AKRON — Despite relatively lackluster first-half financial performances, tire makers for the most part are optimistic about their second half and fiscal 2017 earnings prospects.
Of the 12 publicly traded major global tire makers that have reported first-half results, nine suffered declines in operating income, with most citing elevated spending on raw materials — primarily natural rubber — as the key reason.
Combined, the nine companies' operating margin for the first six months of fiscal 2017 was 12.1 percent, down 3 full points from a year ago.
The lower earnings performance came despite higher sales for the most part.
The higher costs led most companies to institute price increases in many of their markets, in some cases raising prices twice since year-end 2016. The increases for the most part were in the 4- to 9-percent range.
Individually, Bridgestone Corp., Continental A.G., Cooper Tire & Rubber Co., Group Michelin, Nokian Tyres P.L.C., Titan International Inc., Toyo Tire & Rubber Co. Ltd. and Yokohama Rubber Co. Ltd. all raised their second-half earnings expectations after the release of their first-half results.
The optimism stems predominantly from their belief that rawmaterials' costs have stabilized and are trending downward.
Goodyear, on the other hand, lowered its segment operating income expectations for the remainder of 2017, citing the "challenging global marketplace."
Kumho Tire Co. Inc. — which is the object of a takeover bid by China's Qingdao Doublestar Tire Co. Ltd. — and Pirelli & C. S.p.A. haven't yet reported. Nexen Tire Co. Ltd. didn't issue specific forecasts for the rest of 2017.
After initially telling shareholders it expected earnings this year to fall short of 2016, Bridgestone revised its forecast upward, even though the result still won't match the fiscal 2016 operating ratio of 13.5 percent.
Bridgestone anticipates fiscal 2017 passenger/light truck tire sales growth of 5 percent and 6 to 10 percent for truck/bus tires. In North America, demand for passenger/light truck tires will be flat vs. 2016 in both original equipment and replacement, whereas demand for truck tires should continue at the 6- to 10-percent pace.
Michelin said the negative full-year impact from raw materials costs could be as much as $860 million, but it expects to be able to offset this through "agilely" managing prices and holding unit margins firm in businesses not subject to indexation clauses and applying those clauses in business that are.
Due to solid sales growth in the first half, Continental management raised the firm's sales forecast for fiscal 2017 by nearly $550 million and confirmed the earlier earnings outlook.
"Our business with innovative technologies for assisted and automated as well as with connected and efficient driving once again grew faster than the global market for passenger cars and light commercial vehicles," said Elmar Degenhart, chairman of Conti's executive board.
Nevertheless, Mr. Degenhart continues to regard the market environment as challenging, with economic and political uncertainties influencing market activities. "Over the past few years, we have further improved our agility and flexibility — and we are now benefiting from this," he added.
Goodyear Chairman and CEO Richard Kramer told shareholders, "Despite the near-term challenges, I am no less optimistic about our ability to drive our strategic priorities against the favorable industry megatrends."
For the full year, Goodyear expects sales volumes to be down about 3.5 percent from 2016 and segment operating income to fall between $1.6 billion and $1.65 billion, down from $2 billion last year.
Sumitomo raised its earnings projection 26 percent despite suffering double-digit drops in income for the quarter and half-year. The revised forecast is based on the expected easing of raw materials prices, stable currencies and gradual economic recoveries in key markets during the second half of 2017.
Yokohama management revised the firm's initial full-year operating profit forecast from February by about 5 percent to $445 million.
Cooper is sticking with its previous full-year operating margin profit forecast of 8 to 10 percent, based in part on the firm's belief that it will be able to generate earnings at the high end of that range.
"The tire industry continues to face turbulence in the U.S. market in the form of raw material cost variability, weak trends in retail sell-out of tires to consumers, elevated inventory in the channels and a fluid pricing and promotional landscape," said President and CEO Brad Hughes, who based his firm's optimism on an improvement in the second quarter over the first quarter.
For the full fiscal year, Toyo is projecting its tire business will generate $2.88 billion in sales, a 6.6-percent improvement over 2016 and 1.6 percent better than the firm's earlier forecast. Operating income should finish the year 9 percent ahead of 2016.
Toyo based its upbeat forecast on more favorable expectations for reduced raw materials costs in the second half.
Nokian anticipates 5-percent growth in operating income for the full fiscal year on sales growth of at least 10 percent over 2016.
