AKRON (Aug. 31, 2009)—With few exceptions, red was the corporate color for the world's major tire makers in the first half of 2009, but some of those same companies are starting to see glimmers of recovery for the rest of this year and into 2010.
Of the world's dozen largest tire makers, 10 were in the red for the first half or first quarter as they scrambled to deal with double-digit drops in demand throughout most of their markets. Among the majors, only Pirelli Tyre S.p.A. was in the black; smaller makers Nokian Tyres P.L.C. and Titan International Inc. reported profits as well.
Besides the obvious effects on revenue and cash flow from the severe drop in tire demand, tire makers cited for their bottom-line woes the added costs of running factories at only partial capacity.
Heading the list of reasons for optimism in the second half is the realization that raw materials costs have peaked after a dozen or so quarters of escalation and the expectation they should ease downward.
Group Michelin in particular pointed out that “declining raw materials prices should support second half margins,” while Pirelli pointed to higher sales in the second quarter vs. the first quarter as “signals of recovery in the market.” Pirelli derives a third of its global revenue from South America, which has weathered the recession better than other areas.
Akron-based Goodyear—despite a net loss of $221 million and 24.7-percent lower sales in the second quarter—termed its first-half performance “respectable and encouraging” in light of the challenging economic climate.
“Our results (in the second quarter) strengthened compared to the first quarter as reduced raw material costs and our strategic actions aimed at our top line, cost savings and cash generation continue to have the desired effect,” Goodyear Chairman and CEO Robert Keegan said.
Bridgestone Corp. went so far as to revise upward its financial projections for fiscal 2009 based on the success of internal cost-reduction initiatives and the Tokyo-based tire maker's assessment of the global economy, raising its net income forecast to $63 million (0.2 percent of sales) from break-even and boosting its operating income forecast a couple of tenths to 2.3 percent of sales.
Nonetheless, operating and net income at this performance level would be down about 54 and 42 percent, respectively, from fiscal 2008.
Continental A.G., based in Hanover, Germany, focused its efforts inward to control costs in light of global economic uncertainty.
“Despite a slight market upturn, for the time being there is no reason to give the all clear,” said former Conti Executive Board Chairman Karl-Thomas Neumann. “In the second half of 2009 and beyond, the business environment will continue to be a major challenge for Continental as well as for the entire supplier industry. It would therefore be shortsighted, in view of our tight financial situation, to rely solely on our operational strength, especially since the improved operating margins are generated based upon much lower sales.”
Mr. Neumann since has resigned the chairmanship under pressure from Conti's largest shareholder, Schaeffler Group.
Cooper Tire & Rubber Co. was $34.2 million in the red in the first half but expects improvements in its earnings in the second half on more stable raw materials prices, the positive effects of internal cost-reduction programs and improved pricing and product mix.
“Focusing on our global cost structure, profitably increasing our top line and enhancing our organizational capabilities are the key elements of our strategic plan and each are being addressed while preserving liquidity,” said Roy Armes, chairman of the Findlay, Ohio-based company. “While the macroeconomic environment remains challenging, we continue to see progress by successfully executing to our capabilities.”
Nokian Tyres, based in Helsinki, Finland, said it expects second half sales to exceed those from the first half—based on orders for winter tires—but they likely won't match those posted in the latter half of 2008.
First half results
Bridgestone suffered a net loss of $401 million on 27-percent lower sales of $12.6 billion, as demand for the firm's products slumped pretty much across the board and throughout its geographic regions. The operating loss was $209.1 million.
The tire maker noted the economy in Japan and throughout Asia—with the exception of China—continued to deteriorate as did the recessionary economies in North America and Europe.
In response, Bridgestone said it is accelerating plans to implement a range of initiatives, such as to increase sales of strategic products, to construct and enhance a business model that will extend beyond the mere sale of commodities, and to develop eco-friendly products and business.
Shorter term, the company is streamlining investments, curbing expenses and reducing inventories to control costs.
In the Americas, Bridgestone's sales fell 24 percent to $5.65 billion and the operating result fell 72 percent.
Michelin fell $172 million into the red in the first half on 13-percent lower sales, prompting management to reiterate its goal to focus on controlling costs and generating cash flow.
In addition, Michelin reported a 60-percent drop in operating income to $397.2 million on the adverse effects of lower sales, lower capacity utilization and continuing high raw materials prices. The company said the net loss resulted largely from more than $400 million in one-time charges it took in the period to cover a plant closing in France and restructuring measures in North America.
“Faced with the persistent, steep decline in global tire markets, Michelin has responded swiftly and effectively by tightening its management and deploying production adjustment programs,” Managing General Partner Michel Rollier said.
Revenue fell 13 percent to $10 billion, but unit sales were off 23 percent, meaning improved pricing and product mix offset the unit decline.
By business unit, the firm's truck tire business fell 23.2 percent and reported an operating loss of $230 million on lower sales and the cost of maintaining idled capacity. The passenger/light truck tire unit reported a 9.4-percent drop in sales and a 25.6-percent plunge in operating income.
