Search

 

Chairman’s Letter

 

Dear Shareholders,

Continental AG is on its way back to recovering its former strength. 2010 was a very demanding year for us, and, with your support, we ended up achieving a great deal. I wish to thank you on behalf of the entire Executive Board.

I must admit that a year ago, in light of the economic crisis and our financial situation, we could not be certain that we would successfully overcome all the major challenges in just a few months, although we firmly believed in our abilities and potential. Nor could we envision that we would even actually grow stronger.

Today we are able to present you with solid business results and a significant increase in sales. We have also continued to reduce the company's debt and greatly improved our debt maturity structure. This has given us additional operating maneuverability, and the future success of your Continental AG can be planned more easily again.

On the one hand, the key to this positive development is the economic recovery, and we were able to put this tailwind to good use. On the other hand, the old saying is still true: Fortune favors the bold! A large part of our success is due also to our restructuring and cost reduction measures as well as a number of new successful products. Thirdly, and most importantly, we were able to rely on our highly dedicated employees. I trust you will join me in sincerely thanking all of them around the world for their excellent performance.

It is easy to point to the good earnings figures after a successful year. I could quote the corporation's sales increase of about 6 billion euros or 30 percent, or our adjusted EBIT, which we raised by 113 percent to 2.5 billion euros despite the heavy impact of increased raw material prices. We have therefore exceeded our expectations of an adjusted EBIT margin of roughly 9 percent. Surely these figures on their own reflect the success we have achieved.

But the strategy behind the figures is at least as important: ensuring that our performance is high quality, increasing the free cash flow available to us for debt reduction, and driving forward profitable growth especially in the emerging markets.

In the past year, we not only accomplished incremental successes, but also set decisive strategic foundations for our future success.

In this context, it is especially pleasing that the Powertrain division exceeded the break-even point at adjusted EBIT level a year earlier than we had expected in view of the crisis. After all, our goal remains that all business units and segments create value for your corporation.

Our focus for future growth remains in Asia – especially China, but India also – as well as in Brazil and Russia. The demand for mobility in these countries is growing dramatically. At present, our Automotive divisions achieve 21 percent of their sales in Asia, and we intend to increase that figure to 30 percent. This is why we as a corporation are experiencing above-average sales growth of nearly 50 percent to over 4 billion euros in that region, in line with our plans. Production began early in 2011 at our new tire factory in Hefei, China, which will be supplying the Asian market.

In Asia, we have at present a total of around 40 production sites and 30 sales offices staffed by some 24,000 employees. Proximity to customers is crucial in expanding our activities. It is also about working in the region for that region, which means we intend to work locally along the entire value-added chain from research and development through purchasing, down to production and sales.

We are about to double our tire production capacity in Brazil and we intend to establish our own production site in Russia.

We will increase our investment activity in 2011 by about 200 million euros, a large part of which will be in the rapidly growing Tire divisions.

In addition to above-average growth in emerging markets, it is strategically important for us to help shape the megatrends in the automotive industry: safety, information, the environment, and affordable vehicles.

We are helping to research, develop and build the future of these trends in all our six divisions. An example is our systems that link the vehicle with other vehicles or with the traffic infrastructure. They help drivers to be networked from their cars, to communicate, and to drive with maximum fuel economy. Our main task is to integrate the thousands of modern electronic applications and the diverse web offerings into the vehicle in such a way that the strain on drivers is greatly reduced so they drive safely. Our megatrend products also include tires with reduced rolling resistance, lightweight construction technologies and optimized fuel injection systems for lower fuel consumption and CO2 emissions. Above all else, the sustainable vehicle of the future must be lighter and more highly-networked. It will contain a protective shield made of electronic sensor systems and increasingly incorporate new drive systems. Our company has the highest level of expertise in combustion engines and electric drives. We are pleased to say that this year we are producing the first all-electric powertrain for a standard vehicle manufactured by a European carmaker. The electric motor for this will be produced in Germany.

Despite all the excitement about electric vehicles, the combustion engine will still be with us for many decades to come. We are convinced that our engineers have the gripping ambition to make the diesel engine as environmentally friendly as the gasoline engine and the gasoline engine as efficient as the diesel engine. I am certain that they will succeed in reducing fuel consumption by as much as 50 percent by 2020, with emissions having been cut considerably along the way.

The growing need for traffic safety still continues to be an extremely important issue for us since it is all about protecting lives and avoiding accidents. Already today, we are playing a significant role in realizing the vision of "zero accidents" with a large number of products and systems.

In addition to the automotive industry, we are partner to many other key industries that are subject to different economic cycles. Our ContiTech division, for instance, is a committed and very successful partner to the machine and plant construction, shipping, aviation, railway engineering, and mining industries.

The financial and economic crisis of 2009 demonstrated in a dramatic way that our world's globalized markets have become much more multi-layered and dynamic, and less predictable. The winners in the long term will not be the biggest or the fastest, but the most adaptable companies.

