Focusing on the Future of Mobility: Safe, Clean, and Intelligently Connected Remarks from the Executive Board Chairman Dr. Elmar Degenhart Continental Aktiengesellschaft, Hanover, Germany at the Annual Shareholders Meeting on April 30, 2015, in Hanover The spoken word shall prevail.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 2 Focusing on the Future of Mobility: Safe, Clean, and Intelligently Connected My Esteemed Shareholders, Members of the Supervisory Board, Ladies and Gentlemen, Honored Guests, On behalf of the Executive Board and our employees, I would like to welcome you to Continental s Annual Shareholders Meeting. I am very pleased to see you here today. We thank you for your interest in our business development. You are probably wondering why I have brought along my motorcycle helmet. You may have been distracted by the helmet and not noticed my new glasses. But the glasses and the helmet do have one thing in common. They both use a computer program developed by us. With this program, we generate information that will be displayed in front of your eyes. A mini-screen is built into the helmet for this purpose. My glasses are also fitted with a screen. The projection surface is just 5 by 5 millimeters in size. I am reading this speech with just one eye. On the large projection screen you can see what I m looking at right now: Continental The Future in Motion. In the future, we will save many lives with our software, because with it bikers will have important information displayed right in front of their eyes, such as warning messages or directions. Or the biker is able to see what is going on in the blind spot. To make this possible, we use the data from the rear-view camera built into the helmet. Using predictive technology, we help prevent accidents and collisions.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 3 I ve heard that many people would even like to have a feature like this for their friends, partners or family members. Because it would enable them to visually communicate what is expected of them next. This just might be able to prevent those collisions that can happen in relationships as a result of misunderstandings. Let s see. Maybe our engineers can adapt our program for this. I will definitely take the glasses straight back to the lab later. On a more serious note: Ladies and Gentlemen, We are delighted to join you in looking back at fiscal 2014, which was another extremely successful year indeed. 2014 company results Animation step & loop 34.5 billion sales 3.5% increase in sales 3.3 billion operating result (EBIT) 34.2% decrease of net indebtedness We achieved our goals: Our sales grew by 3.5 percent to 34.5 billion. Our earnings before interest and tax rose to 3.3 billion. We achieved an adjusted EBIT margin of 11.3 percent. Our free cash flow has reached an excellent level of over 2 billion, which is about another 200 million more than in 2013. That puts us in a position to consistently and reliably finance our capital expenditure using our own funds.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 4 Our net indebtedness decreased again, falling by nearly 1.5 billion to approximately 2.8 billion. The gearing ratio that is, the ratio of net indebtedness to total equity is only 25.6 percent. The last time we were at a similar level was before the Siemens VDO acquisition. We achieved all this: Despite the persistently weak economic growth in Europe and South America. Despite the uncertain situation in Ukraine and Russia. Despite the substantial fluctuations in the exchange rate. Despite the negative impact the mild winter had on the winter tire business in Europe. Our business in China and North America went well once again, and these two markets were our driving forces. Continental employees (selection): Excellent work in 2014 Our approximately 190,000 employees around the world contributed to our success in 2014. They have once again done an excellent job. Our thanks go out to the entire Continental team!
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 5 Earnings per share Animation step & loop 11.88 earnings per share 3.25 dividend per share 27.4% dividend payout ratio With your investment, you, as a shareholder, placed your faith in Continental. And you put your money on the right horse. After all, our net income after interest and taxes came to nearly 2.4 billion, which equates to 11.88 per share. A year ago, it was still 9.62. This means we achieved an increase of 23.5 percent. We are therefore delighted to propose to the Annual Shareholders Meeting that a dividend of 3.25 per share be distributed. This is the third year in a row that our dividend has increased. The dividend payout ratio amounts to more than 27 percent, up on the previous year s ratio of 26 percent. Thank you for placing your trust in our performance capacity! We promise you we want to continue to be up there with the best. The basis for this is our business model, which is symbolized by this tree.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 6 Corporate model Animation step & loop Crown: Vision, mission, seven strategic dimensions Roots: Corporate values, key initiatives 29 April 2015 Author, Continental AG 5 Its crown comprises a vision, mission and the seven strategic dimensions, which I have mentioned several times here in the past. The same goes for our tree s roots which give us our energy and confidence. We firmly believe that values create value. Our four corporate values are Trust, Freedom To Act, Passion To Win, and For One Another. We are unlocking the full potential of these values with four key initiatives. Quality First for top quality. The Continental Business System for maximum productivity. The continued development of our corporate culture for fully interconnected collaboration. Balance of Cooperation for the right amount of centralized and decentralized responsibility. Our values and key initiatives enable us to achieve peak performance. In sports, you would say that the mind and body are working as one. But how do we convert our fitness into measurable success?
