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Behind the Headlines
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About this podcast
In-depth conversations with decision makers. Jim Reid digs deep for insights. 
BtH 1: Stefan Scholz, Continental AG - WfH to Tesla to ESG
In this episode
Stefan Scholz, Head of Finance & Treasury of Continental Aktiengesellschaft, and Jim Reid discuss how Continental has been affected by COVID 19: within the organisation and with external stakeholders across themes like working from home, where the company is now with ESG – the hottest topic pre-pandemic – supply-chain issues, the relationship between the US and China, and how Tesla is disrupting the market.
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What we discuss
  • Working from home: How has it been going? Has staff been more or less productive?
  • Use of video: How can it help build relationships?
  • ESG – the most pressing issue the company faces: What does it mean for an automotive firm?
  • Global supply chains: Will they be geared towards local distribution or will things eventually go back to normal? With 60 global locations, things could get sticky.
  • The one critical component of the relationship between supplier and partner
  • The China/US relationship: How could Continental be affected if it deteriorates?
  • Is Tesla a good disruptor? The company’s rise has been extraordinary in stock-market terms.
  • Are low interest rates an opportunity for a company like Continental? Does the Japan model work?
  • Is this the time to optimise liquidity? Negative cash flow could be an issue.
  • What does it mean to be a prudent company? And does M&A make sense in times of turbulence?
Resources for this episode
Featured guest
Stefan Scholz,
Head of Finance &
Continental AG
  • Stefan has been working at Continental AG for 20 years already. Being the Group Treasurer of Continental, he reports directly to the CFO Wolfgang Schäfer. Prior to joining Continental he had worked in the Export & Project Finance department at a large German bank for several years. Stefan gained further experience as a Key Account Manager for multinational companies, mainly in the automotive sector.
  • In the past few years Stefan and his Treasury team have put a stronger focus on automatization and digitalization. In the beginning of 2019, a commercial paper issuance was realized by Continental AG using the blockchain technology. ESG is also gaining in importance. A current case is the margin link to internal ESG parameters in the existing revolving credit facility.
  • In addition to his job at Treasury, Stefan is a member of the supervisory board of Continental AG as the representative of the executives.
  • Continental develops pioneering technologies and services for sustainable and connected mobility of people and their goods. Founded in 1871, the technology company offers safe, efficient, intelligent, and affordable solutions for vehicles, machines, traffic and transportation. In 2019, Continental generated sales of €44.5 billion and currently employs more than 232,000 people in 59 countries and markets.

00:00:00 Hi everyone, I’m Jim Reid, the global head of thematic research here at Deutsche Bank, and welcome to this first edition of a new podcast we’re launching called Behind the Headlines. It’ll feature us talking to some of our key clients, and provide insights into how they’re dealing with the current environment and market conditions; in this debut episode, we discuss issues ranging from Covid-19 to tensions between the US and China. We hope you’ll find the discussions insightful, but as ever feel free to get in touch with what you like or don’t like, and what you want to hear more about.
In this podcast, I’m joined by Stefan Scholz, who’s the Head of Finance and Treasury at Continental AG. Continental is the third largest Auto supplier globally and as such at the epicenter of the industry’s transformation process. The company is one of the largest manufacturers of automatic driving related hardware and software but also in the ramp-up of products to electrify ICE powertrains which lower fuel consumption and thereby Co2 emissions.   The company currently employs 200k people globally. The Auto industry is undergoing a great structural transformation with the shift to electric mobility and autonomous driving, a topic we will touch on more later. 
So to begin our conversation Stefan, can we start with the biggest issue for any company right now, which is Covid-19 and how you’ve adapted to it. Many companies had to change the way they work very rapidly in response to the pandemic, and here at Deutsche Bank myself and thousands of others have been working from home, as I know has been the case for countless other companies including yours. So can I start by asking how Continental and yourself have approached working from home since the pandemic began, how your employees have found it and whether you see this becoming a more permanent feature of the landscape for your company?

