AKRON (Sept. 12, 2008) — Slowing demand and rising raw material prices are making tire manufacturers cautious about their financial prospects for the second half of the year and fiscal year 2009.
The uncertain conditions have prompt- ed Bridgestone Corp., Toyo Tire & Rubber Co. Ltd. and Yokohama Tire Co. Ltd. to revise downward their earnings projections for their current fiscal years.
Meanwhile, Michelin expects full-year earnings to mirror those generated in the first half, which fell 11 percent from the 2007 half-year.
The turmoil probably means more price increases before the end of 2008, some tire companies said.
Despite lower earnings in the first half, Michelin Managing Partner Michel Rollier said the company continues to grow and gain market share. “Michelin, now better armed to adjust to market conditions … is holding the course of its strategic plan: improving competitiveness, leveraging production differentiation and increasing a foothold in the high-growth markets,” he said.
Michelin did caution, though, that its forecast depended on markets not worsening in the second half beyond the firm's estimates, which in late July showed 2 and 5 percent drops in North American consumer and commercial vehicle tire markets.
Michelin's operating income for the half-year slid to $1.12 billion as “external cost inflation”—raw materials and energy/transportation costs—eroded gains from improved pricing and higher volumes. Net income dropped 1.4 percent to $679.3 million and sales slipped 0.9 percent to $13 billion despite a 2-percent gain in sales volume.
Michelin estimated its raw material costs will increase by nearly $1.2 billion for the full year, at constant exchange rates. The company said its policy of increasing prices in the replacement market globally should keep full-year margins at the levels seen in the first half.
Goodyear—which reported a marked improvement in first-half earnings thanks to its international business—cautioned shareholders that the second half will be a challenge, with North American tire demand off across the board and raw materials costs expected to climb 10 to 12 percent.
The tire maker didn't specify its earnings position for the rest of 2008, however, after reporting operating and net income of $417 million and $222 million, respectively, on 8.1-percent higher sales of $10.2 billion.
Continental A.G. is a bit more optimistic, expecting 2008 pre-tax earnings to match those of fiscal 2007, when it achieved a 9.3-percent earnings ratio.
However, Conti's outlook is based more on its automotive systems businesses than on its tire divisions, which together suffered a 15.8-percent drop in pretax operating income in the first half, primarily caused by higher raw materials costs.
Cooper Tire & Rubber Co. reported losses in the second quarter and first half on the effects of higher raw materials and utility costs and weak demand in North America. It didn't make a specific earnings forecast for the rest of the year.
Bridgestone cut its earnings expectations for fiscal 2008 by more than 20 percent from those released in February—which already were below the fiscal 2007 performance—after suffering double-digit drops in operating and net income for the six months ended June 30.
The company blamed the drops on rising raw materials and energy costs, which offset marginally higher sales revenue during the period. Bridgestone also expressed concern about the slowing economies in Japan, the U.S. and Europe in revising its forecast.
For the full year, Bridgestone is projecting operating income of about $1.5 billion on sales of $32.7 billion for an earnings ratio of 4.6 percent, down nearly three full percentage points from 2007.
Yokohama earlier this year projected double-digit drops in operating and net income for its fiscal year ending March 31, 2009, on 2.5-percent higher sales. More recently management stuck by that forecast despite lower first-quarter earnings caused by higher raw material costs and logistics expenses.
Toyo revised downward by about a third its forecasts for both operating and net income after suffering a 70-percent drop in operating income in its fiscal first quarter.
Pirelli & C. S.p.A. anticipates reporting earnings in the second half on par with those recorded last year, “barring further deterioration of markets of reference.” For the half-year, the tire maker recorded an earnings ratio of 7.9 percent, down from 10.7 percent for fiscal 2007.