The global economy will continue to develop at two different speeds – a slower development with low growth rates in the advanced economies and much more dynamic growth in the emerging and developing markets.
Macroeconomic development
According to the forecast made in January 2013 by the International Monetary Fund (IMF), the global economy will generate GDP growth of 3.5% in 2013, up slightly on the 2012 level of 3.2%. Whereas the economic performance of advanced economies is likely to see sluggish growth of around 1.4% (2012: 1.3%), the emerging and developing markets will again display a much more dynamic development with an anticipated growth rate of 5.5% (2012: 5.1%). This forecast is based on the two assumptions that initial positive effects will be seen in surmounting the sover- eign debt crisis in the eurozone and that the transition- al solution for avoiding the fiscal cliff in the U.S.A. will have only a moderate negative impact on growth. The advanced economies will be held back in particu- lar by continuing general uncertainty regarding the long-term effects of measures to surmount the debt crisis, and especially the consolidation of national budgets in the eurozone. However, financing situations and conditions for business enterprises will improve again. The increasing trading volume anticipated in 2013 also indicates restored confidence in the ad- vanced economies.
In the emerging and developing markets, there will be positive stimulus resulting from structural policy measures, government investments to stimulate the economy and improve infrastructure, and improved incentives for international direct investments.
However, there are still significant risks to the econ- omic outlook. According to the IMF, the greatest risk relates to the possibility of further intensification of the debt crisis in the eurozone. It sees a further major risk factor, among other things, in a possible significant rise in the oil price as a result of increased geopolitical tensions. The IMF still expects the pace of growth in the advanced economies to continue to be curbed by necessary structural adjustments in the medium term.
The preceding information relating to the forecast reflects the current knowledge at the time this report went to press.
Development of key customer
sectors
Global original equipment business with vehicle manu- facturers has a significant influence on the perfor- mance of the Automotive divisions Chassis & Safety, Powertrain and Interior. The ContiTech division also generates more than 50% of its sales with the global vehicle manufacturers. By contrast, the global re- placement markets for passenger, light truck and commercial vehicle tires are vital for the Tire division. With regard to light vehicle production in 2013, we currently expect last year’s trend to continue, albeit at a slower pace. After a 5% increase in the previous year, in 2013 we expect global production of passen- ger cars, station wagons and light commercial vehicles to grow by 2% to 82.5 million units.
With a rise of around 5.5%, Asia will remain the driving force in this development – driven by the substantial growth anticipated in light vehicle production in China. In NAFTA, we anticipate low growth of 2%. By con- trast, light vehicle production in Europe is likely to decrease again on account of the continuing economic crisis in large parts of the eurozone, but should stabi- lize at a level of 18.4 million units, corresponding to a reduction of 2%.
In 2014, we expect light vehicle production in Europe to pick up again slightly. We are also optimistic for the other regions, provided their general economy devel- ops as expected. Overall, global light vehicle produc- tion could therefore record somewhat stronger growth in 2014 than in 2013, rising by 3% to 84.9 million units.
Production of light vehicles* in millions of units** 2012 2013 2014 Europe 18.8 18.4 18.7 NAFTA 15.2 15.5 15.8 South America 4.3 4.4 4.6 Asia 40.3 42.5 43.8 Other markets 2.3 1.7 2.0 Worldwide 80.9 82.5 84.9
Source: IHS *passenger cars, station wagons, and light commercial vehicles <6t **preliminary figures and own estimates
Production of heavy vehicles* in thousands of units**
2012 2013 2014 Europe 615 599 652 NAFTA 496 521 545 South America 185 205 228 Asia 1,817 1,967 2,039 Other markets 8 9 8 Worldwide 3,121 3,301 3,472
Source: IHS *commercial vehicles >6t **preliminary figures and own estimates
Global production of heavy vehicles should recover in 2013 following the sharp drop in the previous year. We are currently anticipating an increase of 6% to 3.3 million units worldwide. Improvements are expected in the Asian and South American markets in particular, but we also see signs of a recovery in NAFTA.
In 2014 we currently expect to see a further increase in heavy vehicle production of 5% to approximately 3.5 million units.
In our opinion, global demand for replacement pas- senger and light truck tires will increase again in 2013. We currently expect sales volumes to rise by 3% to reach more than one billion tires worldwide for the first
calculated by the Department of Transportation (DOT) on a monthly basis, have also developed positively recently and are expected to amount to around their 2010 level.
We also expect an increase – of 4% – in sales volumes of replacement passenger and light truck tires in South America. For Europe, we anticipate a 3% recovery in 2013 following the previous year’s sales slump, and a further improvement of 4% in 2014, driven primarily by the Eastern European markets. The sales volumes in the other regions should show similar growth in 2014, meaning that we currently expect an increase of 4% to 1.07 billion tires on a global level.
