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Chairman’s Letter

 

Dear Shareholders,

A good player demonstrates a real passion to win, even when times are tough on the economic front. In the past year, your Continental did just that, growing in spite of weak economies in Southern Europe and some emerging markets and intensified competition around the world. The sales increase and the level of earnings underscore our strong competitiveness. Our financing rests on a solid foundation. This has been confirmed by the three major rating agencies Moody’s, Standard & Poor’s, and Fitch, all of which re-assigned us the investment grade rating without any restriction. The end of December 2013 saw our share price peaking at a then historic high of €161.90. On the DAX, we were once again the winner last year in terms of the relative rise in share price.

All in all, last year we achieved further significant milestones on our successful path, strengthened the basis for profitable growth, and demonstrated our future potential.

As a result of all our efforts, you – our shareholders – recorded an 82% increase in the share price in the past year. On top of this, a dividend of €2.25 was paid, making for a total return of 86%. Your Continental shares not only significantly outperformed the DAX and the EURO STOXX 50, but also beat the EURO STOXX Automobiles & Parts by 45 percentage points.

Behind this successful track record is the strong commitment of our almost 180,000 Continental employees and their collaboration with our numerous customers and business partners. For this I wish to thank them on behalf of the entire Executive Board.

Our global team once again proved that values create value. The two go together, since if we fail to put values into practice we cannot be competitive or create value. They are what determines how efficiently and effectively we perform our work, how successfully we operate around the world, and how quickly we launch pioneering new technologies on the market. Our four corporate values – Trust, Freedom To Act, For One Another, and Passion To Win – form the inner compass that we use to determine and implement the necessary changes.

This orientation is very important to us, as our industry is facing profound challenges. The increasing digitalization of all areas of life is bringing changes in both mobility and industrial production. It requires us to develop entirely new solutions. The integration of the Internet is opening up new, additional business opportunities for us.

Our advanced driver assistance systems already help millions of people around the world with tasks such as keeping in the lane, monitoring the blind spot, avoiding a crash at the back of a traffic jam, and preventing collisions with pedestrians in cities. In this way, we make significant contributions to increased safety in road traffic.

Our vision: zero accidents. And this is no longer a utopia!

Our assistance systems help to substantially reduce the number of accident victims while also enhancing comfort and quality of life for their users of all ages. And finally, they foster safe communication while driving.

Such systems have already sparked a great deal of interest extending beyond national boundaries, which was also reflected in the findings of a representative international study we recently published. For example, in Germany alone 90% of drivers stated that they consider driver assistance systems to be very helpful. More than half of motorists in the countries surveyed are open to the topic of automated driving. Even their price expectations are at a realistic level: The drivers surveyed in Germany feel that highly automated driving on freeways at up to 130 km/h would be worth around an additional €3,000 on average. The complete findings of the Continental Mobility Study 2013 can be viewed online at www.continental-mobility-study.com.

In 2016, we will already generate sales of roughly one billion euros with advanced driver assistance systems.

We use these systems to process the data collected by our sensors, infrared cameras and stereo cameras installed in the vehicle. Thanks to networking with powerful data centers, vehicles will also be able to “look around the corner” in the coming decade, enabling them for instance to give warning of an accident beyond a bend in the road. It will thus be possible for them to communicate with other vehicles. We anticipate that by around 2025 vehicles will even be able to drive on a fully automated basis, making them even safer, more efficient, more comfortable and more convenient than they are today.

We are already on the lookout for suitable development partners for this future of mobility, as we are very aware that we cannot take on this task alone. To develop the best systems, we need the best technologies. That is why we are seeking collaborations with global market leaders such as Cisco, IBM, and Nokia’s HERE mapping software unit. We want to work together to network vehicles with one another seamlessly and securely, and to process the resulting huge volumes of data so that they can be used effectively. In this context, we signed an agreement with the BMW Group in January 2013 for the joint development of an electronic co-pilot for driving on freeways.

As you can see, your Continental is playing a key role in advancing the future of automotive digitalization. However, in light of all our excellent future prospects, we are naturally also taking advantage of the many growth opportunities offered by our current business.

For instance, this is what we are doing in China, where we have geared our organization towards fast, sustainable, and profitable growth, increasing our sales by 23% last year. In August 2013, we entrusted my fellow Board member, Dr. Ralf Cramer, with managing our business there. His successor in charge of the Chassis & Safety division, and thus a new Board member, is Frank Jourdan, who previously headed the Electronic Brake Systems business unit.

