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Corporate Management

 

A core component of our strategy is the ongoing enhancement of the value of our company. The financing strategy fosters growth that adds value.

Value management
Key financial performance indicators for Continental relate to the development of sales, capital employed, and adjusted EBIT margin, as well as the amount of capital expenditure, and free cash flow. 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 corporate objectives center on the sustainable enhancement of the value of each individual business unit. This goal is achieved by generating a positive return on the capital employed in each respective business unit. At the same time, this return must always exceed the equity and debt financing costs of acquiring the operating capital. It is also crucial that the absolute contribution to value (Continental Value Contribution, CVC) increases year for 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 operating earnings before interest and tax (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)

Continental Value Contribution (CVC)

  • Operating earnings before interest and tax (EBIT) are calculated from the ongoing sales process. The figure is the net total of sales and expenses plus income from at-equity accounted investees and from investments but before interest and income tax expense. Consolidated EBIT amounted to €4.1 billion in 2016.
  • 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 2016, average operating assets amounted to €20.5 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. ROCE amounted to 20.0% in 2016, once again significantly exceeding the cost of capital. Compared to the previous year, ROCE dropped by 0.9 percentage points. This was due to several isolated events in the Automotive Group in 2016, particularly in the third quarter, which had a negative impact on EBIT of around €480 million.
  • 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 a mult-iyear average, the weighted average cost of capital for our company is about 10%.

Composition of gross indebtedness (€4,952 million)

Composition of gross indebtedness (€4,952 million)

  • Value is added only if ROCE exceeds the weighted average cost of capital (WACC). We call this value added, produced by subtracting WACC from ROCE multiplied by average operating assets, the Continental Value Contribution (CVC). The decline in ROCE of 0.9 percentage points in turn resulted in a CVC of €2,045.3 million in 2016, a drop of €99.9 million year-on-year.
  • In the long term, enterprise value by our definition will increase only if the CVC shows positive growth from year to year. In 2016, the aforementioned negative effects caused CVC to fall for the first time after rising for six years in a row.

ROCE by division (in %)
  2016 2015
Chassis & Safety 13.1 19.0
Powertrain 12.5 14.3
Interior 12.6 19.2
Tires 40.8 39.2
ContiTech 13.5 5.3
Continental Corporation 20.0 20.9

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

The central function Finance & Treasury provides the necessary financial framework to finance corporate growth and secure the long-term existence of the company. The company’s annual investment needs is currently between 6% and 6.5% of sales. The reasons for this are the continuing increase in incoming orders in our automotive areas and the successful implementation of Vision 2025 in our Tire division, which will mean the expansion of tire capacity, particularly in North America and Asia.

Our goal is to finance ongoing investment requirements from the operating cash flow. Other investment projects, for example acquisitions, should be financed from a balanced mix of equity and debt depending on the gearing ratio and the liquidity situation to achieve a constant improvement in the respective capital market environment. In general, our goal is to continue to keep the ratio of net indebtedness to equity (gearing ratio) below 20% in the coming years and ensure that it does not exceed 60% in general. If justified by extraordinary financing grounds or specific market circumstances, we can rise above this maximum level under certain conditions. The equity ratio should exceed 35%. In 2016 the equity ratio was 40.7% and the gearing ratio 19.0%.

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 2016, this mix consisted of bonds (68%), syndicated loan (0%), other bank liabilities (19%) and other indebtedness (13%) based on the gross indebtedness of €4,952.3 million. The term loan of over €1.5 billion that is part of the syndicated loan ended in April 2016. It was fully redeemed early by the end of March 2016 and was not extended. As a result, the committed volume of the syndicated loan, which just consists of the revolving tranche, likewise declined to €3.0 billion since the end of March 2016 (PY: €4.5 billion). The tranche of over €3.0 billion was extended by one year until April 2021. The financing mix will not change significantly.

Maturities of gross indebtedness (€4,952 million)

Maturities of gross indebtedness (€4,952 million)

The corporation generally strives for liquidity as at the end of reporting periods of between €1.0 billion and €1.5 billion, which 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. Cash and cash equivalents amounted to €2,107.0 million as at December 31, 2016. There were also committed and unutilized credit lines of €3,888.4 million.

Gross indebtedness amounted to €4,952.3 million as at December 31, 2016. A key financing instrument is the syndicated loan with a revolving credit line of €3.0 billion that has been granted until April 2021. The revolving credit line had not been utilized as at December 31, 2016.

Around 67% of gross indebtedness is financed on the capital market in the form of bonds maturing between March 2017 and September 2020. The interest coupons vary between 0.0% and 3.125%. The repayment amounts are €750.0 million each in 2017 and 2018, and €500.0 million in 2019. In 2020, the amounts are €600.0 million and €750.0 million. In addition to the forms of financing already mentioned, there were also bilateral credit lines with various banks in the amount of €1,831.0 million as at December 31, 2016. In addition to finance leases, Continental’s other corporate financing instruments currently include sale of receivables programs and commercial paper programs.

Maturity profile
Continental always 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. Other than short-term maturities (which are usually rolled on to the next year), the repayment of the bonds each amounting to €750.0 million due in March 2017 and July 2018 are on the agenda for 2017 and 2018. In view of the bond that is due in March 2017, a euro bond of €600.0 million with an interest coupon of 0.0% was placed at the end of November 2016.

Further improvement in Continental’s credit rating
In the reporting period, Continental was rated by the three rating agencies, Standard & Poor’s (S&P), Fitch and Moody’s. Even after the announcement of the three major acquisitions (Hoosier Racing Tire, Zonar Systems and the Hornschuch Group) and the change in the outlook for the year under review, all three agencies confirmed the credit rating of Continental AG in the investment-grade category. The reason for this continues to be the company’s good operating performance. On May 11, 2016, the rating agency Standard & Poor’s upgraded Continental AG from BBB with a positive outlook to BBB+ with a stable outlook. On October 24, 2016, Fitch also raised its credit rating to BBB+ with a stable outlook. Moody’s did not change its credit rating for Continental AG.

Continental’s credit rating
  2016 2015
Standard & Poor’s1    
Long term BBB+ BBB
Short term A-2 A-2
Outlook stable positive
Fitch2    
Long term BBB+ BBB
Short term F2 F2
Outlook stable positive
Moody’s3    
Long term Baa1 Baa1
Short term no rating no rating
Outlook stable stable

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