Most major tire makers expect their earnings to continue to take a beating in the second half of 2006 as their bottom lines struggled under the weight of raw material costs in the first six months of the year.
Only two major tire makers-Continental A.G. and Pirelli & C. S.p.A.-expect to see improvements in the rest of the year while others either didn't quantify their earnings outlook or forecast a drop. All of the tire makers predict raw material prices will continue their steady and determined rise.
Bridgestone Corp. revised its forecast for full-year operating earnings and net income down 16.2 and 35 percent, respectively, under the threat of more raw material price hikes. Group Michelin expects its operating margin for 2006 to fall to 8 percent from 8.8 percent in 2005, and Goodyear warned that raw material prices will be ``at or above'' first-half increases.
Yokohama Rubber Co. Ltd. management lowered its fiscal 2007 earnings target a second time recently after suffering double-digit declines in operating and net income in the company's first quarter that resulted from larger-than-expected increases in raw materials costs.
Sumitomo Rubber Industries Ltd. also recently warned investors that its full-year profits will be down due to higher raw materials costs.
Major tire makers managed to increase sales in the first half of 2006 by adding new business or improving product mix with higher-margin tires. But profits were increasingly tenuous as high raw material costs, weak demand and rationalization charges ate into their bottom lines. Only two tire makers saw their operating earnings increase in the first half.
Findlay, Ohio-based Cooper Tire & Rubber Co. recorded the biggest gain in sales-up 19.2 percent to $1.22 billion-but most of that increase was from the addition this year of revenue from the firm's Chinese operations. However, Cooper posted a net loss, the only firm among top tire makers to do so.
Goodyear saw the smallest sales gain at only 2.4 percent for the half. The Akron-based tire maker also reported the steepest dip in operating earnings, down 29.1 percent to $205 million.
Bridgestone scored the highest sales overall for the half at $12.4 billion while Continental reported the highest operating earnings, at $916.9 million.
Bridgestone's sales rose 13.4 percent for the half, but operating earnings fell 8.6 percent to $729.8 million. The tire maker blamed the earnings drop primarily on rising raw material costs.
Bridgestone said it expects to record operating earnings of about $1.43 billion for the year, down from a forecast of $1.71 billion announced in February. The revised prediction amounts to a 22.9-percent decrease in operating earnings from fiscal 2005.
For the first half, Bridgestone's tire segment sales rose 13.3 percent to $9.81 billion as operating income fell 15.6 percent to $502.4 million.
``The companies worked to maximize their sales momentum by introducing appealing new products worldwide and improving product mix through increased sales of high-value-added products,'' Bridgestone said in a statement.
Continental's first-half sales rose 6.2 percent to $9.18 billion as earnings also increased 5.3 percent. But the Hanover, Germany-based tire maker's profits were impacted by raw material costs as well as restructuring expenses related to closing its plant in Charlotte, N.C.
Sales in Conti's tire business units rose 8.4 percent to $3.76 billion on gains in both the Passenger/Light Truck and Commercial Tire units, but operating earnings in those units combined fell 14.2 percent to $325.2 million. Raw materials impacted the results of the units by about $135.2 million, Conti said.
Tire unit volume to the North American replacement market fell below last year's level, Conti said.
Conti, however, expects to see improvements in the second half though it expects raw materials will continue to climb. The tire maker plans to offset the costs with price increases, mix improvements and rationalization moves, especially in North America.
Though Conti reported the highest operating earnings in the half, Pirelli achieved the highest growth in earnings, which were up 6.7 percent to $270 million.
Pirelli's sales rose 3.4 percent to $3.07 billion in the half. The firm's tire division also posted gains in operating earnings and sales of 4.1 percent and 12.4 percent, respectively. Pirelli expects more improvements in the second half though it did not quantify its forecast.
Though its operating earnings fell 6.2 percent in the half, Michelin was upgraded to overweight by Morgan Stanley. The firm maintained its forecasts ``despite some of the worst raw material input cost pressure we have ever witnessed in the industry,'' analyst Adam Jonas wrote in a note to investors.
Michelin's sales rose 7.1 percent to $10.2 billion. But raw material costs rose 21 percent-or $447 million-from the first half of 2005.
``Over the past two and a half years, the repeated increases in raw material prices have deteriorated Michelin's costs by more than 1 billion euros,'' said Managing Partner Michel Rollier. ``As the Group is finding it difficult to fully compensate for this evolution, it is becoming essential to accelerate the productivity improvement and cost reduction programs that are already in place.''
Both Goodyear and Cooper faced similar challenges. Goodyear's sales rose 2.4 percent to $10 billion, yet both operating and net earnings fell sharply, by 29.1 percent and 44.5 percent, respectively.
Much of the decline in net income is the result of rationalization charges, but the tire maker also is fighting rising raw material costs and a depressed North American replacement market.
Though analysts credit Goodyear with some progress in mix improvement and cost reductions, the firm also had volume and margin troubles in its largest markets.
Cooper faced a challenging half, punctuated at the end by the departure of its CEO, Chairman and President Thomas Dattilo. Operating results fell to a loss of $30.2 million vs. earnings of $6.29 million last year. Cooper also posted a net loss of $25.9 million from a net loss of $1.67 million last year.
Hankook Tire Co. Ltd., Kumho Tire Co. Inc. and Sumitomo had not reported their first half results by Tire Business' presstime.
The fiscal half years for Toyo Tire & Rubber Co. and Yokohama Rubber Co. Ltd. end on Sept. 30. For the first quarter, Yokohama's operating income fell 34.2 percent to $15.9 million and net income slipped 16.2 percent to $10.8 million. Sales grew 11 percent to $918.6 million on the positive effects of ``robust growth'' in overseas tire business, including 30.5-percent growth in North America.
Toyo reported increased income and sales in the quarter, based on one-time gains from real-estate sales in Japan. Operating income rose 8.7 percent to $29.9 million while sales increased 3.5 percent to $641.1 million.