Rest of 2016 offers mixed bag for tire makers

The world's leading tire makers are wide-ranging in expectations when it comes to the remainder of 2016.

On the one hand, uncertainty about growth prospects in the second half of 2016 has prompted all four of Japan's tire makers to scale back on their earnings expectations for the fiscal year.

On the other, Michelin, Continental A.G., Goodyear and Cooper Tire & Rubber Co. have issued relatively bullish forecasts for their fiscal 2016 prospects.

Bridgestone Corp., Sumitomo Rubber Industries Ltd., Yokohama Tire Corp. and Toyo Tire & Rubber Co. Ltd. all have revised downward their projections for sales and earnings for fiscal 2016, citing the appreciating Japanese yen and lower tire sales during the first half.

In Bridgestone's case, the new forecasts are down double digits from the firm's earlier projections, which in turn already were lower than the company's fiscal 2015 performance.

For the year, Bridgestone is forecasting flat demand growth for replacement passenger tires in Japan, North America and Europe and 1 to 3 percent growth in aftermarket truck tire sales. In contrast, Bridgestone anticipates higher demand growth in Asia-Pacific, including China.

Bridgestone sees some volatile swings in original equipment demand for truck/bus tires, ranging from an 11 percent gain in Asia-Pacific to an 18 percent drop in North America.

Michelin's top executives said they expect to report increased operating income for the full year, at constant exchange rates, and generate volume growth exceeding global trends in key markets.

Michelin said it expects both consumer and commercial tire markets in North America and Europe to “lose some momentum” while remaining buoyant in China. The specialty tire market will continue to be impacted as mining companies complete their inventory drawdowns.

Goodyear Chairman Rich Kramer told analysts in a conference call recently his company expects to report 10 to 15 percent growth in operating income for the fiscal year despite profits being up only 1.3 percent in the first half.

He deferred discussing specifics about strategy until the firm's Investor Day on Sept. 15 but indicated in his remarks that Goodyear's optimism is based on above-average growth in demand for the company's “high-value-added” tires—larger rim diameter tires, for the most part.

Continental raised its earnings forecast for fiscal 2016 slightly based on better-than-expected first-half figures—especially pertaining to the tire and rubber goods sectors.

Continental Chairman Elmar Degenhart singled out the “excellent operating performance” of the firm's Rubber Group for its confidence, noting the unit's “very positive unit sales development ... has given us an additional boost.”

The company expects its full-year pre-tax operating margin to exceed 11 percent, up from the previously published estimate of about 11 percent. Its development is also being helped by lower-than-expected raw material costs.

Continental is maintaining its earlier forecast of 2 percent volume growth worldwide in replacement consumer tires and is raising its expectations for medium and heavy commercial vehicles to 2 percent growth from 1 percent.

Sumitomo Rubber based its lowered forecast on “severe” business conditions related to “intensified competition” in markets afflicted by “sluggish demand caused by a worldwide sentiment of economic stagnation.” Sumitomo also referenced expectations of further yen appreciation.

Pirelli Tyre S.p.A. did not issue any specifics regarding the rest of 2016. The company is evolving toward a new makeup under the ownership of China's ChemChina.

Hankook Tire Co. Inc. did not issue specific financial expectations, stating instead it plans to enhance its market share by strengthening its global distribution channel strategy, including more direct contact with global customers.

Yokohama projects that operating income for the full fiscal year will fall 30 percent from fiscal 2015 on 4.7 percent lower sales as “profit attributable to owners of parent” will decline 44.9 percent. YRC attributed the lowered forecast on weakening demand in its home markets and the appreciating value of the yen.

Cooper, which reported 12 percent higher operating income in the first half, is bullish on the rest of the year, with retiring Chairman and CEO Roy Armes stating, “we look forward to a strong second half and full year” despite expectations of moderating raw material cost benefits and more competitive global markets.

Toyo Tire held pat on its earnings forecast for 2016, although the outlook published earlier already represented an 18 percent drop from fiscal 2015. The company's sales projection is a 2.5 percent drop from the earlier forecast and 3.1 percent from 2015.

Nokian Tyres P.L.C. expects fiscal 2016 earnings and sales to be on par with those in 2015, after reporting slight drops in both in the first half. Nokian said its forecast depends on stable currency markets.

Despite a net loss in the first half and 16 percent lower sales, Maurice Taylor, Titan International chairman and CEO, referenced “some great reasons to be optimistic” in his comments accompanying the release of the sales figures.

Taylor added Titan has seen an uptick in aftermarket construction and forestry tire sales and said he believes the agriculture market slump is at or near the bottom.

For the first half, half of the dozen major publicly traded companies suffered declines in operating income and all but three reported sales drops.

Bridgestone reported an 8.2 percent decrease in operating income on 11.2-percent lower first-half sales. The company's tire business unit's income dropped 8.5 percent while sales fell 14.9 percent. Regionally, first-half sales fell 10 percent in Japan and 14 percent in North America.

Michelin's first-half operating income grew 9 percent despite 2 percent lower sales. Michelin attributed the lower sales to a combination of factors, including currency translation effects, a reduction in the price/mix relation and the contracting OTR segment. These factors offset a 2.5 percent gain in volume sales.

Goodyear reported slightly higher operating income for the period on 7.7 percent lower sales. Net income fell 7.2 percent.

Tire unit volumes climbed 2 percent to 83 million, Goodyear said, driven by growth in Asia-Pacific—primarily in Japan and China. Replacement shipments edged up 3 percent while OE volume slid 1 percent.

Continental reported 6 percent higher pre-tax operating income on 2.3 percent higher sales. Net income rose 13.1 percent to $1.84 billion. Tire division earnings rose 7.5 percent on 2.8 percent higher sales, yielding a 27.5 percent earnings ratio.

Conti reported increased unit sales in the consumer sector in both replacement and OE markets and said commercial vehicle tire sales increased 8 percent.

Pirelli's earnings fell slightly in the half-year but profitability rose as revenues fell 5.9 percent. Pre-tax operating income fell on the effects of non-recurring restructuring charges related to the merger of Pirelli's industrial tire business with that of China National Tire & Rubber Co. Ltd.

Pirelli's consumer business delivered 7.4 percent organic growth, while the industrial business reported no growth due in part to a slowdown in South America.

Sumitomo Rubber reported a 5.2 percent improvement in operating income for the six months despite a 3.9 precent drop in sales. Sumitomo attributed the operating income gain to cost-reduction activities throughout the company's operations, while an appreciating Japanese yen took its toll on sales revenue. Its operating ratio improved marginally to 8.2 percent.

The profit attributable to shareholders—roughly equal to net income—shot up 40.5 percent on the positive effects of extraordinary income from the sale of Goodyear shares SRI held as part of the firm's global alliance dissolved last fall.

SRI's tire business had a 0.3 percent drop in operating income on 3.5 percent lower sales of $2.85 billion. Sales volume increased in several categories, including the domestic replacement and replacement markets in North America and Europe.

Hankook Tire posted 38.9 percent better operating income on 8 percent higher sales, thereby raising the operating ratio 3+ points to 16.7 percent. Hankook did not elaborate on the reasons for the improved earnings, other than to point out above average growth in higher value-added performance tires in Europe and North America, and an expansion of OE tire sales outside of South Korea.

Toyo's operating income for the period fell 10 percent while sales declined 4.1 percent. Toyo cited the negative effects of lower sales, the appreciating yen and higher operating expenses for the income decline, which offset the positive effects of lower raw material costs.

Titan reported a loss from operations in the first half on 16 percent lower sales.