Black can be a beautiful color. Just ask Goodyear.
Other than on its tires, that hue hasn't been in Goodyear's wardrobe or clothed its largest division-North American Tire (NAT)-for six quarters. NAT last posted a profit in 2002's third quarter. But the Akron-based tire maker posted net earnings in the second quarter of $25.1 million while NAT had operating earnings of $30.4 million, respectively.
Still, Goodyear executives aren't polishing their turnaround laurels just yet.
``Our progress from where we were 18 months ago is gratifying, but we realize fully that it is critical that we continue to show year-over-year improvement, and that remains our primary focus as a company,'' said Robert Keegan, chairman, persident and CEO, in a conference call with analysts.
Indeed, rising raw material costs, pension obligations and outstanding debt continue to present challenges to the company's balance sheet. Raw materials costs alone grew 4 percent over last year, and Goodyear is sticking to its estimate of a 5 to 7-percent hike overall this year, meaning the second half may see very rapid growth.
The tire maker also said its Dunlop brand continued to lose market share. Goodyear plans to introduce new products and marketing plans for Dunlop closer to the Specialty Equipment Market Association (SEMA) show in November.
The tire maker also has some strong positives in its corner. The most noticeable is the success so far of its new Assurance line of products, launched earlier this year. A strong commercial tire market, favorable price mix, increasing revenue per tire and price increases also are working to the benefit of Goodyear.
Analyst Stephen Girsky at Morgan Stanley raised his earnings expectation for the year to 23 cents per share vs. a loss of 38 cents. He maintained his equal-weight valuation of the stock.
``We are encouraged to see profitable results in all operating segments in the quarter,'' he wrote to investors. ``We are increasing our estimates to reflect the better-than-expected operating performance.'' Still, he warned of rising raw material costs, a slowdown in industry volume, particularly in North America, and near-term cash calls that could pose hurdles for Goodyear's continued improvement.
For the quarter, Goodyear's net income of $25.1 million contrasted a loss of $53 million the year before. Sales rose 20.1 percent to $4.51 billion from $3.8 billion last year. Tire unit volume also grew to 55 million units from 52.8 million units last year.
NAT's segment operating income of $30.4 million reversed a loss of $10.2 million in 2003. The unit posted sales of $1.98 billion, up from $1.69 billion a year ago. Tire units shipped increased 1.6 percent to 25.7 million units from 25.3 million units.
Goodyear's other businesses reported profits for a total segment operating income of $285.8 million, a rise of 91.7 percent from last year.
For the first half of the year, Goodyear posted a net loss of $51.8 million compared with a loss of $249.5 million last year. NAT in the half posted an operating loss of $1.3 million, improved from a loss of $76.7 million last year. Tire unit volume overall grew to 110.7 million units from 105.4 million units while volume in North America rose 0.6 percent to 50.4 million units from 50.1 million units.
``Overall the quarter in North America represents an encouraging one for us as the team is executing against its plans to revitalize that business,'' Mr. Keegan told analysts.
A centerpiece of Mr. Keegan's comments was the Assurance line, which includes the ComforTred touring tire and TripleTred all-season tire. The products began shipping in March and April, making the second quarter the first full period to which Assurance contributed.
``Our new products are having a major impact in the market,'' Mr. Keegan said. ``Frankly, we underestimated the overwhelmingly positive reception for these products by both our dealers and the end user.''
He read unsolicited comments from customers, one of which said the ComforTred tire carried a high price but was ``well worth every penny.''
Goodyear's replacement units increased 6 percent in the quarter with a ``halo effect'' from Assurance contributing to an overall increase of 10 percent in Goodyear-branded sales, he said.
Mr. Keegan added that the tire maker is working to increase the number of sizes, and it also will push TripleTred in time for the fall and winter driving seasons. ``I will guarantee you we'll see more and hear more about Assurance in the near future,'' he said.
The new tires have created positive buzz about Goodyear products in general, he said, and they haven't cannibalized sales from other Goodyear products, primarily because the company lacked many offerings in the luxury broadline segment.
``It's probably having more impact on other people's tires than ours,'' he said.
John Turk, president of Conrad's Total Car Care and Tire Centers in Cleveland, said he's pleased with Goodyear's progress.
``They set an agenda a couple of years ago, they've been upfront about it, and I think they've been successful in implementing it,'' he said. ``It seems to me they've fixed what they said they'd fix. I'm really pleased to hear about their profits; it's good for Goodyear, good for Conrad's and good for the industry.''
Senior Washington reporter Miles Moore contributed to this story.