Analyst Saul Ludwig paints an intimate portrait of the tire industry: Look for increases in consumer and commercial tires at the replacement level in 2003. As for major consolidations, 'it will be a w
Perhaps there are analysts who sit behind their desks all day, talking to faceless executives by phone without ever getting out into the real world. Saul Ludwig is not one of those.
Ludwig, a managing director at McDonald Investments Inc. in Cleveland, Ohio, traveled to at least three cities a month during 2002. His cross-country tour helped give him insight into both the tire and chemical industries, which explains why he is the tire industry's top analyst.
During a recent radio interview, Scott Roulston, CEO and president of Roulston & Co. -- Ludwig's former employer -- even recognized Ludwig for his research skills.
Ludwig has been a part of our annual Facts Issues since 1973. Surprisingly strong original equipment shipments and Goodyear Tire & Rubber Co.'s domestic problems set the tone for his 2003 forecast.
MTD: What were the U.S. replacement shipment highlights in 2002 vs. 2001 for passenger, light truck and medium truck tires?
Ludwig: I estimate replacement passenger tire shipments were down 2.1% to 187 million units. They were down in 2001 vs. 2000, too. I had anticipated units to decline primarily because of the effect of Firestone shipments in 2000 and 2001, the price the industry paid for replacing all those tires in the preceding two years.
In the replacement light truck tire segment, the market was relatively flat. Shipments were up 0.8% to 31.7 million units, and I had predicted they would be up about 1%. So that was a good estimate.
Medium truck tire shipments grew 8.3% to 15 million units, which was better than the 4% increase I had projected. I think the economy in general -- look at the GDP -- was stronger than expected. Housing and autos were very strong because of low interest rates and incentives.
MTD: How about original equipment shipment comparisons and projections?
Ludwig: At OE, passenger tire shipments were up 5.5% to 57.5 million units, and that was much better than expected because there were a lot of deals and rebates offered from vehicle manufacturers.
OE light truck shipments were up 31.6%. I had them up 5%, so I missed this one by a mile. But the numbers are very small, so there can be great discrepancies. The distinction between passenger and light truck tires is blurred. If you combine both OE passenger and light truck tire shipments into "consumer" tires, the market was up 8.5%. I began last year thinking OE consumer tires would be down 5%.
OE medium truck shipments were up 9.9%. I had forecasted no change. The increase was due to implementation of a new standard that tightened up emissions after Oct. 1, so there was a lot of buying before the deadline. Obviously, I grossly underestimated the strength of the OE markets in 2002.
MTD: What are your predictions for the coming year?
Ludwig: I predict replacement passenger tire shipments will rise 1.6% to 190 million units.
Light truck tire shipments will be up 1.7% to 32.2 million units, and medium truck tire shipments will increase 2.4% to 15.4 million units. I expect modest economic growth in 2003, but "driving" levels, which normally rise only 1%, are up sharply. In 2002 they were up 3% to 3.5%, while airline revenue passenger miles were down.
At OE, I would look for a 1% decrease in passenger tire units, to 57 million, and an increase of 1.1% in light truck tire units to 8 million. But as a whole, OE consumer tire units will decline by 1% in 2003.
I expect OE truck tire units to increase by 7.3% this year, to 4 million units.
MTD: Who gained and lost market share in 2002?
Ludwig: In consumer tires, I think the market share winners were the imported tires from Asia, Cooper and Bridgestone/Firestone. I think Goodyear, Continental and Pirelli lost share. Michelin also may have lost slightly.
MTD: Perhaps the biggest story of the year in the tire industry was Goodyear's generally poor performance in the U.S. You even downgraded its stock from "Buy" to "Hold." What will it take for Goodyear to turn things around?
Ludwig: Goodyear had the right strategy to turn things around. But the company was hampered by flawed execution along with higher raw material prices and higher pension and benefits costs. What was done to get things back on track? It put in new management. Bob Keegan was moved to CEO and Jonathan Rich to president of North American operations. Kevin Kramer took over the consumer OE division, and Ted Fick was appointed to head up the commercial division. Jack Winterton is now in charge of consumer tire dealer replacement sales.
Winterton, Fick and Kramer report to Rich, who reports to Keegan. That eliminated a management level. This constitutes a complete transformation of the North American tire management team, with Keegan responsible for worldwide operations and strategy.
I think Goodyear will do even more to strengthen the company. They already are taking steps to rebuild dealer relations. They also will create more focused and product-oriented advertising, which they will emphasize during heavier selling seasons instead of evenly throughout the year. And they will move to reduce costs even more, which will result in further employee reductions and facility downsizing like at the Union City, Tenn., plant, where they have laid off 800 employees and downsized output. I think the turnaround at Goodyear will be gradual, as opposed to dynamic.