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 7 The answer to this question lies in the trunk of the tree. Corporate model Animation step & loop Our three value streams: Innovation Productivity Global profitable growth 29 April 2015 Author, Continental AG 6 It links the roots to the crown. It holds our three value streams: 1. Innovation 2. Productivity 3. Global profitable growth In our first value stream, we turn ideas into marketable products. These are our innovations. They are our future. Our employees have already envisioned this future. In the following illustration, you will see examples of important future technologies. We are already putting some of these into production today. Others will follow soon. Mobile Future painted by employees
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 8 We have more of these in the pipeline. Current Innovation examples Advanced driver assistance Systems ehorizon Intelligent transportation systems Holistic humanmachine dialog Hybrid systems technology Electrification of vehicles Printed electronics Light-weight materials Tires made from dandelions We use them to provide valuable contributions toward overcoming the most pressing challenges in our industry. We strive for: Zero road traffic accidents. Clean air thanks to lower fuel consumption and lower emissions. More convenience, more comfort, better information, as well as entertainment and driving enjoyment thanks to intelligent interconnected systems. Technology leadership
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 9 We are systematically researching and developing the key technologies required for this. We spend over two billion euros on this every year, which equates to over six percent of our sales a peak value. There are only very few companies in our industry that operate at such a high level. By doing this, we want to successfully and sustainably help shape the future of mobility. And by doing so, we want to be considered the leading technology company in our industries. In order to do this, we are developing our solutions close to our customers. With this in mind, we expanded our research and development center in Singapore in 2014. Worldwide, we have a total of 127 of these centers, creating tailor-made solutions in 27 markets. 29 April 2015 Author, Continental AG Korbach: Incorporating research and development into the production site 10 At our tire plant in Korbach, we go one step further. Here, we are incorporating our research and development department directly into our production site. From July 2016, we will be producing around 350,000 technologically sophisticated high-performance tires every year. This factory in the factory should set a precedent all around the world. With our innovations, we want to improve above all the safety of road users. To achieve this, we are working in many areas in our organization. Because accidents, ultimately, just belong in a museum.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 10 This is made possible by modern connected technology. Zero accidents are no longer a utopia! You have all undoubtedly driven down smaller highways. They are quite beautiful yet quite dangerous. Six out of ten fatal accidents happen on such roads. Particularly on rainy nights when visibility is poor and roads are slippery, or at dangerous intersections. Safe driving: with Continental tires and electronic stability control Our guardian angels accompany you on your journey. Our tires keep you on track. This has been proven by recent comparative tests, in which they have been awarded top marks. They have been praised in particular for their good steering precision, good safety margins during aquaplaning, short wet and dry braking distances, as well as their excellent mileage performance. Our electronic stability control (ESC) keeps your car from skidding, because in emergency situations, it brakes the wheels individually as required. You as the driver get home safely and don t end up, for example, in a ditch by the side of the road.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 11 Intelligent mobility through interconnectivity 29 April 2015 Author, Continental AG 12 In the future, these already excellent systems will become even more intelligent by being connected. Vehicles will communicate with other vehicles. Or with the next set of traffic lights. Or with mainframe computers in the cloud. We firmly believe that the car will soon become part of the Internet. We are surrounding the car of the future with a shield of information. This will make it even safer, more environmentally friendly, more convenient and more comfortable. It will learn to look around corners. Picture yourself driving down a winding road. In the future, your vehicle will know the current condition of the road and will take into account the prevailing weather conditions. It has saved the route. It calculates its position via the Internet. Fog, ice, snow, rain, fall foliage on the road the car will detect hazards like these in real time. It will alert you early enough. It will also warn against risky overtaking maneuvers. Or it will prevent collisions with obstacles that appear suddenly. Icy bend in the road ahead? Driving too fast? Your car will recognize these hazards in advance and brake automatically. Together with our partners IBM and Nokia HERE, we are developing a dynamic, electronic horizon for situations such as these. Changes in the weather, the current traffic conditions or roadworks are all entered onto a digital map.