The sales improvement by Titan — the company's second consecutive quarter of "significant" growth after a four-year period of "protracted downturn" — prompted Titan President and CEO Paul Reitz to profess optimism heading into 2018.
Mr. Reitz said Titan sees opportunities to "utilize our tire manufacturing and technical expertise to expand into other related products that don't require significant, additional investment."
Individually, the major tire makers' results for the half year ended June 30 were as follows. Also see the table on page 41 for more details.
Bridgestone's operating income fell 7.3 percent to $1.8 billion despite 5.8-percent higher sales of $15.5 billion, lowering the operating ratio one and a half points to 11.6 percent. Net income rose 6.9 percent to $1.17 billion.
The tire division reported similar results — operating income down 6.7 percent to $1.65 billion on 6.4-percent higher sales of $12.8 billion.
Globally, unit sales of passenger/light truck tires rose 3 percent, with sales of larger rim diameter (18 inches and larger) tires up 20 percent. Truck/bus radial sales were up 9 percent.
Bridgestone said unit sales of passenger/light truck tires in North America fell, but sales of truck/bus tires "increased strongly" versus 2016. Globally, sales of large and ultra-large OTR tires were up 45 and 15 percent, respectively, over 2016.
Bridgestone's net sales in the Americas rose 5 percent to $7.68 billion, but operating income for the region dropped 12.9 percent to $802 million.
Michelin's operating income slipped 0.9 percent to $1.51 billion as higher raw materials costs offset gains in the price-mix constellation and other operating parameters.
Sales grew 7.5 percent higher to nearly $12 billion, buoyed by a 16-percent jump in specialty tire (earthmover and agricultural) volumes and 3-percent growth in passenger tires. Truck tire volumes were stable.
Net income rose 12.2 percent to $935 million.
"Michelin's good performance, compared with a strong first half 2016, is in line with our 2020 roadmap," said Michelin CEO Jean-Dominique Senard.
Michelin attributed its first-half sales growth to additional volume from the first-time consolidation of Brazilian two-wheel tire maker Levorin ($400 million), a favorable price-mix effect ($157 million) and a favorable currency effect ($215 million).
Michelin's passenger/light truck tire business reported 5.9-percent higher sales, but operating income slipped 1.7 percent. Truck tire unit sales were up 4.6 percent despite a second-quarter slowdown in volume sales. Operating income fell 20.5 percent.
Specialty businesses' unit sales jumped 19.5 percent on 16-percent volume growth, especially for mining tires and OE earthmover and agricultural tires. Operating income jumped 20.1 percent.
Goodyear's operating income fell 21.3 percent due to the negative effects of higher raw materials costs and lower unit volumes. Sales were down in both periods as well, with the tire maker's business in Europe suffering the most due to "increased competition and lower summer tire industry demand."
Chairman and CEO Mr. Kramer said the results "reflect the impact of volatile raw material costs and an increasingly challenging competitive environment, particularly in the U.S. and Europe."
Mr. Kramer called the first half a "highly unusual" environment, with weakening OE and replacement demand despite strong underlying industry fundamentals, such as favorable trends in miles driven, gasoline prices and unemployment.
Segment operating income fell to $746 million while sales were off 2.4 percent to $7.39 billion, cutting the firm's operating margin 2.5 points to 10 percent.
Unit volume fell 10 percent to 37.4 million units worldwide, due in part to lower OE demand and increasing competition in the U.S. for tires in 16-inch rim diameters and below.
Continental suffered slight declines in operating income for the half-year despite higher sales. Conti cited increased costs for raw materials for both its automotive and rubber groups for the earnings declines, but said the pressure on earnings from these costs appears to be easing somewhat.
Conti's pre-tax operating income was off 2.2 percent on 9.9-percent higher sales, for an operating ratio of 14.9 percent.
Conti's tire unit suffered a 15.2-percent drop in adjusted operating income on a 3.9-percent improvement in sales. Conti said its OE passenger/light truck tire business was off slightly, but replacement sales were up. Sales of commercial tire products were up 10 percent.
Conti expects global demand for passenger/light truck and medium/heavy commercial tires to grow 2 and 3 percent, respectively, this year.
Sumitomo's operating and net income fell 27.1 and 31 percent in the half, due to the "soaring prices" of raw materials.
Driven by solid growth in its tire business, SRI's sales for the period rose 12.4 percent, dropping the operating ratio nearly 3 points to 5.3 percent.
