Driven by stronger operating income in all of its tire business segments, Goodyear reported first quarter net earnings of $68 million-its fourth consecutive profitable quarter-and a dramatic improvement from its first-quarter net loss of $78 million last year.
Goodyear posted record first quarter sales of $4.77 billion, an 11.6-percent improvement over 2004. The Akron tire maker attributed the sales increase to higher pricing, a more favorable product mix and favorable currency translations of approximately $126 million.
``By continuing to focus our resources on driving improvements in targeted markets, we see the benefits in both increasing competitiveness and earnings,'' said Chairman and CEO Robert J. Keegan in a statement. He said the North American, Latin American, European Union and Asia/Pacific tire businesses all drove the earnings improvement despite rapidly rising raw material costs.
North American Tire also achieved its fourth consecutive quarter of positive operating income of $11 million, a sharp contrast to an operating loss of $24 million last year. Sales jumped 10.3 percent to $2.14 billion, thanks to volume increases, favorable pricing and product mix and cost reduction activities. Goodyear noted that North American Tire's raw material costs increased by approximately $64 million during the quarter.
Total segment operating income grew to $292 million, a 61.3-percent increase from the 2004 period.
Goodyear's results include net after-tax gains of $7 million from reversals of rationalization charges and net after-tax charges of $12 million related to general and product liability-discontinued products.
Tire unit volume in the first quarter increased 200,000 units from the year-ago period to 55.9 million units. Goodyear said unit volume change was impacted by a 7.9-percent increase in the North American replacement market and offset by lower original equipment (OE) volumes of 8.7 percent in North America and Europe. North American Tire's commercial tire business saw a 14.9-percent rise in volume.
In a May 5 conference call with investors, Mr. Keegan noted that Goodyear is enjoying its best first quarter in seven years and that the improvement is due to a ``multiple driver situation'' in which the revenue gains can't be attributed to a single factor. The multiple factors contributing to earnings include:
* The rebuilding of the company's relations with dealers by Jon Rich, North American Tire's president, which Mr. Keegan called a ``key factor'';
* New product introductions;
* Better analytics to help price management and drive its product and brand mix; and
* Building brand equity.
Mr. Keegan acknowledged that although North American fill rates have improved, Goodyear is still having ``some issues'' with Dunlop. He also noted that Goodyear is receiving more orders for its newly launched Wrangler and Fortera light truck tires with SilentArmor technology than the Assurance line a year ago-and the tire maker is only beginning its ad campaign on those products.
Goodyear also has grown in several areas of its business, Mr. Keegan said, thanks to structural changes implemented in the past few years. Those changes included becoming more selective in its OE business to improve its profitability and inoculate itself from OE volume fluctuations.
``This decision, in combination with our emphasis on improving our mix in the consumer replacement market, has shifted our volume to higher margin products,'' he explained.
The tire company also refocused its resources on the truck tire market, capitalized on the radialization of the truck tire market in emerging markets, became more selective in its private label business and enhanced its marketing programs on its flag brands. Decision-making has ``improved significantly,'' he said, as Goodyear has become more analytical and market-oriented in its processes.
``Our capabilities are improving...as we are blending new talent from outside with knowledgeable talent from within Goodyear and driving decision-making lower in our organization. The result has clearly been improved market-based decisions, faster decisions and improved profitability,'' Mr. Keegan said.
However, Mr. Keegan said raw material costs, which have impacted its cost-reduction strategy, will continue to pose challenges for Goodyear in 2005. He said China poses benefits to Goodyear in the procurement of raw materials, equipment, semi-finished and finished products, parts and tools. He said Goodyear will increase its procurement in those areas to $800 million over the next five years, from $80 million currently.
``This potentially game-changing position will fundamentally reduce our cost structure,'' he said, adding that Goodyear also is looking for third-party, low-cost products in Asia.
Goodyear expects the number of low-cost tires it imports into North America and Europe to grow more than 18 percent to 32 million tires from 27 million, Mr. Keegan said.