Pandemic wreaks havoc with 2020 tire co. financials, clouds outlook

AKRON — The term "double-digit" — as in double-digit decline — permeated the tire industry's financial reporting through the first half of fiscal 2020, but what does the rest of the year hold in store for the industry and its various sectors?

While business has begun showing signs of life midway through the third quarter, few if any of the world's leading tire makers expect sales to rebound sufficiently in the third and fourth quarters to overcome the pandemic-induced deficits that piled up in the first half.

Of the dozen larger publicly traded tire makers that have reported half-year finances, nine reported net losses and all reported high double-digit drops in operating income or even operating losses and sales declines ranging from 16% to nearly 32%.

Most of the industry's major companies shied away from making specific forecasts for the year, owing to the possibility of renewed flareups of COVID-19 and their potential impact on the economic situation.

Of the majors that have reported, Group Michelin perhaps summarized the industry's outlook most succinctly, stating:

"After a first half shaped by the effects of the health crisis, notably the various restrictions on freedom of movement, global tire demand is expected to be impacted in the second half of the year by the economic recession ensuing from the pandemic."

In what it called a "highly uncertain market scenario," Michelin said it expects passenger and light truck tire markets to be off by 15% to 20% versus 2019 and truck and OTR tire markets by 13% to 17%.

Continental A.G., in its half-year report, said it expected sales of consumer tires in the third quarter would be down 10% to 15% in Europe, 5% to 10% in North America and up to 5% in Asia. Sales of medium and heavy-duty truck/bus tires are expected to dip 5% to 10% in both Europe and North America.

Despite the first-half sales implosion and the uncertainty of the second half, Michelin said it still expects to deliver full-year segment operating income in excess of $1 billion and cash flow of more than $500 million, "barring any new systemic impact from COVID-19."

In its half-year report, Bridgestone Corp. said full-year earnings will likely plummet 70% or more from 2019 on 23% lower sales, provided the virus is kept in check.

Continental noted that the uncertain economic environment makes it difficult to "gauge possible further adverse consequences for production, supply chains and demand" and thus it is unable to forecast fiscal 2020 results to the "usual level of detail and accuracy."

It is "reasonably certain," however, that Continental's sales volumes and revenue will fall short of prior-year levels with a "noticeable" decline in earnings as well.

Sumitomo Rubber Industries Ltd. is expecting earnings to be off by as much as 45% with sales down 16%.

Pirelli & C. S.p.A., which suffered a sales drop of nearly 32% in the first half, is projecting sales will decrease close to 22% for the full year, thus indicating a second-half resurgence. The operating ratio is expected to be in the 12% to 13% range, or about half of what Pirelli reported in 2019.

Yokohama Rubber Co. Ltd. is expecting full-year earnings to drop nearly 66% versus 2019 on 17.5% lower sales.

At Cooper Tire & Rubber Co., Chairman and President Brad Hughes said Cooper management expects a second-half improvement even though the coronavirus "presents a level of risk going forward."

Mr. Hughes noted that while Cooper's first half results were "significantly impacted" by the pandemic, "our performance materially exceeded our expectations." Cooper reported an operating loss of $900,000 on 20.8% lower sales in the half.

Mr. Hughes noted that Cooper was able to improve its market share in the U.S. during the latter part of the second quarter as it was able to deliver products to consumers "who are increasingly looking to buy high quality, affordable tires."

For the six months ended June 30:

Michelin's operating income dropped 78% to $344.4 million or 3.3% of sales, on 20.6% lower sales of $10.4 billion, due mainly to a 22.4% decrease in volumes caused by "worldwide collapse in tire demand." The net result was a loss of $160.7 million versus earnings of $990 million in 2019.

Sales volumes fell, it said, "due to the health crisis, a deep fixed cost shortfall and a loss of industrial productivity," which were partly offset by government-backed furlough grants.

Other factors negatively impacting operating income included a $90 million decrease from COVID-19-related expenditure, including the cost of purchasing

In addition, the tire and rubber company said it saved $225 million through a reduction in SG&A expense as part of its cost-cutting measures during the pandemic.

Bridgestone posted a 68.3% drop in operating income and a net loss for the six months on 22.1% lower sales.

Bridgestone attributed the earnings and sales declines to the negative effects of the COVID-19 pandemic on the global economy.

For the full year, Bridgestone is forecasting the trend established in the first half will continue — sales will fall about 23% shy of fiscal 2019 revenue, with pre-tax operating income falling 70% short.