The highest growth, amounting to 5.5%, is forecast for South America.
The European replacement market, which has record- ed declining sales volumes since July 2011, should achieve a turnaround in 2013 and improve by 5% as against 2012 to approximately 19.8 million units. Here we anticipate catch-up effects among truck users, as toll statistics show that kilometers driven have in- creased slightly in the past two years, for Germany at least. (The toll statistics measure the kilometers driven on German roads by trucks subject to tolls with a permitted weight of 12 tonnes or more, and are pub- lished by the German Federal Office for Goods Transport on a monthly basis.)
In NAFTA, too, we expect to see catch-up effects in terms of demand for replacement commercial vehicle tires, which should cause truck tire sales volumes to grow by 2% to 21.0 million units. In contrast to the reduced demand for truck tires in 2012, the tonnage index calculated on a monthly basis by the American Trucking Association (ATA) was higher than its 2011 level. We anticipate a further rise in tonnage in 2013, meaning that increasing truck tire wear should also lead to the above-mentioned increase in demand for replacement commercial vehicle tires.
Provided these trends in the individual regions contin- ue, we currently estimate that demand for replacement truck tires will grow by 4.5% in 2014 to total 148.4 million units worldwide.
Replacement sales of passenger, light truck and 4x4 tires*
in millions of units 2012 2013 2014 Europe 287.4 296.0 307.9 NAFTA 247.9 252.8 260.4 South America 59.3 61.5 63.8 Asia 277.6 295.4 315.4 Other markets 117.6 116.1 118.5 Worldwide 989.8 1,021.8 1,066.0
Source: LMC World Tyre Forecast Service *preliminary figures and own estimates
Replacement sales of truck tires*
in millions of units 2012 2013 2014 Europe 18.9 19.8 20.7 NAFTA 20.5 21.0 21.6 South America 12.7 13.4 14.2 Asia 67.3 70.2 74.0 Other markets 17.2 17.6 17.9 Worldwide 136.6 142.0 148.4
Expected business development in 2013
For 2013, we anticipate an increase in global light vehicle production (passenger cars, station wagons and light commercial vehicles) from 80.9 million units in 2012 to approximately 82.5 million in 2013. We also expect demand on Continental’s key replacement tire markets to grow by around 2%. Based on these as- sumptions, we anticipate a rise in sales of around 5% to more than €34 billion for the Continental Corpora- tion. Following the record year 2012, in which we already achieved many of our medium-term financial targets early, our goal is to maintain the high level of the adjusted EBIT margin at over 10% in 2013 as well. In the current year, there are risks for our sales and EBIT target arising from a slowdown in global econom- ic growth, and particularly from a further decline in economic activity within the eurozone with corre- sponding effects on the assumptions regarding pro- duction trends in Europe. An equally important factor affecting achievement of our targets is an agreement between the political parties in the U.S.A. on further action regarding the “fiscal cliff”, which must be reached in May 2013 at the latest. Otherwise, the spending cuts and tax increases which would then take effect automatically could have negative conse- quences for U.S. economic growth in the second half of 2013.
In contrast, opportunities may arise from a better development of the global economy, and particularly the eurozone and the U.S.A., than is currently de- scribed in the report on expected developments. Giv- en a more favorable development, we should succeed in increasing consolidated sales by more than 5%. In the coming years, we are essentially aiming for sales growth that is roughly 5 percentage points higher than the growth of our reference markets. However, this will be difficult to achieve in the current year due to a number of adverse influences, such as the very low demand for diesel vehicles in Southern European
the latest. In 2012 alone, we acquired an order volume of approximately €25 billion in lifetime sales within the Automotive Group.
In this context, we are aiming for sales growth of more than 4% to over €20 billion in the Automotive Group in 2013. The adjusted EBIT margin should increase slightly year-on-year to over 8%. For the Powertrain and Interior divisions, we anticipate an improvement in the adjusted EBIT margin.
For the Rubber Group, we expect sales to climb by 6% to more than €14 billion, and the adjusted EBIT margin to exceed 14%.
We do not currently anticipate any significant negative impact from increases in raw material prices in 2013. Here we are assuming an average price of $3.60 per kilogram for natural rubber (TSR 20) and $2.50 per kilogram for butadiene, a base material for synthetic rubber. However, this estimate is still dependent on whether and to what extent demand for tires in Asia, Europe and NAFTA can recover over the course of 2013. We cannot rule out the possibility that, in the event of a faster recovery of the tire replacement mar- kets than we had assumed, the price quotations for both of these raw materials may undergo significant increases over the remainder of the year. Whether and to what extent such increases in raw material prices can be quickly passed on to consumers in the current fiscal year remains to be seen.