00:02:11 I'm happy that at Continental we introduced the right software tools sometime ago. If I remember correctly last year that means the ability for a lot of employees to work from home or to use mobile work that means you can select where you want to work. This was officially introduced already one/two years ago and that means almost everybody has got the ability to do it.  The basis is you have the right software and secondly you have the right hardware equipment. Fortunately this was also available in March when we got the information that we should not return here into our offices and for me personally it was also a new experience because I did not work on a regular basis from home.  And it was in the beginning and you experience because I felt everything has to be more structured and then if I sit in my office because everything has to be agreed with the counterpart, my assistant was not sitting next to me organizing something. I can mention something verbally if we sit together or nearby in the office and this was done and for us it was a new experience.  So today I would say I'm positively surprised about the reliability of the infrastructure when we talk about the usage of our IT systems to go on the server of the company but also when we look our IT infrastructure at home and it took a while until more people were switching on the video camera in the beginning I think more people preferred to only use the telephone or the voice and in the last few I would say months, we are talking now, we are in August, already in April and May people feel safer and switched on the video camera and I can tell you this was a good experience because you could develop a certain relationship to some people because they were showing how it is to sit maybe in the office or some people had to sit in the kitchen.

00:04:40 Out of interest, have you found that productivity has been affected positively or negatively by the transition to working from home? 

00:04:58 If I look at the productivity I would say I could not feel a negative impact out of that.  A lot of people confirmed yet they saved time because they did not have to commute from one part to another part on the other hand they stayed also pretty long in the office, from my point of view has not decreased but maybe even increase cause we could help some of our colleagues who do not have the right space maybe at their home who have two children they have to take care of the children schools were closed and they can manage to say OK I will take care of the children maybe in the morning and I will work then whether this person will work then in the afternoon or in the evening.  We have more flexibility and this flexibility has been used by the employees and I feel that they are even more motivated due to the fact that they can decide on their own.

00:06:01 Now that we’ve discussed working from home, I want to ask about a topic that was very front-of-house before the pandemic, which is ESG, so environmental and social governance. Recent years have seen an increasing focus on this from corporates in a range of sectors, so my question is whether since the pandemic you find that ESG is still an area you’re focused on as a company, and if so, which part is the most important to you? Also, how do you ensure accountability from management on ESG issues?

00:06:37 Yeah that's a good point for sure we were following what's going on in the area of green bonds and nevertheless our company had the approach to bring the people together and not to focus at somebody as Treasury is focusing on green bonds or something else and others are talking about climate protection.  It was impossible, it has been important for us to bring the attention of the ESG topics to all employees. How can you manage?  It is pretty easy when you work at the business area of content icon called powertrain with Tesco technologies they focus on developing the technology for clean mobility that means zero emission driving then the people can feel it easier but others may be a bit more far away. We have to understand what is the benefit of the company is focusing on ESG more than in the past and everybody can feel that there is a link. Because what I said before we introduced also in our 4 billion revolving credit facility arranged in December 2020 that we set to our banks OK we would like to introduce margin grid which will be dependent on our Continental improves some KPIs linked to the ESG area and the focus was not that we believe we can reduce the margin enormously but to implement some criteria we introduced in other instruments at Continental tools that means the remuneration at continental regarding executive board or executives and senior executives there is now also a link regarding sustainability performance indicators where we measure whether Continental has improved in these criteria and then I think everyone is focusing more on this if you are in touch with this. If you send out a PowerPoint presentation That's great but if there is a certain direct links between a maybe performance indicator and my salary then I would like to understand it more intensively I invest more time I think about how can I improve it and for sure the environmental topic environmental responsibility was very high when in particular Greta supported this topic in the media the health topic is now clearly on their gender higher because the health of the employees is most important topic. 

00:09:46 Speaking of shocks, being a global firm your supply chain must be of critical importance. Have you found that your supply chain has been impacted by the pandemic? Will you make your supply chains more local in the future or rely on the world going back to normal eventually?

00:10:02 Yeah that's a fair question we're the automotive supplier have a lot of locations a lot of production facilities.  If I remember correctly we are around in 60 different countries and that means we have already the benefit that we have production in several regions all around the world and this means we have some flexibility. When we look at supply chain topics you know that the pandemic came up in the beginning in Asia in China and when it came here to Europe our colleagues could take a benefit out of it because our colleagues in China had to manage a lot of things supported then by the colleagues in Europe and or the United States and it's in the opposite way they brought their experience into the topic optimization of supply chain topics and yes for sure we had additional costs we have to add to order we had to carry some goods maybe by plane and not by truck or by railway and I do not believe that we will have different sourcing because what I said before we are already located in I would say more or less all regions which player in the certain role for the automotive industry in particular and we have suppliers in different parts all around the world and it's important that you have the transparency and that you have also when we talk about stakeholders. A good relationship to your supplier that he discloses his problems and then we can together look for a solution and I know that my colleagues had to arrange a lot of phone calls a lot of interaction more interaction with the suppliers than usual. But in the end I don't believe that we have to change a lot due to the I would say positive experiences we could make during the crisis and please allow me to repeat what I said before that I think we have to experience we got experience in the financial market crisis 2008 nine with a big impact on the automotive industry as this has helped.