I am delighted that the contract of my colleague on the Board, Heinz-Gerhard Wente, has been extended through April 2015. As head of the ContiTech division, he and his team work with great commitment to drive forward the expansion of our industrial business.

We have concluded an agreement with The Carlyle Group, U.S.A., to buy Veyance Technologies, Inc., U.S.A. Veyance operates globally in the field of rubber and plastics technology. With its some 9,000 employees, it posted sales in 2013 of approximately €1.5 billion, 90% of which was generated in the industrial business. As soon as the respective antitrust authorities have given their approval, we shall have moved a step closer to our strategic goal of further increasing the share of our sales derived from industrial clients and the aftermarket.

Each year we invest nearly two billion euros in the further expansion of production throughout the corporation. In Kaluga, Russia, for instance, we began manufacturing passenger tires for the Russian market in the fall of 2013, ahead of schedule. Some 400 employees will initially produce 1.5 million summer and winter tires there. In the long term, capacity can be increased to more than ten million passenger tires per year.

Our new tire plant in Sumter, South Carolina, U.S.A., started operations early in 2014 as planned. After the end of the first expansion stage in 2016, this plant will produce around four million passenger tires each year. By 2021 we intend to increase annual capacity to as much as eight million tires. Around 1,600 new jobs will be created as part of this investment totaling approximately U.S. $500 million.

Our three Automotive divisions are also excellently positioned in their respective areas. An external study identified the 20 fastest-growing automotive products and systems, with which our Automotive divisions achieve roughly 50% of their sales.

At present, solutions that are being marketed with great success include our electronic braking systems, such as ABS (anti-lock brake system) and ESC (electronic stability control), with over 20 million units sold each year.

The 48 Volt Eco Drive system for graduated, cost-effective powertrain hybridization enables more efficient recovery of braking energy. Together with forward-looking energy management, this allows for fuel savings of around 13%.

Our new head-up display is much larger and can superimpose photo-realistic images and 3D animations, thus presenting information for drivers in a more intuitive manner.

From January 1, 2015, the European Commission intends to introduce in all new vehicles the automatic emergency call system eCall, which we are already mass producing. In the event of an accident, this system automatically sends a call to the emergency phone number 112. A pan-European test showed that 90% of calls reached the emergency response centers within 20 seconds.

With these and other solutions, we save lives and improve the quality of life – millions of times over, in three out of four vehicles on all roads around the world.

For this reason, we spend more than €1.8 billion a year on research and development for future mobility. This is equivalent to roughly 5.6% of annual sales – an exceptionally high level. In Germany’s DAX 30 bluechip index alone, your Continental is thus one of the top five future-oriented companies. With about 10,000 software engineers on the team, we are one of Germany’s largest employers for this profession.

As you can see, with Continental the future is starting earlier – both for our customers and for you as investors.

In 2014, we are expecting sales to grow to about €35 billion. Please continue to accompany us along our successful path, as it is the trust that you, our shareholders, place in our future potential that inspires us.

 

Signature Dr. Elmar Degenhart

Dr. Elmar Degenhart
Chairman of the Executive Board

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v, Chairman of the Executive Board

Dr. Elmar Degenhart
Chairman of the Executive Board

 

American Depositary Receipts (ADR)ADRs securitize the ownership of shares and can refer to one, several, or even a portion of a share. ADRs are traded on U.S. stock exchanges in the place of foreign shares or shares that may not be listed on U.S. stock exchanges.

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

GDP. Gross domestic product is a measure of the economic performance of a national economy. It specifies the value of all goods and services produced within a country in a year.

Capital Employed. Capital employed refers to the funds used by the company to generate its sales.

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.

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

EBIT. Earnings Before Interest and Taxes. EBIT represents the results of operations.

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.

IAS. International Accounting Standards. Accounting standards of the IASB.

IFRS. International Financial Reporting Standards. The accounting standards of the IASB.

Net indebtedness. The net amount of interest-bearing financial liabilities as recognized in the balance sheet, cash and cash equivalents, the positive fair values of the derivative 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. According to our definition, operating assets correspond to capital employed.

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).

The WACC represents the weighted average cost of the required return on equity and net interest-bearing liabilities.