SRI's tire business reported a 35.7-percent drop in operating income, while sales increased 13.1 percent.
SRI attributed the solid sales performance to better-than-expected gains in the domestic replacement market, increased aftermarket sales in North America and Europe and solid OE business in Japan, China, Brazil and Turkey.
Hankook's operating profits were off 22.4 percent on 1.4-percent lower sales.
Hankook attributed the drop in earnings to increased raw materials costs but did not comment on the reasons for the reduced revenue. Hankook noted that sales of ultra-high-performance tires increased during the quarter, raising the share of total sales they represent to nearly 37 percent.
Yokohama had double-digit gains in operating income and sales, based on strong domestic and overseas demand and the first-time inclusion of results from Alliance Tire Group (ATG).
Operating income rose 16.8 percent on 15.9-percent higher sales, leaving the operating ratio unchanged at 5.9 percent. Earnings benefited from the sales increases, tire price increases YRC instituted in Japan in April and from the weakening of the yen versus other currencies.
Those positive factors more than offset the adverse earnings effect of elevated raw materials prices, YRC said.
Yokohama's tire segment reported an 8.9-percent increase in operating income on 6.4-percent higher sales. YRC noted strong growth in OE sector demand, especially in China, North America and Russia. Business in the replacement sector increased in both unit volume and value.
Yokohama posted replacement sales gains domestically and overseas, supported by recovering demand in Russia and reflecting strong sales in North America and in Europe.
The ATG segment was in the black as the OTR market exhibited signs of recovery and sales met management's expectations. Global weakness in grain prices weighed on demand for agricultural tires, however.
Cooper's operating income fell 38.5 percent on 1.9-percent lower sales, dropping the operating ratio 5.5 points to 9.1 percent. Cooper cited the negative effects of higher raw materials and manufacturing costs and lower unit volume sales for the earnings decline.
Cooper achieved strong unit volume increases in Latin America and Asia, as well as in truck and bus radial tires. Unit volume was up 11 percent internationally, but down 4.4 percent in the Americas segment, including a 10-percent drop in the U.S.
Cooper described the first half of 2017 as a "competitive pricing and promotional environment," leading to weak industrywide sell-out volumes.
The Americas segment had a 28.3-percent drop in operating income on 6-percent lower sales of $615.4 million. A bright spot was Cooper's truck/bus tire business in the U.S., where its shipments were up 27.4 percent during the second quarter, significantly outperforming the industry.
For the rest of 2017, Cooper expects current industry conditions to persist into the third quarter, Mr. Hughes said. As a result, Cooper will continue to manage its inventory levels in line with demand.
Toyo's operating income fell 16.7 percent despite 3-percent higher sales, dropping the operating ratio nearly three points to 11.4 percent. Net income quintupled to $98.5 million.
Toyo cited elevated raw materials prices as the main reason for the lower first half earnings.
Toyo's tire division performance paralleled that of the parent company — earnings down 11.9 percent on 3.6-percent higher sales.
Nokian posted double-digit gains in sales and operating profit with key contributions by the firm's operating businesses in all of the firm's key markets.
Strong growth at Nokian's passenger car tires business unit "was driven by Russia due to its stronger currency, price increases and low carry-over stocks from 2016," according to Hille Korhonen, Nokian's new president and CEO, who predicted more modest growth in that country for the second half of the year.
The Finnish tire group has responded to growing demand by increasing the production volumes at its plants in Vsevolozhsk, Russia, and Nokia, Finland, and by adding a production line at the Russian factory.
Raw materials costs, however, continued to rise during the first half, increasing by around 20 percent year-over-year. The business in North America grew 8.7 percent in the first half, but that lagged behind growth in Russia and Eastern Europe (84.4 percent) and Western Europe (10.6 percent).
Titan was in the red on an operating and net basis for the six months, although it reported a 52.6-percent improvement in its second quarter earnings from operations on 10.4-percent higher sales.
The sales improvement — the company's second consecutive quarter of "significant" growth after a four-year period of "protracted downturn" — prompted Titan President and CEO Paul Reitz to profess optimism heading into 2018.
Mr. Reitz noted Titan's agricultural business improved by 18 percent in the second quarter and that management is tracking improving market conditions in the aftermarket mining and construction business, as well.
These gains "fit well with our strategy that was launched almost two years ago to position ourselves to capture more of this business," he added.