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Continental to spin off powertrain unit, cancel partial IPO

Continental AG said Oct. 22 that it will fully spin off its Vitesco Technologies powertrain division and cancel its plan for a partial IPO of the business.

The German auto-parts manufacturer also warned that it will have to book about €2.5 billion of noncash impairments in the third quarter, largely due to lower expectations for the automotive market in the coming years. However, the company said its performance in the quarter was in line with expectations and it remains on track to meet its guidance for the full year.

Continental said it will not pursue the partial listing in 2020 because of the market's "largely unpredictable conditions." Instead, it will put a proposal for a full spinoff to shareholders at the annual meeting on April 30, 2020. It is expected to take effect within the same year.

"In the coming year, our powertrain business should be given the independence and flexibility it needs for further growth," said CEO Elmar Degenhart.

"Vitesco Technologies is already a pioneer in the field of electric electrification. We are very well prepared to capitalize on the transition from combustion drives to electric mobility and the corresponding opportunities for growth," said Vitesco Technologies CEO Andreas Wolf.

Continental said it does not expect "any material improvement" in the market for passenger cars and light commercial vehicles over the next five years. As such, it will recognize noncash impairments of goodwill and other intangible assets totaling about €2.5 billion in the third quarter.

The write-downs apply mainly to the results of acquisitions made before 2008, the company said. Of the total, €1.54 billion is attributed to the interiors division, €724 million to the chassis and safety unit and €244 million to the powertrain operations. It will also recognize provisions of €97 million for the first nine months of the year related to its restructuring program.

The adjustments will not have an effect on the Continental's adjusted operating profit outlook, CFO Wolfgang Schäfer said.

In addition, Continental reported preliminary results for the third quarter. Sales for the three months to Sept. 30 rose 2.9% to about €11.1 billion from €10.8 billion in the year-ago period, ahead of the S&P Global Market Intelligence mean consensus estimate of €10.91 billion.

Adjusted EBIT margin fell to about 5.6% from 7.1% in the year-ago period. Profit margin fell to about 1.6% in the automotive group from 4% in the third quarter of 2018, while in the rubber group it dipped slightly to about 12.3% from 12.5%.

Automotive group sales grew 2.2% year over year to €6.6 billion and rubber group sales increased 3.9% to €4.6 billion.

"Considering the unresolved trade disputes, the unclear situation regarding Brexit, and declining markets, we did reasonably well in the third quarter from an operational standpoint," Schäfer said. "We thus confirm our annual outlook for sales, adjusted EBIT and free cash flow before acquisitions."

In late afternoon trading, Continental shares were up 4.1% at €124.10.