DRAFT Analysis – European tire makers leading the way after H1 results

London – There were some clear winners and losers in the announcements of second quarter and first half results by tire makers over the past couple of weeks – much, though, depending on currency factors and companies’ HQ locations.

Based on the headline figures, most of the biggest gains were made in Europe, with Continental, Michelin and Pirelli outperforming their main rivals in the US and Japan.

In the first half of 2016, earnings at Continental AG’s Tire division went up 11.1 percent to over €1.4 billion on 2.8 percent higher sales of around €5.3 billion. Chairman Dr. Elmar Degenhart reported positive unit sales development in the tire business and lower than expected raw materials prices.

Looking forward, Degenhart said: “Our growing financial strength enables us to increase investment in R&D. In doing so, we intend to set the course for pioneering technologies at an early stage and continue our rapid, profitable growth on a long-term basis.”

For the six months to 30 June, Michelin reported volumes up 2.5 percent: rising 4 percent in passenger car and light truck tires and 1 percent in truck tires, and declining by 2 percent in its specialty businesses.

The French tire maker said operating income from recurring activities “grew strongly” to €1.4 billion, despite a 2-percent drop in sales to €10.2 billion. The boost in operating income was helped by: a €115m positive impact of changes in the price mix and raw materials costs; and €155m in gains from a competitiveness plan. These factors more than offset higher production costs and overheads.

"In the first half, Michelin delivered a strong business performance driven by the quality of its tires and services, the effective management of the balance among growth and pricing, as well as by cost competitiveness,” said CEO Jean-Dominique Senard.

The Michelin boss added that in “a highly competitive marketplace” Michelin was focused on enhancing the quality of its customer service, streamlining operating procedures, deploying digital technologies and empowering its teams.

In Italy, Pirelli reported a 5.9-percent rise in first-half revenues to €2,968.6 million, reflecting price increases in emerging markets, higher replacement sales and different geographic and product mixes.

This included a positive performance of the Consumer business – particularly in the Premium segment and mature markets – and a flat performance at Pirelli’s Industrial business due in part to a slowdown in South America.

In the Premium segment, Pirelli reported volume-growth of 13.4 percent – 15 percent in Q2 after and 11.7 percent in Q1. Organic revenues increased by 11.3 percent to €1,607.2 million – around 65 percent of total Consumer revenues compared to 62 percent a year ago.

Pirelli’s EBIT margin before non-recurring and restructuring charges grew to 14. percent compared with the prior-year 14.2 percent. Regionally, profitability improved in Europe and NAFTA thanks to strong growth of the Premium segment. APac, though, was the most profitable area with an EBIT margin above 20 percent.

Overall, Pirelli linked the improved profitability to “the effect of internal levers of price/mix and efficiencies achieved to contrast forex volatility and the decline of some markets mainly in the Industrial segment.”

But it was not all plain-sailing in Europe: Nokian Tyres plc reported a 0.7-percent fall in operating profit to €128.0 million, on first-half net sales of €613.3 million – 2.2-percent lower than a year ago.

Currency movements accounted for a €17.4-million drop in net sales, which would otherwise have grown by 2.7 percent, the Finnish tire maker pointed out.

Reviewing the six months to 30 June, Nokian president and CEO Ari Lehtoranta said winter tire markets in North America and Russia were “as challenging as we had anticipated, but our good performance in Europe and in summer tires in general helped to balance the situation.”

But the sharpest falls were among Japanese tire makers, hobbled by the growing strength of the Yen as well as a general slowdown in domestic sales and in certain product markets elsewhere.

Bridgestone – the world’s biggest tire maker, by sales – posted an 8-percent fall in operating income, to Yen218.2 billion, on first-half net sales down 11 percent to Yen1,646.5 billion.

Bridgestone’s tire sales fell 13 percent to Yen1,352.7 billion and operating income 3 percent to Yen198.6 billion. The declines, it said, were due to a stronger Yen and lower selling prices due to declines in raw materials prices.

Passenger car tire sales rose but truck & bus tire sales fell. Excluding currency factors, operating income increased with “a good balance between sales volume and quality of business.”

At Yokohama Rubber Co., first-half operating profit fell 37.9 percent to Yen15.7 billion on 9.5 percent lower sales (to 30 June) at Yen268.1 billion. Tire profits fell 37.6 percent, to Yen12.1 billion, on 10.1 percent lower sales, at Yen208.2 billion.

The performance, said Yokohama was linked to a unit-decline in Japanese vehicle production, weak demand, lower prices and the strong Yen. These factors were only slightly offset by lower raw material costs.

There was better news from Sumitomo Rubber Industries: operating income rose 5 percent to Yen30.8 billion on first-half sales down 4 percent to Yen373.6 billion. The Japanese company's report did not include commentary on SRI’s performance over the first six months of the year.

Among US tire makers, Goodyear reported an 8-percent drop in sales for the first six months to $7.6 billion, on unfavourable foreign currency translation of $225 million and the deconsolidation of its Venezuela business.

Tire unit volumes were up 2 percent to 83.0 million, driven mainly by growth in Japan and China. Replacement tire shipments were up 3 percent. OE unit fell 1 percent. Excluding Venezuela, unit volumes increased 3 percent.

Goodyear’s first half operating income rose 1.3 percent to $950 million on favorable price/mix net of raw materials and the impact of higher volume. These improvements were partially offset by the deconsolidation of Venezuela.

For the second quarter, Goodyear posted a 3.5-percent drop in segment operating income to $531 million on Q2 sales of $3.9 billion, 7-percent lower than in the same three months of 2015.

The result for the three months to 30 June featured an impressive 37-percent rise in earnings in the EMEA region, offset by mainly one-off factors impacting the tire maker’s business in the Americas.

Globally, Q2 tire unit volumes reached 41.5 million units, up 2 percent from 2015. This increase, said Goodyear, driven by growth in the Asia Pacific and Europe, Middle East and Africa regions. Replacement tire shipments were up 4 percent, but OE unit volumes were down 4 percent.

““Industry fundamentals remain favourable across many of our key markets and demand for our premium, high-value-added tires is strong,” said Richard Kramer, Goodeyar chairman and CEO .

In its second quarter report, Cooper Tire & Rubber Co. reported 10.5 percent higher operating income, helped by lower raw materials costs. Sales, by contrast, fell 1.5 percent to $740.3m. Its ‘international segment’ reversed an operating loss a year ago to earnings of $3.1 million this year.

“We achieved record-setting second quarter operating margin, building upon the strong results we delivered in the first quarter,” said chairman, CEO and president Roy Armes.

The Americas segment generated operating margin of more than 17 percent and the international segment "performed better than expected,” Armes concluded.