For the first half of fiscal 2020, Bridgestone reported operating income of $477.2 million on sales of $16.1 billion. The net loss was $203.7 million.

Bridgestone noted reduced volumes and currency depreciation impacts were the primary reasons for the lower earnings. Offsetting these negative factors were gains from lower raw materials and operating expenses and improved price/mix effect.

From a product point of view, Bridgestone's various business units were affected similarly — passenger/light truck tire activities' sales fell 24.9%, truck/bus tire activities were off 27.1% and "other" tire activities (OTR, farm, aircraft, motorcycle, etc.) dropped 20.8%.

From a geographic standpoint, Bridgestone reported sales in the Americas fell 22.2% to $6 billion. Operating profit plummeted 59% to $323.1 million.

Goodyear fared the worst of the leading tire makers, suffering operating and net losses of $478 million and $1.32 billion, respectively, on 28.1% lower sales of $5.2 billion. Despite the deep losses, company management said it believes the firm has positioned itself to recovery from the impact of the COVID-19 pandemic and grow in the future.

The decline, the company said, was driven by lower industry volume and reduced sales from other tire-related businesses. These factors were partially offset by improvements in price/mix.

Industry demand during the second quarter was significantly affected by the actions governments, businesses and consumers took to slow the spread of COVID-19, with the greatest impact occurring in April and May, the company said.

For the first half of the year, tire volumes totaled 51.7 million units, down 31% from 2019. Replacement tire shipments declined 28% in the first half of the year, reflecting the impact of lower consumer demand, temporary store closings and wholesale and retail customers reducing inventory levels. Original equipment unit volume decreased 41%.

Despite suffering a 23% drop in first-half sales revenue, Continental's tire group expects a slight recovery in the tire market in the second half of the year.

Conti's tire business reported 41% lower pre-tax operating income of $792.6 million on sales of $4.88 billion, cutting the operating ratio five points to 16.3%.

Conti cited the negative impact the COVID-19 pandemic for the declines in sales volumes for passenger and light truck tires, which it said were "significantly below" the previous year's level in both the OE business and replacement sector.

Citing preliminary data, Continental said global sales volumes of replacement tires for passenger car and light vehicles fell by around 15% year-on-year in the first half, in the wake of the COVID-19 pandemic.

Conti linked the slump in the first quarter to weak demand in China, while attributing the second-quarter decline to containment measures in Europe and North America. The division also posted an 8% drop in demand for replacement tires for medium and heavy commercial vehicles.

Sumitomo Rubber (SRI) reported operating and net losses of nearly $25 million and $86.5 million on 20.8% lower sales of $3.15 billion. SRI said the results reflect "extremely harsh" global economic conditions during the COVID-19 pandemic.

Overall, Sumitomo said an "extremely severe" business environment impacted by the pandemic caused the sales environment to deteriorate significantly. SRI noted in particular the Japanese economy faced "extremely harsh conditions."

At the same time the Japanese yen continued to appreciate against the Euro and emerging country currencies and the prices of natural rubber and petroleum-based raw materials fell and remained low.

SRI's tire business unit also fell into the red during the period, reporting a business loss of $8.3 million on 20.8% lower revenue of $2.69 billion. The company reported lower replacement and OE market sales, both domestically and internationally.

North America fared better than other regions, with sales revenue down "just" 12.5% from 2019 at $617.5 million.

Looking ahead, SRI said it expects the sales decline for the second half to be around 10%, with China and North America leading the way when it comes to market recovery. The market for replacement tires is recovering faster than that for OE tires, SRI said.

Despite double-digit declines in first-half results and a net loss of more than $119 million, Pirelli & C. S.p.A. said it has "contained" the effects of the COVID-19 pandemic, learning from experience gained in China.

Pre-tax operating earnings (adjusted EBIT) plunged 85% to $73.5 million during the first half, on 31.6% lower sales of $2 billion. The net loss was $112 million, compared with a profit of more than $340 million in the first half of 2019.

Pirelli cited the impact of the COVID-19 pandemic-related lockdown measures, as well as a "general worsening" of economic conditions, for a marked drop in consumption and production.

Unit demand for car tires fell 36% in the second quarter, Pirelli said, dragging down demand in the half by 28%.

Pirelli said the tire sector was strongly impacted by COVID-19 globally in the first six months of the year, as economic conditions generally worsened while consumption and production decreased.

