Goodyear posts Q1 results, confirms targets

While Goodyear Tire & Rubber has expressed satisfaction with the US$373 segment operating income earned in the first quarter of 2014, chairman and CEO Richard Kramer acknowledged the effect of ‘headwinds’ in emerging markets during the three-month period, particularly the impact of Venezuela on the company’s Latin America business. Segment operating income was up 24 per cent year-on-year and had a margin of 8.3 per cent; this is the fourth consecutive quarter where SOI margin has exceeded eight per cent.

“Our segment operating income growth demonstrates our strategy is working and continues to deliver sustainable results,” said Kramer. “Despite the Venezuelan charge in the quarter, our operating results remained strong and in line with our expectations and we are reaffirming our 2014-2016 financial targets.”

The tyre marker’s first quarter 2014 sales were $4.5 billion, compared to $4.9 billion a year ago. The result reflects $202 million in lower sales in other tyre-related businesses, most notably third party chemical sales in North America; $126 million in unfavorable foreign currency translation (driven primarily by the weakening of the Brazilian Real, Venezuelan Bolivar and Australian dollar); and $98 million in lower price/mix, principally due to lower raw material costs, partially offset by $44 million in higher tyre unit volumes.

Tyre unit volumes totaled 40 million, up one per cent from 2013. Original equipment unit volume was down two per cent while replacement tyre shipments were up three per cent. “We remain confident in our full-year expectation of two per cent to three per cent year-over-year volume growth, despite the negative impact of severe January winter weather in North America and labour and economic disruptions in Venezuela during the quarter,” said Kramer. During an earnings conference call on 29 April, Kramer commented that “regarding Venezuela, the combination of volatile economic conditions and disruptions due to the labour negotiations had a negative impact of about one percentage point on our total company first quarter volumes.”

Events in Venezuela led to an after-tax foreign currency exchange charge of $132 million, which dragged down Goodyear’s net result; the company reported a $58 million ($0.23 cents per share) net loss for the first quarter of 2014, as opposed to net income of $26 million ($0.10 cents a share) in the first quarter of 2013. Adjusted diluted earnings per share was $0.56

Good performance in EMEA

The Europe, Middle East and Africa region proved to be a sales highlight for Goodyear, and was the only region to post higher year-on-year sales in Q1 2014. Sales rose four per cent from last year to $1.7 billion and reflected a seven per cent increase in tyre unit volume and favourable foreign currency translation of $20 million, which were partially offset by lower price/mix. Original equipment unit volume was up 11 per cent and replacement tyre shipments were up six per cent.

Regarding the rise in replacement tyre shipments, Kramer commented that “the increased volume reflected improved sell out and continuing recovery in the region.” He added that the “combination of impressive third party rankings and industry leading tyre label grades across our portfolio” has made Goodyear “very optimistic” about the upcoming summer tyre selling season: “I can say confidently during my time at Goodyear, we have never had a stronger line up of Goodyear branded products around the world then we have today.”

First quarter EMEA operating income of $110 million was a $79 million improvement over the prior year. Favourable price/mix net of raw materials of $39 million, lower unabsorbed overhead of $35 million due to higher production levels and higher tyre unit volumes of $19 million positively impacted operating income. SOI margin increased to 6.6 per cent from 1.9 per cent in the prior year.

“EMEA’s performance in the first quarter also reflects continued success in the commercial business, where we had volume growth in our fleet business as well as in Eastern Europe,” added executive vice-president and chief financial officer Laura Thompson. “We also experienced positive price mix in our commercial business, demonstrating our strong product and service proposition. Factory utilisations further improved in the first quarter and as previously announced, we closed one of our factories in Amiens, France.

“We continue to closely monitor the situation in Ukraine and Russia,” continued Thompson. “Thus far the situation has not had a material impact on our overall EMEA business, as the scale of our Ukrainian operations in relatively small. In summary, we continue to focus on our previously announced profit improvement plans to restore our Europe, middle-east and Africa business to historical levels of profitability. The significant improvement and the run rate of our profitability over the past twelve months is reflective of the economic recovery as well as the result of the actions we have taken thus far. EMEA is off to a good start in 2014, but of course we have more work to do.”

Other regions

North America’s first quarter 2014 sales decreased 13 per cent from last year to $1.9 billion. Sales reflect a one per cent decrease in tyre unit volume, mainly related to adverse winter weather conditions; lower price/mix; and a $201 million decline in sales in other tyre-related businesses, most notably third-party chemical sales. Original equipment unit volume was down five per cent and replacement tyre volume remained flat. First quarter operating income of $156 million was a 23 per cent improvement over the prior year and a first quarter record. Operating income was positively impacted by lower conversion costs of $47 million and favourable price/mix net of raw materials of $3 million. These were partially offset by $9 million in higher transportation costs, $5 million in increased SAG expenses and $4 million resulting from lower tyre unit volume.

Latin America’s first quarter sales decreased 18 per cent from last year to $422 million. Sales reflect $93 million in unfavourable foreign currency translation and an 11 per cent decrease in tyre unit volume. Original equipment unit volume decreased 30 per cent, due primarily to lower consumer vehicle production. Replacement tyre shipments were down two per cent, driven by lower volume in Venezuela. First quarter operating income of $42 million was down 30 per cent from a year ago. Price/mix improvements of $20 million and lower raw material costs of $14 million benefited operating income, but it was negatively impacted by lower tyre volume of $14 million; increased SAG expense of $12 million; higher conversion costs of $12 million, due primarily to labour disruptions that reduced production levels in Venezuela; $8 million in unfavorable currency translation; and higher factory start-up costs of $4 million. Due to a range of issues in Venezuela, Goodyear has decreased its projected full-year 2014 segment operating income from $60 million to $40 million.

Asia Pacific’s first quarter sales decreased 13 per cent year-on-year to $492 million. Sales reflect a two per cent increase in tyre unit volume, which was more than offset by reduced price/mix, $41 million in unfavourable foreign currency translation and $6 million in lower sales in other tyre-related businesses. Original equipment unit volume remained flat and replacement tyre shipments were up three per cent. First quarter operating income of $65 million was down 23 per cent from last year. Lower factory start-up costs of $11 million were offset by $8 million in unfavourable foreign currency translation; $7 million in higher SAG expense, $7 million in lower insurance recoveries and $2 million in unfavourable price/mix net of raw materials.

Outlook

Goodyear has reaffirmed its 2014 -2016 financial targets, including segment operating income growth of between ten and 15 per cent per year, annual positive free cash flow from operations and, an adjusted debt to EBITDAP ratio of 2.5x. The company also continues to expect a two to three per cent year-on-year increase in unit volumes for 2014, as it believes the ongoing economic recovery in EMEA and growth in North America will offset emerging market weakness, particularly in Latin America.