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 12 This happens roughly in real time. Data will be transferred reliably to all vehicles over secure channels, CISCO provides us with support here. This is our interpretation of anticipatory driving in the new age. Safe driving: advanced driver assistance systems protect pedestrians Modern technology is also required when it comes to maneuvering your car. We have all been in the situation where you are backing out of a parking spot when suddenly there is a child or pedestrian in the way. Our cameras and radar sensors will quickly and precisely scan and record the vehicle s surroundings in the future. They see the child long before the driver could. The car stops automatically. Saved! Our business with these and other advanced driver assistance systems is growing at an annual rate of almost one-third, rising from around 500 million today to around 1.5 billion in 2018.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 13 Safe driving: marking important information in the driver s field of vision Let s stay in urban traffic. You are driving your car during rush hour, whilst at the same time looking for the right road. Busy roads. Distractions everywhere. Accidents occur in such situations particularly often. Our heads-up display protects you from such accidents. It displays important driving information in front of your eyes. In the future, we will even use augmented reality technology to do this, which makes the visual symbols appear as though they are right in front of your eyes on the road. They even appear in the correct lane. This means you can clearly see where you should be going. My final example for intelligent mobility of the future comes to light when driving in traffic. Stop-and-go traffic. Tail lights. Mufflers. It is tedious and tiring. Allow us to make it easier for you! We are going to keep your car moving by connecting it to others electronically, similar to a tow bar. This frees up your hands and your mind, giving you time to relax, talk on the phone, and enjoy some entertainment.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 14 Intelligent mobility through progressive automation The technology for this is maturing rapidly, and we expect fully automated driving to be on our highways by around 2025. For this, we want international testing fields across Europe. We are therefore now calling on politicians to clear the way for such tracks. 48-Volt Eco Drive: cutting fuel consumption by more than 20% Innovations are just as important for the drive systems in the vehicle. Our goal is to reduce energy consumption because lower consumption means lower emissions and lower costs. This is a major challenge for our industry, since we are already working at the limits of technology. Which is why we are adopting a two-pronged approach to overcome this challenge: we are continuing to improve internal combustion engines and at the same time are developing electric drive.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 15 Our 48-Volt Eco Drive mild-hybrid system, which is ready for production, combines the best of both worlds: combustion and electric technology. The 48-Volt Eco Drive system can be installed in conventional-drive vehicles. Diesel or gasoline? The type of fuel is irrelevant. This makes our solution worthwhile for vehicles in the volume sector. Large quantities provide opportunities for improving energy efficiency. Three features, in particular, are making a valuable contribution to this: Coasting with the engine switched off during the journey Efficient recovery of braking energy, Restarting the engine again very quickly and conveniently. These, together with forward-looking energy management technologies, can cut fuel consumption by more than 20 percent. This helps save the environment and saves you money. Continental and Schaeffler: successful cooperation Together with Schaeffler, we developed the Gasoline Technology Car in 2014, which is equipped with the 48-volt system I just mentioned. We are currently working together on the next generation of this technology and promise new records here in terms of fuel consumption. Continental and Schaeffler work together closely wherever value is created for their customers and for both companies.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 16 A car is composed of many innovative products and systems. 20 of these are currently experiencing strong growth, all of which are offered by our three Automotive divisions. These 20 product segments make up around half of our automotive sales. Software: the new wheel of our industry The key lies in the electronics and the software, which enable more and more features in mobility. Software is the new wheel of the industry. Nowadays, hardly anything can turn or function without it. The modern vehicle has up to 100 on-board electronic control systems. As the vehicle s brain, they make pre-programmed decisions. The information for this comes from as many as 170 different sensors, which are the car s eyes, ears, nose and sense of touch. The actuators carry out the instructions. A modern vehicle has up to 160 of them on board, usually in the form of electric motors. Previously, the various electronic systems, sensors and actuators acted independently of one another. They were each responsible for one function. In the future, sensors and electronic systems will work together in a network, thereby significantly increasing vehicle performance. Vehicles will then be able to communicate with one another as described via networks. Even more and better software will make this possible.