Thorough. Reflective. Forthcoming.
There were a number of defining moments and trends in the tire industry in 2007 that will have an impact on 2008. Continued plant closings – and announced closings. A new CEO for Cooper Tire & Rubber Co. The increase in imports from China at the expense of the rest of the world.
But perhaps the most influential development was jump-started the previous year. On Dec. 22, 2006, Goodyear Tire & Rubber Co. reached a tentative agreement on a three-year contract with the United Steelworkers of America.
The settlement, following an 86-day strike that cost the company close to $400 million, started an amazing turnaround, according to analyst Saul Ludwig. The subsequent establishment of an independently managed VEBA (Voluntary Employees Beneficiary Association) trust fund to provide retiree health care benefits to union members will more than make up for the loss over the life of the new contract.
“The establishment of the VEBA started a new trend, which has been followed by vehicle manufacturers and others to deal with the considerable cost of retiree health care and coverage,” he says.
Modern Tire Dealer’s annual interview with Ludwig, a managing director at KeyBanc Capital Markets Inc., gave him the chance to look at Goodyear and other 2007 topics of interest in review. That includes looking at his 2007 forecast in hindsight.
MTD: Please elaborate on Goodyear’s good year in 2007.
Ludwig: Entering 2007, Goodyear had negative equity of $758 million; by Sept. 30, equity was a positive $1.7 billion, a remarkable transformation.
Goodyear’s net worth was helped by an equity offering and the sale of its Engineered Products business. The company also reported improved operating results compared to the previous year. And its labor agreement will help it financially in the future.
MTD: Roy Armes assumed his responsibilities as CEO and president of Cooper Tire on Jan. 1, 2007. Would you classify that as a defining moment for the industry in 2007?
Ludwig: Yes. Since he took over, the company has had a dramatic improvement in results versus 2006. I think he fostered the programs put in motion before he got there. He has garnered great support from the dealers and inside the company. He also has the right personality for the job.
MTD: What are your thoughts on the status of tire manufacturing in North America? Is there still too much plant capacity?
Ludwig: We have witnessed an onslaught of plant closings over the last few years because manufacturers finally woke up to the fact that they had too much -- and underutilized -- high cost plants in North America.
Gone are plants in Huntsville (Ala.), Tyler (Texas), Oklahoma City, Charlotte, Mayfield (Ky.) and part of Fort Wayne (Ind.). Valleyfield and Kitchener in Canada have closed, and a plant in Mexico City is on the way out. Only Toyo has built a new plant here, although Kumho may soon begin construction of a new plant in the U.S.
With capacity cut, the remaining plants are running full out, and efficiency is improved. That led to better pricing and higher net income in 2007. To keep the trend of profit improvement the North American manufacturers will have to be sure to keep capacity aligned with demand and not be timid in curtailing production facilities further if need be.
Yes, Michelin, Bridgestone, Goodyear and Cooper will not be shy about further plant closings if needed. I think there will be more plant closings over the next few years.
MTD: Will the Foreign Tire Sales recall affect the importing of Chinese-made tires into the U.S., especially in terms of numbers?
Ludwig: I don’t think so. As it turns out, hardly any of the recalled tires were actually turned back in. Furthermore, the Chinese got a wake up call as to product quality and additionally, those who import tires will be more careful in the future as to who they source product from.
Imports have remained strong even post-recall. What may limit Chinese imports might be surging demand for tires within China, thus limiting the quantity available for export.
In 2007, imports of Chinese-made passenger, light truck and truck tires into the U.S. increased by 50%. In contrast, tire imports from all other countries combined decreased 2.5%.
MTD: What were the U.S. replacement shipment highlights in 2007 vs. 2006 for passenger, light truck and medium truck tires?
Ludwig: Passenger tire shipments were up an estimated 3.5% to 203 million units, which is what I estimated at the start of 2007. Light truck tire shipments were up 1.8% to 34.2 million units, which is less than the 3.6% increase I predicted.
Truck tire shipments totaled 16.2 million tires, a drop of 4.1%. Conversely, I had predicted a 4.1% increase.
MTD: In the original equipment segment, how did the consumer and commercial numbers shake out in 2007?
Ludwig: OE passenger tire shipments came in at 46 million units, a 4.6% comparative decline. I also predicted a decrease, but only 2.1%. OE light truck tire shipments were down 12% to 4.4 million units; I predicted they would be down 4%.
On the truck tire side, shipments were way down because of the number of new trucks sold before the 2007 emissions regulations went into effect. 4.4 million units shipped were down 35.3%, which is what I estimated.
MTD: Who gained market share in 2007? Who lost?
Ludwig: Goodyear was a major loser in share for three main reasons: They suffered from the lingering effects of the strike, they were short of certain high-end tires that were in strong demand, and they intentionally walked away from a good chunk of private label business. Goodyear’s replacement unit volume tumbled by more than 10% in a market that increased 2.7%.
The other share changes were slight. Michelin and Cooper may have lost some share, while Continental and Bridgestone probably gained a little. The major gainer was Chinese imports.
Korean imports actually fell about 5% -- which was somewhat of a surprise. However, both Hankook and Kumho also have manufacturing in China, so the explanation may be that some of the tires traditionally coming from Korea may have come from China.
Imports from Canada, by the U.S.-based companies from their Canadian plants, tumbled by 20%, reflecting the strong Canadian dollar.
MTD: How did raw material costs in 2007 compare to 2006? How will raw material costs in 2008 compare to 2007?
Ludwig: While oil prices rose sharply, the total raw material bill for a tire increased only 4% (based on a weighted average) in 2007, or just about what I predicted last January. That followed a 13% increase in 2006 vs. 2005. (The key raw materials used in a tire and their relative price changes for the year are shown below.)
Raw material 2007 vs. 2006
Styrene: down 5.5%
Butadiene: up 3.3%
Natural rubber: up 7.3%
Carbon black: down 2.6%
Steel: no change
Polyester: up 6.7%
Weighted average: up 4.0%
On the other hand, there have been several price hikes for raw materials that have just been announced to take effect Jan. 1, 2008. In 2008, steel (for bead wire and tire cord) may be up close to 5%, polyester maybe close to 10%, carbon black up 15% and rubber chemicals up 5%. Zinc oxide has come down slightly, and natural rubber may have peaked.
In the aggregate, I expect the average raw material bill for a tire to be up 4% in 2008 vs. 2007.
MTD: Are gas prices still having an effect on consumer driving habits?
Ludwig: Surprisingly less than I would have thought. Based on data from turnpikes, I believe that miles driven in 2007 were just about the same as in 2006. But on a weighted average basis, the price per gallon of gasoline in 2007 was $2.86 per gallon versus $2.63 in 2006, so that is why I was a bit surprised that driving levels held up so well. The American consumer just loves his car!
MTD: Any final thoughts looking back on 2007 or ahead to 2008?
Ludwig: Last year, I predicted much better financial results for tire manufacturers, and just about every tire company in the world will show substantial improvement when they post 2007 results in early 2008.
For 2008, I expect further gains, with especially large improvements at Goodyear and Cooper. The one to watch closely in 2008 though, is Titan International, as its very substantial new investment to produce 57- and 63-inch OTR tires ramps up.
A sharp recovery in agricultural tires, coupled with heavy demand for large OTR tires, present Titan with the potential for much higher earnings. So, if CEO Morry Taylor does, in fact, walk the talk, Titan could be the surprise performer in 2008.
I am not “taking the money to the bank” just yet, but am merely pointing out something to watch for as 2008 unfolds.
MTD: Thanks, Saul.