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Continental AG profit rises on car electronics, tires

Continental AG, the world's fourth-largest tiremaker, said Q4 profit rose 64% as sales of car electronics and high-performance tires increased.

The shares rose to a record. Net income rose to €323.4 million ($423.3 million) from €196.6 million, CFO Alan Hippe said at a Frankfurt press conference today. Revenue increased to €3.94 billion from €3.57 billion. The company plans to double its dividend to €2 a share. „Continental has found the recipe for success in the auto supplier industry,” said Patrick Juchemich, an analyst at Sal Oppenheim in Frankfurt with a „buy” recommendation on Continental stock. Continental sold more profitable products to carmakers last year such as electronic stability systems, tire pressure monitors and winter tires. The Hanover, Germany-based company, which last year acquired Motorola Inc.'s automotive-electronics division, has boosted productivity in part by shifting production to low-cost countries such as Romania and Brazil. Shares of Continental rose as much as €2.66, or 2.7%, to €102.45 and were up 0.1% at €99.88 as of 1:05 p.m. in Frankfurt. The stock has gained 18% over the past 12 months, giving the company a market value of €14.6 billion. „We will not deviate one millimeter from our focused efficiency course,” CEO Manfred Wennemer said at the press conference.

Q4 net income was also helped by lower taxes in the US related to health-care costs, Hippe said. The tiremaker expects sales this year to rise 5% and operating profit to increase, Wennemer said. The company plans no share buybacks. The company spent $1 billion last year to buy the Motorola division. Continental is looking to make more acquisitions, including Goodyear Tire & Rubber Co.'s engineered products unit and Siemens AG's VDO unit, and has about €4 billion in cash. „It would be foolish in an industry that is consolidating and moving fast not to have enough cash to act,” he said. Prices for raw materials such as rubber and oil will continue to rise over the next decade and increases are „something we will have to live with,” said Wennemer. The supply-price increases reduced 2006 profit by €317 million. The takeover of the Motorola division added communications systems for drivers to an electronic-product line that also includes stability systems that prevent vehicle rollovers. There is „huge” potential for telematics with demand for entertainment systems such as connecting mobile music-listening devices to a vehicle's sound system and for safety including car-to-car and car-to-environment programs, Wennemer said. Continental expects a decision by Goodyear in the Q1 about what it plans to do with its engineered-products business, which competes with the ContiTech division, Gerhard Lerch, the head of ContiTech, said at the press conference.

A VDO transaction will depend on a decision by Siemens, Wennemer said. „It's up to Siemens alone what steps VDO should take,” he said. A takeover of the business would benefit both Siemens and Continental and create a second large German competitor in the industry after Robert Bosch GmbH, he added. Continental's Automotive Systems unit, which includes vehicle electronics, accounted for 40% of 2006 group revenue, while car and truck tires contributed 41%. Full-year net income increased to €981.9 million, or €6.72 a share, from €929.6 million, or €6.38, Continental said. Revenue rose 8% to €14.9 billion from €13.8 billion. Quarterly revenue at the automotive systems unit rose 22% to €1.59 billion. Sales gained 5.8% at the passenger tire unit to €1.3 billion and rose 2.8% at the truck tire division to €380.8 million. The ContiTech division reported a 1.4% decline in sales to €705 million. Operating profit at the automotive systems fell 54% to €57.9 million before of integration costs for Motorola. The passenger tire division reports a 73% increase to €325.9 million and the truck tire division had a 26% gain at €49.6 million. Continental's Q4 earnings before interest and tax as a proportion of sales rose to 12.3% from a margin of 10.3% a year earlier. (Bloomberg)