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Published on September 5, 2005

Sales up, profits mixed for top tire firms

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Date Published September 5, 2005

The plague of raw material price increases took their toll on global tire makers' bottom lines in 2004, but other factors also are influencing profits so far this year.

Profitability was mixed but sales consistently up for the largest tire makers, in the first half of 2005. Pirelli S.p.A. led the pack with the largest percentage sales increase, 13.1 percent to $2.75 billion. Groupe Michelin posted the smallest gain at 0.1 percent to $9.03 billion. Bridgestone Corp. reported the highest sales for the period, at $11.4 billion, up 8.9 percent from the same period last year.

Profitability was more tenuous and is expected to continue to be so for the rest of the year.

Bridgestone nearly doubled its net earnings to $919.5 million, but a large amount of that came from a pension fund change in Japan. The company's operating earnings in the Americas rose 23.9 percent to $173.6 million as sales grew 10.9 percent to $4.94 billion, putting the Americas business unit on par with Japan in terms of sales volume.

Still, the tire maker cautioned shareholders the company faces a ``challenging'' business environment for the rest of the year with increasing raw material costs chipping away at profitability.

Michelin controls costs

Michelin-which posted a 5.5-percent gain in net earnings to $465 million-anticipates operating margins will exceed last year's despite the rising raw material costs. The tire maker said its price mix as well as its tight control over costs enabled it to maintain operating income at last year's level.

Michelin ``not only managed to compensate for a 3.6-percent decline in sales volumes but also for the escalation in raw material costs that turned out to be more severe than in the first half of 2004,'' the tire maker said. The firm expects raw material price increases of 14-15 percent through year-end.

Goodyear also made similar strides, offsetting rising raw material costs through improved mix, productivity gains and three price increases. Good-year, marking its fifth consecutive quarterly profit in the second quarter, posted net earnings of $137 million in the half, an improvement over a $48 million loss for the same period last year.

The Akron-based tire maker posted net sales of $9.76 billion in the half, up from $8.82 billion a year ago.

Goodyear warned about raw material costs-which company officials expect to grow about 10 percent through year-end-as well as its high debt load and unfunded pension requirements. On the other hand, strong-selling new products, more available cash, higher revenue per tire and other factors bode well for Good- year, officials said.

Cooper Tire & Rubber Co. faced similar raw material challenges, but its main problem in the first half of the year was the strike at its Texarkana, Ark., plant this spring. Cooper posted a net loss of $1.67 million in the half, down from earnings of $58.3 million last year.

Sales grew 3.6 percent to $1.02 billion from $989.2 million, boosted by improvements in price and mix. Lower unit sales-from both weaker demand and the work stoppage-offset mix gains.

``We made some good progress once the strike was behind us, and that progress was clearly evident in June, but it was not enough to offset the broad impact on sales and disruption of our manufacturing operations in the first two months of the quarter,'' said Thomas Dattilo, chairman and CEO of Cooper.

Cooper gets lukewarm grade

Analyst Jonathan Steinmetz at Morgan Stanley retained his underweight position on Cooper as the tire maker's results and outlook came in below his forecast.

``We do not see a near-term end to the margin pressure as we believe the company will need to sacrifice price to regain lost market share, raw material costs show no signs of weakening and competitive conditions remain intense,'' he wrote in a note to investors.

Continental A.G. also continued to struggle in North America and doesn't expect to reach its earlier target of break-even by the fourth quarter. Sales for the company overall rose 10.6 percent to $8.2 billion and net earnings rose 59.3 percent to $494.4 million. But volumes fell in the U.S. passenger and light truck tire operation.

``The deviation from our target figures is not large,'' said Allan Hippe, president of Continental Tire North America Inc. and finance director for Continental A.G. ``But many factors would have to turn out positively in order for us to just break even. At the same time, this shows we are not in the middle of a catastrophic scenario, but rather that things are just progressing more slowly than expected.''

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