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 17 Worldwide, we currently have around 11,000 engineers, programmers and experts working in the field of software, which makes us one of Germany s biggest employers in this area. Smartphones, the Internet and social media have brought about a completely new dynamic one that is radical, powerful, and demanding. The logic of the digitally connected world is having a major impact on the car and thus on mobility as a whole. Above all, we see the opportunities that this change represents. In our eyes, the contributions of the IT and Internet industry are challenging and enriching alike. We are therefore open to any collaboration that creates value. Our expertise in intelligent mobility is recognized all around the world. This expertise is essential because it turns prototypes and concepts into reliable, safe production vehicles. Corporate model Animation step & loop Our three value streams: Innovation Productivity Global profitable growth 29 April 2015 Author, Continental AG 19 But that s enough about innovation. For innovations alone are not sufficient for sustainable growth. Value stream number two is equally important: our increasing productivity. It results in the combination of effectiveness and efficiency.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 18 Working effectively means: Doing the right things. Specifically meeting customers wishes. Maximizing efficiency. Working efficiently means: Minimizing effort and cost. Concentrating on what is important. And optimizing the cost-benefit ratio. Over the past five years, we have increased our productivity around the world with our Continental Business System (CBS). The modern methods of lean management form the basis for this. This has enabled us to become significantly more competitive worldwide, while helping to boost our employees satisfaction and improve their health. Without this CBS philosophy, our success in recent years would not have been possible. An example of this is one of our factories in Shanghai, which produces, among other things, electronic brake systems and instrumentation. We improved the quality of the work there and cut the employee turnover rate by half. For this, the factory was named Factory of the Year in a prestigious industrial benchmark competition the Oscars of the production world. Demand for vehicles will continue to rise worldwide. We are growing with it faster than the markets themselves. Value stream number three is global, profitable growth.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 19 We are growing organically. Our capital expenditure ratio remains at a steady level of five to six percent of sales. Second electronics factory in Wuhu, China 29 April 2015 Author, Continental AG 20 One example of this is our second electronics plant in Wuhu, China, which will have a workforce of around 1,500 people making instrumentation and other products. New generation of MK 100 brakes 21 The second example is the new generation of electronic brake systems, the MK 100, which we produce in Germany and worldwide. We are certain that these brakes will accelerate our growth. New tire plant in Sumter (North America)
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 20 The third example is our new tire production in the U.S. plant in Sumter, where construction is running according to plan. From 2016, four million tires will be made there each year, and later on as many as eight million. Expansion of turbocharger production in China and North America And the fourth example is the expansion of turbocharger production in China and North America within the next two years. We can also achieve rapid growth through acquisitions. Supplier of exhaust aftertreatment systems through acquisition of EMITEC One example of this is the full takeover of our former joint venture Emitec, which now makes us a provider of complete systems for exhaust gas aftertreatment.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 21 BestDrive: sales network increased by 700 premium dealers worldwide In the tire business, we use our Best Drive sales network. We have just increased the number of associated premium dealers worldwide by over 700, thereby improving our access to important markets including France, Spain, and Poland as well as China and the U.S.A. Preliminary 2014 Annual figures Shareholders Meeting Veyance acquisition to strengthen our industry business A striking example of growth through purchasing is the case of Veyance Technologies, which became part of Continental at the beginning of 2015. This specialist in rubber and plastics technology holds a strong position in the North and South American markets, and generates nine out of ten euros of its sales in industrial business. So it is the perfect fit for our corporate strategy, because a growing proportion of the industry business will better offset the economic fluctuations in the automotive industry.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 22 In the medium to long term, we are aiming to increase the share of our sales generated with industrial customers and end consumers toward the 40-percent mark. It is currently at around 30 percent. Hans-Jürgen Duensing will push forward with the integration of Veyance and the pursuit of our strategy. He has more than 20 years of experience in the ContiTech business. As of tomorrow, he will join our Executive Board team and head our ContiTech division. He succeeds Heinz-Gerhard Wente, whose term of office is scheduled to end today. We wish Hans-Jürgen Duensing a good start and every success in his new role. Heinz-Gerhard Wente is retiring after 40 years at the company. On behalf of the Executive Board and the global Continental team, I would like to extend my special thanks to him for his many years of valuable service to Continental. Together with his team, he has managed to significantly and sustainably expand our rubber and plastics expertise. Under his leadership, the ContiTech division has developed into an internationally competitive industrial partner and automotive supplier that makes an outstanding contribution to the corporation s earnings on a regular basis. Dear Heinz-Gerhard, thank you for your unwavering commitment and loyalty to the company, and for your excellent contributions to our success. I always really valued your advice and your openness as did we all. All the best for the future!