However, the tire maker said its "efficiencies and cost containment actions" limited the impact of the reduction in demand and the slowdown.

The Milan, Italy-based manufacturer said it used experience it gained in China — where production and commercial activities have returned to normal — to respond promptly to the pandemic and define an action plan in April.

Yokohama Rubber (YRC) posted an 88.3% drop in operating income to $185 million on 20.6% lower sales of $2.28 billion, prompting management to project double-digit declines in sales and earnings for the full fiscal year.

Net income plummeted 70.2% to $115.5 million, the company reported.

Yokohama said resilience by its Multiple Business and Alliance Tire Group (ATG) off-highway tires segments offset an operating loss suffered by the tires segment amid the COVID-19 pandemic.

The tire segment reported an operating loss of nearly $19 million on 20.7% lower sales of $1.54 billion. YRC attributed the decline in business profit to a drop in unit sales volume, an upturn in unit costs associated with reduced production volume and inventory-disposal costs associated with a product recall in North America during the first quarter.

Sales revenue declined in original equipment tires in Japan and overseas as the COVID-19 pandemic depressed vehicle demand in Japan and necessitated continuing production adjustments by auto makers worldwide.

Toyo Tire Corp. posted 48.3% lower operating income of $73.4 million on 15.7% lower sales of $1.39 billion, prompting management to project double-digit declines in sales and earnings for the full fiscal year.

Net earnings plummeted 93.1% to $4.8 million. Toyo cited the negative effects of lower sales and higher production costs related to the reduced sales for the earnings decline.

Toyo's tire segment reported a 39.6% drop in operating income for the period to $90.1 million on 13.6% lower sales of $1.24 billion.

Toyo said aftermarket tire demand, after hitting bottom in April, has begun to recover in some regions, including North America, and the size of the demand drop in the OE sector has been shrinking as well, as vehicle makers have resumed production.

In addition, Toyo said "a souring U.S.-China relationship" has increased the likelihood of anti-dumping duties being imposed.

Toyo reported its second-quarter results were measurably worse than in the first quarter.

Business in North America fell 15% in the second quarter to $368.5 million and 12.3% in the six months to $754.5 million, Toyo reported.

For the full fiscal year, Toyo is projecting sales in North America will be off by about 11% versus fiscal 2019, indicating a slight rebound from the first half.

Cooper Tire reported an operating loss of $917,000 on 20.8% lower sales of $1.03 billion due in large part to the implosion of economic activity due to the pandemic.

The net loss was $17.8 million, versus net income of $15.8 million a year ago.

Despite the double-digit dips in sales and earnings and the continuing risks imposed by the COVID-19 pandemic, Cooper said it is confident its business will improve in the second half and that it can recover longer term.

Cooper attributed the drop in operating profit to the effects of lower unit volume ($44 million) and higher manufacturing costs ($39 million), deficits that were offset partially by favorable raw-materials costs, favorable price and mix and lower selling, general and administrative (SG&A) expenses.

In his comments on the results, Mr. Hughes noted that Cooper started the year with a strong balance sheet and took "early and decisive actions" to help weather the coronavirus storm and said Cooper "seized opportunities" to continue to build business.

"As a result of these efforts, and the economic recovery that started to emerge later in the quarter, Cooper was able to generate significant free cash flow for the period and grow market share in the U.S.," he said.

Mr. Hughes noted that Cooper management does not believe the company will have a substantial cash usage in the third quarter. On the contrary, due to the improving financial position and outlook, Cooper paid down in July $200 million of the $270 million it had borrowed on its revolving credit facilities.

Titan International Inc. posted operating and net losses for the quarter and six months as sales dropped 26.7% during the quarter and 21.6% for the six months.

This marks the fifth quarter in a row that Titan has posted operating and net losses, and management is bracing for more challenges entering the third quarter, which "typically experiences" slower sales due to seasonal demand shifts.

Titan attributed the losses primarily to the negative impact of lower sales volume across most geographic regions, driven by most countries' efforts to deal with the COVID-19 pandemic.

Titan's loss from operations was $12.7 million for the six months on sales of $627.6 million. The net loss was $30.5 million for the half-year.

In its half-year earnings report, Titan cautioned that it typically experiences a sales slowdown in the third quarter due to summer maintenance shutdowns and employee holidays, and that in 2020 the slowdown likely will be "further exacerbated" by the effects of the continuing COVID-19 pandemic.