Globally almost all markets except China continued to lag, Michelin said, although there are signs the replacement car tire markets in Europe and North America bottomed out in the first quarter. Retail inventory is at a record low, the company said, indicating most of the ordering drawdown is finished.
Michelin pointed out that it generated more than $800 million in free cash flow through efficient management of working capital (particularly inventory) and a 36-percent reduction in capital spending during the period.
Goodyear's net loss in the half was $554 million vs. earnings of $222 million a year ago. Sales were off 26.5 percent to $7.48 billion and the pre-tax loss was $636 million.
More than half of the corporate sales decline was related to a 17-percent drop in global tire unit volume, Goodyear said, with currency translation losses and lower third-party sales of chemicals in North America comprising most of the rest. Excluding the impact of currency translation, sales were down 18 percent from last year's second quarter.
During the second quarter, Goodyear said it achieved $200 million in new cost savings on top of $145 million in the first quarter. The firm cut its work force by 1,700 employees on top of 3,800 workers eliminated in the first quarter, thereby exceeding its 2009 goal of 5,000 job cuts.
Continental returned to the black on an operating basis in the second quarter, following a first quarter loss, despite a 28-percent drop in sales.
The company attributed the turnaround to the “most extensive cost-cutting package in the company's history” and the “rigorous and consistent adaptation” of the company to the difficult market conditions. Conti has cut its employment by 16,000 since last September.
For the half ended June 30, the pre-tax operating result was a $175.3 million loss on 31.6-percent lower sales of $12.8 billion.
Mr. Neumann lauded the company's rubber group—comprising Conti's tire and non-tire rubber activities—for posting “substantial” profits and providing “reliable cash flow.”
“The key figures for the second quarter once again clearly demonstrate that Continental's organization is well balanced and makes strategic sense,” Mr. Neumann said. “The rubber group, which is less susceptible to economic trends on the whole, is posting substantial profits, providing for reliable cash flow.”
Conti's passenger/light truck tire division posted higher pre-tax operating income in the second quarter despite 16.1-percent lower sales, but first-half earnings were down slightly. First-half sales were off 18 percent to $2.98 billion, although Conti said replacement market unit volumes in the Americas were up over a year ago.
Pirelli Tyre stayed in the black, although net income was down 46.7 percent to $76.3 million. First half sales of $2.7 billion were 11.6 percent below the comparable 2008 number.
First half pre-tax operating income before restructuring charges was down 16 percent to $339 million from a year ago, but earnings in the second quarter were nearly equal to those of last year, as Pirelli began to benefit from the effects of falling raw material prices, enhanced efficiencies from a restructuring program under way and some pickup in the market.
The consumer tire business (car, light truck and motorcycle tires) reported 8.2 percent lower sales of $1.93 billion in the half with operating earnings falling 23.6 percent to $136 million. The industrial segment (truck tires and steelcord) reported a 19.1-percent drop in sales to $766 million.
Sumitomo Rubber Industries Ltd. (SRI) fell $72.2 million into the red in the first half as sales fell 19.2 percent to $2.41 billion. Operating income fell 79.8 percent to $30.1 million, or 1.2 percent of sales. A year ago the operating ratio was 4.2 percent.
The company's domestic business fared marginally worse than the international activities, with sales down 26.5 percent.
SRI's tire division fell $25.1 million into red on an operating basis as sales fell 19 percent to $1.95 billion.
Sales in North America fell 19.8 percent to $388.2 million, SRI reported.
Hankook Tire Co. Ltd. reported operating earnings of $140 million and sales of $1.86 billion for the first half, citing its operations in China and Hungary as drivers of its gains, the latter reporting operating profits in the quarter on a 44.6-percent jump in sales. The Seoul, South Korea-based company also reported signs of recovery in its domestic market.
In the U.S., Hankook Tire America Corp., based in Wayne, N.J., reported its second consecutive quarter of growth over the previous calendar quarter, reporting an increase in sales of more than $30 million in the second quarter over the first quarter.
Cooper's loss in the first half was $34.2 million, compared with a net loss of $20.5 million in 2008, as sales declined 17.1 percent to $1.2 billion. Operating profit, however, improved to $25.2 million during the period vs. an operating loss of $5.86 million in 2008.
Kumho Tire Co. Inc. was $161.4 million in the red in the half on 15.2-percent lower sales of $751.4 million. The Seoul, South Korea-based firm also was in the red on an operating basis during the period ended June 30 at $81.1 million.
Kumho's second quarter loss was its fourth straight quarterly loss.
In addition, Toyo Tire & Rubber Co. Ltd. fell deeper into the red in the first quarter of its fiscal year as sales plunged 28 percent from a year ago.
Osaka, Japan-based Toyo's operating and net losses for the period were $32 million and $27.4 million, respectively, as sales tumbled to $653.1 million. In the 2008 quarter, Toyo had an operating profit but a net loss. Toyo cited the impacts of lower sales, lower capacity utilization and exchange rate changes for its losses.