Corporate Management

The goal is the sustained increase in the Continental Group’s value.

Value management

Value management at Continental is focused on value creation through profitable sales growth. Key financial performance indicators are sales, the adjusted EBIT margin, the amount of capital expenditure, free cash flow and capital employed. To allow us to use the financial performance indicators for management purposes as well, and to map the interdependencies between these indicators, we summarize them as key figures as part of a value-driver system. Our mid-term corporate objectives center on the sustainable enhancement of the value of each individual operating unit. This goal is achieved by generating a positive return on the capital employed that sustainably exceeds the associated equity and debt financing costs within each individual unit. Crucial to this is that the absolute contribution to value (the Continental Value Contribution (CVC)) increases year-on-year. This can be achieved by increasing the return on capital employed (with the costs of capital remaining constant), lowering the costs of capital (while maintaining the return on capital employed) or decreasing capital employed over time. The performance indicators used are EBIT, capital employed and the weighted average cost of capital (WACC), which is calculated from the proportional weight of equity and debt costs.

Continental Value Contribution (CVC) in € millions / ROCE in % (For 2021, the figures for continuing operations are shown.)

EBIT is the net total of sales, other income and expenses plus income from equity-accounted investees and from investments but before financial result and income tax expense. In the year under review, EBIT for the Continental Group was €0.8 billion.

Capital employed is the funds used by the company to generate its sales. At Continental, this figure is calculated as the average of operating assets as at the end of the quarterly reporting periods. In 2022, average operating assets amounted to €20.3 billion.

The return on capital employed (ROCE) represents the ratio of these two calculated values. Comparing a figure from the statement of income (EBIT) with one from the statement of financial position (capital employed) produces an integral analysis. We deal with the problem of the different periods of analysis by calculating the capital employed as an average figure over the ends of quarterly reporting periods. The ROCE amounted to 3.7% in 2022.

The weighted average cost of capital (WACC) is calculated to determine the cost of financing the capital employed. Equity costs are based on the return from a risk-free alternative investment plus a market risk premium, taking into account Continental’s specific risk. Borrowing costs are calculated based on Continental’s weighted debt-capital cost rate. Based on the long-term average, the weighted average cost of capital for our company is about 10%.

Value is added if the ROCE exceeds the weighted average cost of capital (WACC). We call this value added, produced by subtracting the WACC from the ROCE multiplied by average operating assets, the Continental Value Contribution (CVC). In 2022, the CVC amounted to -€1,277.2 million.

Financing strategy

Our financing strategy aims to support the value-adding growth of the Continental Group while at the same time complying with an equity and liabilities structure adequate for the risks and rewards of our business.

The Finance & Treasury group function provides the necessary financial framework to finance corporate growth and secure the long-term existence of the company. The company’s annual investment requirements are likely to range from 6% to 7% of sales in the coming years.

Composition of gross indebtedness (€7,695 million)

Our goal is to finance ongoing investment requirements from the operating cash flow. Other investment projects, such as acquisitions, should be financed from a balanced mix of equity and debt depending on the ratio of net indebtedness to equity (gearing ratio) and the liquidity situation to achieve constant improvement in the respective capital market environment. In general, the gearing ratio should be below 40% in the coming years and not exceed 60% in general. If justified by extraordinary financing reasons or specific market circumstances, we can rise above this ratio under certain conditions. The equity ratio should exceed 30%. In the reporting year, the equity ratio was 36.2% and the gearing ratio 32.8%.

Gross indebtedness amounted to €7,694.7 million as at December 31, 2022. Key financing instruments are the syndicated loan with a revolving credit line of €4.0 billion that has been granted until December 2026, and bonds issued on the capital market. Our gross indebtedness should be a balanced mix of liabilities to banks and other sources of financing on the capital market. For short-term financing in particular, we use a wide range of financing instruments. As at the end of 2022, this mix consisted of bonds (51%), a syndicated loan (4%), other bank liabilities (17%) and other indebtedness (28%) based on gross indebtedness. The syndicated loan that was renewed ahead of schedule in December 2019 consists of a revolving tranche of €4.0 billion and has an original term of five years. The margin will also depend on the Continental Group’s sustainability performance. In November 2021, Continental exercised the second and final option to extend the term by one year. The lending banks then extended this financing commitment until December 2026 at unchanged conditions.

The company strives to have at its disposal unrestricted liquidity of about €1.5 billion. This is supplemented by committed, unutilized credit lines from banks in order to cover liquidity requirements at all times. These requirements fluctuate during a calendar year owing in particular to the seasonal nature of some business areas. In addition, the amount of liquidity required is also influenced by corporate growth. Unrestricted cash and cash equivalents amounted to €2,441.3 million as at December 31, 2022. There were also committed and unutilized credit lines of €4,573.5 million.

As at December 31, 2022, €300.0 million of the revolving credit line of €4.0 billion had been utilized. Around 51% of gross indebtedness is financed on the capital market in the form of bonds. The interest coupons vary between 0.0% and 3.625% p.a. The most recent bond issue took place in November 2022 in anticipation of the upcoming bond maturities in 2023. A bond with a volume of €625.0 million, a term of five years and an interest rate of 3.625% p.a. was placed with investors. The bonds with maturities between 2023 and 2027 ensure a balanced overall maturity profile for the repayment amounts. In addition to the forms of financing already mentioned, there were also bilateral credit lines with various banks in the amount of €2,182.5 million as at December 31, 2022. Continental’s corporate financing instruments currently also include saleof- receivables programs and commercial paper programs. As in the previous year, Continental had two commercial paper programs in Germany and the USA in 2022. As at the end of 2022, the nominal volume of the commercial paper issued under the German program was €350.0 million.

Maturity profile

Continental strives for a balanced maturity profile of its liabilities in order to be able to repay the amounts due each year from free cash flow as far as possible. Aside from short-term indebtedness, most of which can be rolled on to the next year, two bonds in the amounts of €500.0 million and €750.0 million, respectively, will mature in 2023. The other bonds issued in 2019, 2020 and 2022 require repayments of €725.0 million in 2024, €600.0 million in 2025, €750.0 million in 2026 and €625.0 million in 2027.

Maturities of gross indebtedness (€7,695 million)

Continental’s credit rating unchanged

In the reporting period, Continental AG was rated by the three rating agencies Standard & Poor’s, Fitch and Moody’s, each of which maintained their investment-grade credit ratings in 2022. The rating outlook from Moody’s improved from negative to stable. The most recent rating adjustment took place in spring 2020, when all three rating agencies adjusted their long-term credit rating downward by one notch. Our goal remains a credit rating of BBB/BBB+.

1 Contracted rating since May 19, 2000.

2 Contracted rating since November 7, 2013.

3 Contracted rating since January 1, 2019.