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 23 Preferred employer Be it on the Executive Board or in the factory, our growth depends first and foremost on having the right people for the job. Because their expertise and skills, their conduct, their creativity, and their passion to win are the crucial value contributions. We firmly believe that the best and most effective way to create pioneering solutions is with a pioneering corporate culture. So for the past five years, we have been systematically further developing our corporate culture. In doing so, we have been Encouraging our employees and managers to network more intensively with each other. Promoting overarching cooperation and increasing our collective intelligence. And fostering the individual responsibility of our teams. We will continue to invest significantly in these developments. Because we want to continue to be one of the most attractive and sought-after employers in the world. Expectations for 2020 Animation step & loop > 50 billion sales >20% return on capital employed (ROCE) 100-105 million light vehicle production (<6 tons)
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 24 Our sales will have climbed to over 50 billion by the year 2020. In making our estimates, we are assuming that the production output of light vehicles weighing less than six tons will increase. We are forecasting a global growth rate of roughly three percent per year, which would result in the production of between 100 and 105 million new cars in 2020. We expect each of our five divisions to make roughly an equal contribution to our predicted growth. At the same time, we continue to keep our sights set firmly on a return on capital employed (ROCE) of at least 20 percent. Quarterly results for Q1 2015 Animation step & loop 9.6 billion sales 1 billion adjusted operating result (adjusted EBIT) +14% sales compared to previous year The start to the first quarter of this year confirms our path to success. Our sales amount to 9.6 billion. This equates to a year-on-year growth of 14 percent. The adjusted EBIT rose by over 10 percent to around a billion euros. We will publish our complete financial figures for the first quarter on May 7, 2015.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 25 Outlook for 2015 Animation step & loop ~ 38.5 billion sales >10.5% adjusted EBIT margin ~6% of sales capital expenditure > 1.5 billion free cash flow before acquisitions For the current year, we anticipate that approximately 89 million new light vehicles weighing up to six tons will be produced worldwide. We expect to see a global rise in demand for replacement passenger and light truck tires of three percent to over 1.1 billion units. We estimate that our sales will increase by more than 11 percent to about 38.5 billion. This will include a sales contribution of at least 1.3 billion from the recently acquired Veyance Technologies. It will also include a billion euros from favorable exchange rate effects. Our adjusted EBIT margin is expected to exceed 10.5 percent. The free cash flow before acquisitions will probably amount to at least 1.5 billion.
Focusing on the Future of Mobility Continental AG, Dr. Elmar Degenhart, April 30, 2015 26 Ladies and Gentlemen, Our industrial world is in the decisive stage of a major change. The technology race to shape future mobility has hardly ever been so intense. Your Continental is well prepared for this. This is because: Our finances are in excellent shape. We are pursuing a clear growth strategy in value creation. We have geared our corporate culture towards pioneering innovations. And, last but not least, we have a fantastic global team of highly skilled, highly motivated employees. Your successful future starts earlier with Continental! We are therefore determined to take advantage of the opportunities that lie ahead. So you can continue to place your trust in our performance capacity with your investment. After all, your successful future starts earlier with Continental! The race is on. And together we can win.