00:12:37  And connected to supply chains, one of the big focuses for markets and corporates, even before the pandemic, were the escalating tensions between the US and China. Obviously we’ve seen some significant tariffs imposed with the trade war, and now the pandemic has made relations between the two even worse. From your perspective as a corporate treasurer, to what extent is that increase in tensions a risk to your business?

00:13:03 Yeah that's a risk and push through it's not a nice development we have seen in the last few years because we were accustomed to look at global markets to have less restrictions lower tariffs and what we have seen in the last few years this was for sure not good talking about having easy environment to deal with partners all around the world for us is Continental, what I said before, we have several production facilities in several regions all around the world therefore yes we would be hit by further development of this problem all of these problems some countries have with each other but over the time you can solve it due to shifting maybe production from one part to another part to avoid maybe these additional tariffs yes it will hit us it will hit us in a certain way but I think it's a problem we could manage on the other hand it's difficult to foresee how this will develop in this decade because the last decade was not positive that aspect and I hope that we do not see again bigger conflict coming up and we know that the willingness to look for a compromise has not been felt and it doesn't look like that in particular the United States and China Healthy ability and to come back to a level we had before and nevertheless we have dependency of several industries of the supply of goods and of some parts that maybe US companies purchase from suppliers in Asia there is an interaction and let's look and let's have maybe the next podcast in five years and then we can analyze what happened in between.

00:15:17 I’d like to ask you about different trends within your particular sector. For autos, one of the stunning developments this year has been the rise of Tesla, which in stock market terms has been absolutely extraordinary, have risen by multiples in the last year, even with the recent pullback. Do developments like these affect the way you as a corporate treasurer look at your business? How do you view these kinds of disruptions, or opportunities as they may be?

00:15:52 Yeah to be honest I underestimated Tesla in the beginning from my point of view and on the other hand it's great to see what kind of entrepreneurship they have been living and in particular Elon Musk who was made really big steps forward with Tesla when we look at the production already.  What I like at Tesla is that they were really progressive disruptive innovative they introduced a kind of new technology that means they did not copy the existing IT infrastructure, they recognize that software is getting more important they developed I would say technologies which were not in line with the existing technologies of the bigger OEMs when we look at for instance over the air updates usually you have to go to your dealer and have to ask what I will contact you and ask you OK can you come into my premises please because I would like to give you an update regarding your engine and motor control new program is available. They introduce is doing this over the air I'm not sure whether others did this before as well but on the other hand they were really pro growth, progressive and in the end they initiated that some other big car manufacturers. I think they are even more bold nowadays and more innovative too and it had an impact we should not forget that also in China we see all from my point of view a big innovation and I feel it if I deal with my Treasury colleagues in China they are in direct contact with a lot of positive developments regarding the technology sector in China too and we should not focus only on the United States and we should not underestimate the impact maybe in the long run of the Chinese technology companies.  They have also companies similar to Amazon but focusing maybe or maybe on this region more and it's the same with Tesla it's also interesting to see how fast they are to build up the new factory here in Germany nearby Berlin. 

00:18:30 As part of my job in research I’ve been looking for a long time now at how we’re living in an environment of rising debt, and speculating whether we’ll move into a more helicopter money/MMT type world. One of the things that’s enabled and encouraged this rise in debt has been the fact that interest rates are at incredibly low levels around the world by historic standards, supported by unprecedented levels of central bank interventions. For your company, do you see this as an opportunity to lock in longer-term finance, or do you instead run the financing of the company to where you have financing needs?

00:19:15 The answer is it's an opportunity for sure to do this on the other end here to check whether it fits to the business model you have or we have had our company because continental has been I would say very strong when we talk about free cash flow generation and when we look at our experiences I have been working here at Continental for about 20 years now joining Continental coming from a bank. Our philosophy has been to take into account the aspects we have in our mind or we can foresee and based on this usually we do not issue bonds with a maturity of more than seven years for instance although the interest rates are effective on the other hand our indebtedness our gearing ratio is pretty low and our free cash flow generation will continue and all the circumstances I do not see any risk any problem it could change if we have maybe a bigger acquisition and we think oh it will take more work more than a while to have the opportunity to repay the debt out of the acquisition then maybe we go into a maturity scheme longer than seven years for instance. 

00:20:32 Are you looking to optimize your liquidity in any way?  Given counterparty risk and also given low interest rates is there any need to optimize liquidity?

