Despite record sales, Goodyear posts a Q1 loss

Sales at Goodyear Tire & Rubber Company during first quarter of 2012 were a record for the period, the US tyre maker claims. Announcing the company’s results for the opening three months of the year, Goodyear chairman and CEO Richard J. Kramer commented “I'm pleased with our results as our businesses posted solid operating income.”Our teams delivered these results in the face of a difficult volume environment and high raw material costs, with a strong focus on price/mix.

“Favourable results in North America, in spite of the weak industry environment, are a clear indication of our success in delivering innovation, targeting profitable market segments and driving operational excellence,” Kramer added. “As expected, Europe, Middle East & Africa’s results were affected by weak economic conditions, which remain uncertain, and warm winter weather. Our first quarter results demonstrated a consistent focus on our global Strategy Roadmap. We have positive momentum and I remain confident that we will reach our 2013 targets.”

Goodyear’s first quarter 2012 sales amounted to US$5.5 billion, up two per cent from the 2011 quarter and a first quarter record. Volumes within the company’s Tire unit totalled 43 million, down eight per cent from 2011 and reflecting weak industry demand in many markets. This lower result compares to first quarter 2011 volumes that were up almost seven per cent from 2010.

The manufacturer says the strength of its price/mix performance can be witnesses in its first quarter sales; this is credited with driving revenue per tyre up 16 per cent year-over-year, excluding the impact of foreign currency translation. Unfavourable unit volume and foreign currency translation reduced sales by $345 million and $108 million, respectively, Goodyear reports.

The company’s segment operating income was $292 million in the first quarter of 2012, down $35 million from the year-ago quarter. Segment operating income reflected an improved price/mix of $525 million, which Goodyear says more than offset $482 million in higher raw material costs ($420 million net of raw material cost reduction actions).

Segment operating income was negatively impacted by $54 million in lower volume and higher under-absorbed fixed costs of approximately $6 million. Cost inflation along with inefficiencies related to a plant closing in North America and poor productivity at factories in France more than offset any benefit gained through cost saving programmes.

At the bottom line, talk of record sales brought little cheer. During the quarter Goodyear posted a net loss (available to common shareholders) of $11 million, or five cents per share, compared with a net income of $103 million in the first quarter of 2011. All per share amounts are diluted.

The first quarter of 2012 included $86 million (35 cents per share) in charges resulting from the early redemption of senior notes; $14 million (6 cents per share) in rationalisations, asset write-offs and accelerated depreciation; $3 million (1 cent per share) in discrete tax charges; and gains of $5 million (2 cents per share) from the net impact of insurance recoveries related to the Thailand flood and $3 million (1 cent per share) from asset sales. All amounts are after taxes and minority interest.

2012 Financing Actions

Goodyear successfully completed financing actions totalling $3.9 billion during 2012. In February, the company issued $700 million in 7.0 per cent senior notes due 2022. The proceeds were used to redeem all of its outstanding $650 million 10.5 per cent senior notes due 2016. In April, it refinanced $3.2 billion in credit facilities by amending and restating its principal US credit facilities. The credit available under the company’s asset-based revolving credit facility was increased to $2.0 billion and its maturity extended until 2017. The maturity of the company’s $1.2 billion second lien term loan was extended until 2019.

First Quarter Business Segment Results

Sales at North American Tire in the first quarter of 2012 increased eight per cent from last year to $2.5 billion, a first quarter record. Sales reflect an eight per cent decrease in tyre unit volume and improved price/mix, which drove a 21 per cent increase in revenue per tyre, excluding the impact of foreign currency translation, compared to 2011’s first quarter. Original equipment unit volume increased 11 per cent. Replacement tyre shipments were down 14 per cent, reflecting weak industry demand and strong sales growth for Goodyear in the year-ago quarter.

First quarter 2012 segment operating income of $80 million was a $40 million improvement over the prior year. Improved price/mix of $246 million more than offset $184 million of higher raw material costs. Segment operating income benefitted from $13 million of higher earnings in other tyre-related businesses. It was negatively impacted by $13 million of lower volume and $24 million in higher conversion costs due to inflation and by transition costs related to a plant closure.

Europe, Middle East and Africa Tire’s first quarter sales decreased one per cent from last year to $1.9 billion. Sales reflect a nine per cent decrease in tyre unit volume, strong price/mix performance and unfavourable foreign currency translation. Original equipment unit volume was flat. Replacement tyre shipments were down 11 per cent, reflecting lower industry demand. Revenue per tyre increased 16 per cent in 2012 compared to 2011, excluding the impact of foreign currency translation.

First quarter 2012 segment operating income of $90 million was $63 million below the prior year. Improved price/mix of $209 million more than offset $177 million of higher raw material costs. Segment operating income was negatively impacted by $65 million due to lower volume and higher conversion costs and by $26 million in higher SAG expenses, including increased warehousing costs related to higher inventory levels versus 2011.

First quarter sales at Latin American Tire decreased 11 per cent from last year to $521 million. Original equipment unit volume decreased 11 per cent. Replacement tyre shipments were down 12 per cent. The decrease in volume was primarily due to weaker industry demand and increased competition. Revenue per tyre increased four per cent in 2012 compared to 2011, excluding the impact of foreign currency translation.

First quarter segment operating income of $55 million was down $12 million from a year ago. Price/mix improvements of $41 million more than offset $37 million in raw material cost increases. Segment operating income was negatively impacted by lower volume of $12 million and $4 million due to the sale of the farm tyre business in April 2011.

Asia Pacific Tire’s first quarter sales increased five per cent from last year to $577 million, a first quarter record. Original equipment unit volume was up seven per cent. Replacement tyre shipments were down 11 per cent. The impact of flooding in Thailand and softer consumer replacement demand in many parts of Asia more than offset growth in China. Revenue per tyre increased nine per cent in 2012 compared to 2011, excluding the impact of foreign currency translation. Favourable foreign currency translation increased sales by $7 million.

First quarter segment operating income of $67 million was even with last year. The 2012 quarter was impacted by improved price/mix of $29 million, which more than offset $22 million of higher raw material costs. Segment operating income was also impacted by $7 million in costs related to the planned start up of a new factory in China.

Insurance recoveries offset costs resulting from the temporary closure of the company’s factory in Thailand due to flooding. The net impact on Asia Pacific Tire’s first quarter segment operating income was favourable to the tune of $3 million. Goodyear reports that the factory has resumed production and is expected to return to full operating levels in the second quarter of 2012, improving the supply of both aviation and passenger tyres.

Outlook

Goodyear expects long-term growth in the global tyre industry to continue, but at a slower pace than previously forecast due to continued economic weakness in multiple markets. Due to the weaker than expected first quarter volumes, the company expects that its full-year tyre unit volume for 2012 will be approximately two per cent below 2011.

For full year 2012 in North America, Goodyear expects the consumer replacement market to be down between one per cent and three per cent, consumer original equipment up between two per cent and seven per cent, commercial replacement to be between down two per cent and up two per cent and commercial original equipment up between ten per cent and 15 per cent.

For the full year in Europe, the consumer replacement industry is expected to be down between three per cent and five per cent, consumer original equipment down between five per cent and nine per cent, commercial replacement down between three per cent and eight per cent and commercial original equipment down between ten per cent and 15 per cent.

Goodyear anticipates its raw material costs for the second quarter of 2012 will increase approximately 12 per cent over the prior year. For the second half of 2012, the company expects raw material costs to be about equal with the second half of 2011. For the full year of 2012, Goodyear expects its raw material costs will increase approximately nine per cent compared with 2011.