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Auto-parts maker Continental shifts strategy as Q2'19 EPS falls 41% YOY

Continental AG on Aug. 7 reported second-quarter earnings that missed analysts' expectations and announced a major strategy shift that will see the German automotive-components maker cut investment in combustion engine parts and shun solid-state battery production.

Basic and diluted earnings per share for the April 1 to June 30 period slumped to €2.42, down 41% from €4.11 in the same quarter of 2018 and lower than the S&P Global Market Intelligence consensus mean estimate for GAAP EPS €2.61.

Revenue fell 0.9% to €11.26 billion versus €11.37 billion in the prior year, while adjusted operating profit plunged to €868.1 million from €1.15 billion, yielding an adjusted EBIT margin of 7.8%.

"The current market environment is highly challenging. The key automotive markets of Europe, North America and particularly China are declining. We are responding to the declining market by ensuring rigorous cost discipline and enhancing our competitiveness," said CEO Elmar Degenhart in a press release.

Continental announced that it would intensify its focus on electrified powertrains and related components and reduce investment in items such as fuel pumps for combustion engines as regulatory pressures drive a shift away from fossil fuels. It will rebrand its powertrain unit as Vitesco Technologies, with current powertrain head Andreas Wolf taking the role of CEO.

"The market for high-voltage components and hybridization solutions, for example, is growing at a much faster pace than anticipated. This sharp rise in production is leading to an economically attractive business at an earlier stage than previously thought," the statement said.

Continental also said it will not produce solid-state battery cells, a strategy it had been mulling, due to expectations that car manufacturers will enter this field on their own at first through lithium-ion cell production while solid-state technology is improved upon.

"The course has therefore been set. Continental can no longer set up an attractive business model with the solid-state technology which will probably not be available until after 2030," Degenhart said.

The strategy changes will affect "segments, technologies, locations and jobs to varying degrees," Continental said. It is in talks with employee representatives and expects to lay out the details of its new plan in the coming weeks.

The company anticipates special items of about €200 million relating to the transformation of its power train division into a separate group of legal entities.

Continental on July 22 cut its full-year guidance to sales of €44 billion to €45 billion versus the €45 billion to €47 billion previously expected and for an adjusted EBIT margin of 7% to 7.5% versus a prior forecast of 8% to 9%. For the automotive division, the sales forecast has been lowered to €26 billion to €26.5 billion, down from a prior forecast of €27 billion to €28 billion.

It is one of a number of automotive suppliers to have come under pressure from declining car sales and rapidly shifting technology. Italian tire-maker Pirelli & C. SpA and German parts-makers ZF Friedrichshafen AG and Schaeffler AG have all cut their full-year guidance so far in August.

In morning trading, Continental's shares were up 0.7%, or 80 euro cents, at €119.40.