recover," he stressed. "In some cases, we postponed or stopped extensive investment plans. Moreover, in talks with our customers we have stretched or restructured expenditures in research and development wherever possible. This has lowered our investment costs for the coming year by roughly a half a billion euros compared to our original intentions and adjusted the R&D expenditure by €200 million as well."
Hippe emphasized that, thanks to the continuing strong business development in the Rubber Group, Continental will have a substantial free cash flow in 2008 on the whole. In addition to these funds, the sale of company units undertaken to date (including the EMD business to Brose) and the extensive conversion of the convertible bond maturing in May 2011 noticeably helps reduce the net financial indebtedness despite the adverse market climate. 
"In the next two years we are also expecting to reduce net financial indebtedness, as we assume that free cash flow will remain in the three-digit millions range despite the very difficult market environment predicted for 2009. Should we refrain from dividend payments, financial liabilities would go down even faster," Dr. Hippe stressed. "Nonetheless, Continental must also adapt its financial structure to the new situation as a consequence of the adjustment to its operational activities." In closing, Dr. Hippe pointed out that at present, Continental has substantially more than €3 billion in liquidity.

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