As a result of good progress in reducing our indebted- ness, we expect interest expenses for bank loans and bonds to decrease further in the current year. How- ever, net interest expense will be negatively impacted by two extraordinary factors, which had a positive effect in some cases on the development in 2012. This negative impact will result firstly from a reclassification of interest expenses for pension provisions from per- sonnel expenses to interest expenses. This effect
from 2011 and 2012 for the bonds issued in 2010 and 2012. In the worst case, this effect could amount to around €250 million.
For 2013, we anticipate special effects of approxi- mately €50 million. Amortization from the purchase price allocation resulting primarily from the acquisition of Siemens VDO in 2007 will amount to around €370 million in 2013 (2012: €445.5 million). By the end of 2014, the purchase price allocation from the acquisi- tion of Siemens VDO will be fully amortized. The tax rate will be under 30% in 2013.
Capital expenditure in 2013 is expected to remain at the previous year’s high level. One main focus will be expanding the presence of our automotive business in Asia. Within the Chassis & Safety division, the expan- sion of capacity for the new generation of braking systems MK 100 (ABS and ESC systems) remains the largest investment project. In the Powertrain division, we are investing particularly in manufacturing capacity for new generations of products at the locations in Limbach-Oberfrohna and Roding, Germany. The Inte- rior division is increasing capacity for central control units at the location in Frenstat, Czech Republic, and expanding production of instrument clusters at the locations in Timisoara, Romania, and Wuhu and Shanghai, China.
Within the Rubber Group, capital expenditure will be focused on the establishment and expansion of the new tire plants in Kaluga, Russia, and Sumter, South Carolina, U.S.A., and on the expansion of the tire plant in Hefei, China. We are also investing in expanding production capacity in Puchov, Slovakia. With regard to commercial vehicle tires, the core projects for 2013 will be the expansion of capacity in Otrokovice, Czech Republic, and Mt. Vernon, Illinois, U.S.A. Capital ex- penditure in the ContiTech division will focus on in- creasing capacity in the Fluid Technology, Conveyor Belt Group and Power Transmission Group business units.
Further reduction of net indebtedness remains an important goal for Continental. Despite the proposed increase in the dividend distribution (by €150 million to €450 million) for fiscal 2012 (payable in 2013), net indebtedness is expected to decrease further in 2013. We are therefore planning for free cash flow of more than €700 million in the current year. Following the
renegotiation of the syndicated loan in January 2013, there are no major refinancing requirements in the current year or the following year. Despite the negative influences on equity resulting from the first-time appli- cation of new accounting standards in the current year, the gearing ratio (net indebtedness to equity) should remain below 60% in 2013. As a result of the first-time application, pension provisions will rise by roughly €1.2 billion in comparison to the previous balance sheet disclosure. Taking into account deferred taxes, equity will accordingly decline by around €1.0 billion. However, we still expect the equity ratio to be above 32% in 2013.
As expected, the start to 2013 has proven difficult. Current assessments indicate that light vehicle pro- duction in Europe and NAFTA put together will fall by around 8% in the first quarter of 2013. For Europe alone, where Continental generates approximately 50% of its sales in the Automotive Group, we antici- pate a decline in production of 12%. This downturn in the first quarter cannot be offset this year by growth in other regions, as was the case in the previous quarter (Q4 2012), for example. In addition, demand on the replacement tire markets in Europe and NAFTA is also continuing to develop sluggishly.
Overall, we therefore expect consolidated sales to decrease by 1% to 3% in comparison to the record sales in the first quarter of 2012. This decline in sales will mainly be attributable to the Automotive divisions. Over the remainder of the year, we anticipate a rise in consolidated sales, particularly in the second half of 2013, supported by an increase in global light vehicle production and demand on the replacement tire mar- kets.
Outlook for 2014
In its latest World Economic Outlook from January 2013, the International Monetary Fund (IMF) forecasts an increase in global economic growth of more than 4% in 2014. According to the IMF, growth in the euro- zone will pick up considerably then. In accordance with this, we anticipate a 3% increase in global light vehicle production in 2014 and expect demand on the replacement passenger and light truck tire markets to grow by around 4%.
If this scenario proves correct, the Continental Corpo- ration is likely to post high single-digit growth in sales again in 2014. To accompany this growth with suffi- cient capacity, investments equivalent to roughly 6% of consolidated sales would be necessary, although we would still finance these entirely from free cash flow. Given a constant high dividend distribution, net indebtedness should decrease further. We would then use our regained financial strength to finance external growth to a greater extent than in the previous years.
154 Statement of the Executive Board 155 Independent Auditor’s Report
156 Consolidated Statement of Income and Comprehensive Income
157 Consolidated Statement of Financial Position 158 Consolidated Statement of Cash Flows 159 Consolidated Statement of Changes in Equity
Notes to the Consolidated Financial