This is why in the past year we began to clearly analyze where and how we can become better in our daily work behavior, and we have launched a comprehensive development process to this end. In the coming months, we want to start adjusting better to fastchanging customer requirements. This involves, for example, more effective management and more efficient networking of employees across all levels and continents, both internally and beyond the boundaries of our organization. In addition, we want to simplify our value-added chains and tune ourselves more closely to the speed of the markets.

As you can see, the entire Continental team is again on the path to success. We look forward to the road ahead and are glad that you will be actively supporting us along the way.

Sincerely,

Signature Dr. Elmar Degenhart

Dr. Elmar Degenhart
Chairman of the Executive Board

top

v, Chairman of the Executive Board

Dr. Elmar Degenhart
Chairman of the Executive Board

 

Continental Value Contribution (CVC). The CVC represents the absolute amount of additional value created, and the Delta CVC represents the change in absolute value creation over the prior year. This change in the absolute contribution measured by Delta CVC allows us to monitor the extent to which management units generate value-creating growth or resources must be employed more efficiently. The CVC is measured by subtracting the weighted average cost of capital (WACC) from the ROCE and multiplying this by the average operating assets for the fiscal year. The weighted average cost of capital calculated for the Continental Corporation corresponds to the required minimum return. The cost of capital is calculated as the weighted average ratio of the cost of equity and borrowing costs.

Currency swap. Swap of principal payable or receivable in one currency into similar terms in another currency. Often used when issuing loans denominated in a currency other than that of the lender.

Defined Benefit Obligation (DBO). DBO is defined as the present value of all vested and non-vested benefits calculated on the basis of estimated salary levels at retirement. The only actuarial method that may be used to calculate the DBO is the projected unit credit method. DBO corresponds to PBO (projected benefit obligation).

Derivative financial instruments. Transactions used to manage interest rate and/or currency risks.

Dividend payout ratio. The dividend payout ratio is the ratio between the dividend for the fiscal year and the earnings per share.

EBIT. Earnings Before Interest and Taxes. EBIT represents the results of operations. Since 2002, when the amortization of goodwill was discontinued, EBITDA has been equal to EBIT.

EBITA. EBIT before scheduled goodwill amortization.

EBITDA. Earnings before interest, taxes, depreciation and amortization.

Finance lease. Under a finance lease, the lessor transfers the investment risk to the lessee. This means that the lessor bears only the credit risk and any agreed services. The lessee is the beneficial owner of the leased asset. Finance leases are characterized by a fixed basic term during which the lease may not be terminated by the lessee.

Gearing ratio. The gearing ratio represents the net indebtedness divided by total equity, expressed as a percentage.

Hedging. Securing a transaction against risks, such as fluctuations in exchange rates, by entering into an offsetting hedge transaction, typically in the form of a forward contract.

IAS. International Accounting Standards.

IASB. International Accounting Standards Board. The authority that defines the International Financial Reporting Standards.

IFRIC. International Financial Reporting Interpretations Committee. Committee that reviews and determines appropriate treatment of accounting issues within the context of IFRS and IAS.

IFRS. International Financial Reporting Standards. The accounting standards issued by the IASB.

Interest rate cap. An interest rate cap sets an upper limit for a variable interest rate in relation to a notional debt amount. To the extent that the variable interest due on the underlying debt exceeds the cap amount, the holder of the cap receives income as compensation in the amount of the difference to the cap. An up-front premium is paid as consideration for the cap.

Interest rate swap. An interest rate swap is the exchange of interest payments between two parties. For example, this allows variable interest to be exchanged for fixed interest, or vice versa.

Net indebtedness. The net amount of interest-bearing liabilities as recognized in the balance sheet, cash and cash equivalents, the positive fair values of the derivative financial instruments as well as other interest-bearing investments.

Operating assets. Operating assets are the assets less liabilities as reported in the balance sheet, without recognizing the net indebtedness, discounted trade bills, deferred tax assets, income tax receivable and payable, as well as other financial assets and debts.

Operating lease. A form of lease that is largely similar to rental. Leased assets are recognized in the lessor's balance sheet and capitalized.

PPA. Purchase Price Allocation. PPA is the process of breaking down the purchase price and assigning the values to the identified assets, liabilities, and contingent liabilities following a business combination. Subsequent adjustments to the opening balance sheet – resulting from differences between the preliminary and final fair values at the date of initial consolidation – are recognized as "PPA adjustments".

Rating. Standardized indicator for the international finance markets that assesses and classifies the creditworthiness of a debtor. The classification is the result of an economic analysis of the debtor by specialist rating companies.

ROCE. Return On Capital Employed. We define ROCE as the ratio of EBIT to average operating assets for the fiscal year.

SIC. Standing Interpretations Committee (predecessor to the IFRIC).

US GAAP. United States Generally Accepted Accounting Principles. These principles are subdivided into binding and guiding principles.

Weighted Average Cost of Capital (WACC). The WACC represents the weighted average cost of the required return on equity and net interest-bearing liabilities.