00:20:51 Yeah we had this question about the letter say 4 five months ago because I think all companies treasurers and CFO's had to think about what could be the negative impact of the pandemic on our cash flow and also Continental had a negative free cash flow in the second quarter and we analyzed in March and April what could be the right instrument what could be the right timing and maybe I start to come back to December 2019 where we were not aware of any pandemic 2020 and we renewed pretty early our 3 billion revolving credit facility in these days the maturity date was April 2021 but we thought now it's a good timing we think the environment is pretty good we have a good relationship to our core banks and we went into context with our core banks. In the 4th the end of the third quarter beginning of the fourth quarter 2020 and we renewed the facility we increase the amount cause he said be a bit pre pour just do it and it's probably a good timing and good question is what is the perfect timing then in March in April we could go into the crisis with a pretty comfortable liquidity position because we define liquidity as cash at bank plus committed Unused credit lines of banks the major topic is revolving credit facility which I described before and we said OK let's have an additional facility available and we have Continental we prefer to have project names which are not a number or a nice first name of somebody only now we said this facility should get the name safety first facility because we said we do not believe that it's necessary but let's be a prudent company and let's discuss with our existing bank partners whether an additional facility could be agreed in a short time frame.

00:23:13 OK and if we move away from the immediate concerns about liquidity positions. Let’s look at M&A.  Asset prices in several industries are significantly lower compared to pre-crisis level. Is Covid-19 a chance for potential M&A transactions for relative strong performing companies?

00:23:35 Yeah I think I need your recommendation which companies undervalued Jim, I couldn't get to the right answer on this if I look at our process here talking about M&A our radar is still on that means we are screening the market we have been screening the markets for a long time if we identify a potential target for sure we have continued since March. In analyzing how it's going onto we see a positive development in respect of acquisition price but unfortunately when you look at interesting companies maybe in the technology sector these prices have not gone down and nevertheless we had to be bold because when I look at our financial condition which is still pretty good we have a triple B rating here at Continental. We have a lower leverage ratio given ratio that means the capabilities and opportunities to do such a step they are here we have our radar on and it's not only the question of the acquisition price you know sometimes some targets are not available due to the ownership or something else but we continue and I think it's a good time to do it and and you should not order, we should not wait and should wait until the epidemic will stop because nobody knows what will happen but when we look at the automotive industry as a whole and the production figures for 2020 and the outlook we came down from in the high 80 million cars were cars and light trucks vehicles were produced 85/86 million last year and when you look at what is anticipated this year about 70 million cars it looks like that we saw the button in 2020 and this is a better basis then starting maybe with 90 million or 95 million and then we have the risk what will happen with the production figures if a crisis will arise.

00:26:02 So that brings to an end our questions with Stefan. We have a number of interesting takeaways. Notably, in line with others, you’ve found that the transition to working from home since the pandemic has seen many of your employees actually saving time and benefiting from the extra flexibility. Meanwhile, you’ve also seen ESG become an important focus for your employees, and as you mentioned you now have a link to sustainability performance indicators when it comes to executive remuneration. On supply chain disruption, you’ve found that’s not impacted you so much given your global presence, but that global footprint also means that a rise in trade tensions or further tariffs between the US and China would be a negative development for your company. Many thanks for your time, and see you next time. 

*Minimally edited for clarity.*

About Jim Reid

Jim is Global Head of the Fundamental Credit Strategy Group; he also heads up Deutscher Bank's Thematic Research Product and Corporate Bank Research.

He is a top-ranked strategist, consistently named the No.1 analyst in the major surveys over the last 25 years. He has had 25 No.1 positions in these awards in the last decade, more than quadruple the number of any other analyst. His daily Early Morning Reid report has been running for over 13 years now, has tens of thousands of daily readers, and has the most subscribers of any Deutsche Bank Research publication globally. It is one of the most widely read financial market pieces in the investment world.

Jim is Global Head of the Fundamental Credit Strategy Group; he also heads up Deutsche Bank's Thematic Research Product and Corporate Bank Research.

He is a top-ranked strategist, consistently named the No.1 analyst in the major surveys over the last 25 years. He has had 25 No.1 positions in these awards in the last decade, more than quadruple the number of any other analyst. His daily Early Morning Reid report has been running for over 13 years now, has tens of thousands of daily readers, and has the most subscribers of any Deutsche Bank Research publication globally. It is one of the most widely read financial market pieces in the investment world.
BtH 1: Stefan Scholz, Continental AG - WfH to Tesla to ESG