(Bloomberg) -- Continental AG is evaluating asset sales and will cut additional costs to protect returns and turn around its key automotive unit that’s fallen behind peers.
The parts maker on Monday announced plans to carve out the user experience business — which makes displays for car interiors — to ready it for a potential sale, joint venture or initial public offering. Continental will also reduce research and development spending, it said during an investor event in Hanover, Germany.
The moves will help the auto unit “become better, faster and more agile,” Chief Financial Officer Katja Garcia Vila said in an interview.
Continental, whose market value has shrunk some 40% in the past five years, is among German industry stalwarts facing a wrenching transition to a cleaner economy. The changes are particularly painful for the country’s automotive sector, which thrived because it perfected making combustion-engine cars, with hundreds of local parts makers supplying gearboxes, fuel injectors and crankshafts. Now that the battery is taking over, their “Vorsprung durch Technik” is evaporating.
At Monday’s meeting, Continental confirmed its financial forecast for this year and increased its dividend payout plan to as much as 40% of net income, from as much as 30% previously. It updated its mid-term goals and now targets as much as €56 billion ($61 billion) in sales in three to five years, from €39.4 billion last year. The automotive unit is supposed to provide as much as half of that.
In addition to carving out the user experience business, the company said it’s reviewing other automotive assets generating some €1.4 billion in sales — meaning around a quarter of the entire auto division is under review. The goal is to complete the asset changes within two to three years, executives said. Bloomberg previously reported that Continental is weighing selling its user experience and autonomous mobility businesses.
“Much will depend on whether management can now give investors confidence why it will be more successful in lifting the auto margin than in the past three years,” Stifl analyst Alexander Wahl said.
Continental declined 0.8% as of 4:53 p.m. local time. The stock is still up roughly a quarter this year on improving supply chains and initial headway fixing the auto unit.
UBS analysts had flagged the division’s high investments ahead of the meeting and said divestments would make Continental leaner and probably more profitable. The company reported negative free cash flow in four of the past six quarters.
Continental previously announced thousands of job cuts to reduce expenses by around €400 million annually starting in 2025. Additional measures announced Monday include shrinking the number of the auto unit’s 82 research sites to help cut the businesses’ R&D expenses to 11% of sales in two to three years and less than 10% in three to five years, from an expected 12% this year.
The manufacturer has been facing higher costs for materials, labor, energy and logistics in its home market Germany, and in July announced plans to exit one of its factories there. It’s also working through investigations about its role in the 2015 diesel-emissions cheating scandal, the fallout from a cyberattack and quality control failures in its industrial-hoses unit.
Read more: Continental to Exit Plant With 900 Workers Over High Costs
Any major strategy pivot will require the backing of the powerful billionaire Schaeffler family that’s currently reshaping its auto-parts empire. The clan behind Continental and Schaeffler AG is trying to buy the half of Vitesco Technologies Group AG it doesn’t already own in a €3.8 billion deal.
There is reason for optimism. In the past quarter, the company reported positive free-cash flow and raised the outlook for operating profitability at the tires division. That business has long been a reliable generator of cash and profit, sparking calls that management should focus on it for the future. It’s willing to pursue M&A to expand in Asia and the Americas and the specialty tires market, the company said Monday.
A review of the automotive unit revealed that Continental is the best owner for the business as the industry shifts to electric vehicles, Chief Executive Officer Nikolai Setzer said.
“We see strong growth potential, strong upside potential,” he said during a call with reporters. The unit “is a strong pillar and contributor to the company.”
(Updates with timeframe of asset changes in sixth paragraph.)
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