MTD: Will Goodyear close any plants?
Ludwig: I would say plant closings are a possibility. But because of product line complexity, it's not as easy to close plants as once was the case.
And closing plants is very expensive and Goodyear's balance sheet cannot take more big hits.
MTD: Pirelli is once again trying a new strategy in the U.S. It seems to rely heavily on OE fitments. What are your thoughts on its early progress?
Ludwig: I think Pirelli's progress, including securing Ford fitments, has been excellent. I think for them to use OE as pull-through to other business is the right strategy because Pirelli has higher-priced premium lines, and consumers tend to replace higher-premium tires with the same brand. It's a longer-term strategy, but for them it's the right strategy. You might question why they should try to penetrate the U.S. market at all, but since they are trying to do just that, it is the right strategy.
MTD: Continental AG also is pushing for brand recognition at OE in the U.S. for its Continental brand. Once again, the rumor of the company possibly selling its North American subsidiary has cropped up, which the company says will not happen. Does doing something so drastic make any sense?
Ludwig: I continue to think there's no immediate plan to do that. But Continental is in a tough position in the U.S. Too much of its mix is OE and not enough is replacement -- and in neither is there a preponderance of high-end tires. They've been the big winner at OE, as others have dropped out because they feel pricing is too low. I don't see any easy turnaround solutions. I think Dr. Ulrich Wellen understands clearly what the challenges are, but the solutions are not so simple.
Continental also has added a new executive to head up global consumer tires, but he will hang his hat in Charlotte. This may be a last ditch effort to turn the consumer tire business around in the United States.
MTD: Is Bridgestone/Firestone all the way back, a scant two years after the Firestone Wilderness recall?
Ludwig: No, they are not all the way back. There is still a long way to go, but they have made tremendous progress. It's the turnaround story of the year. Lampe has done extremely well with the hand he was dealt. The fact that the company is going to make $70 million this year is a testament to John Lampe and his team.
But Bridgestone's North American profitability has to get better. Remember, those positive numbers include earnings from South America, company-owned stores -- which are doing well, their truck tire business, wholesale consumer tire sales and industrial products. They still have to get more profitable in their hard-core consumer business. They, too, are probably losing money at OE, which is endemic to the industry.
MTD: CEO and President Tom Dattilo said earlier this year Cooper Tire eventually may have to increase its distribution base by selling through a non-independent tire dealer channel. He also has said the company may have to produce an OE tire. Your thoughts?
Ludwig: The key for Cooper is this: If they do broaden the distribution of the Cooper line, it is important the price integrity be maintained. If it is, it shouldn't have an impact on its traditional independent dealers. In fact, it would be better because of the increased advertising of the brand. As far as OE tires are concerned, I do not expect Cooper to go in that direction.
MTD: Do you expect tire company earnings to meet expectations in 2003? What factors will affect tire company performance?
Ludwig: Yes, I expect them to meet expectations. I think expectations that analysts have now for tire manufacturers are realistic. But there are a lot of cross-currents that could affect earnings: price increases, the conflict with Iraq and the resulting effect on the price of oil, and the ultimate level of vehicle production. We don't know what will happen if vehicle manufacturers get rid of their creative financing plans.
These are three significant variables we make judgements about. But we can't defend those conclusions because of the uncertain world in which we live. I do not think the TREAD (Transportation Recall Enhancement, Accountability and Documentation) Act will have much of a cost impact in 2003.
Among the publicly traded tire manufacturers, I think Cooper came closest to meeting its beginning-of-the-year numbers in 2002. Michelin was close, too. Goodyear did not.
Looking at tire marketers, TBC had record earnings, and fully met profit expectations and exceeded the industry in terms of both profit and unit growth. They are doing a fine job.
MTD: Are distribution groups -- the former wholesalers who now offer tires, wheels, equipment, advertising programs and more -- becoming the new power in the industry?
Ludwig: I think as you get more consolidation at retail, the role of the wholesaler diminishes because the large retailers can buy direct. In 2002 it was quiet on the consolidation front. TBC's acquisition of Mueller Tire, a 19-store retail chain, was perhaps the biggest acquisition. I think you'll see more retail consolidation, but there's been a pause in intensity.
Sellers wanted more money this year than buyers were willing to pay. As time passes, this disconnect between sellers having an unrealistic view of their business's worth and buyers' perception of value will move closer together because that's what's happened historically. There will be a few deals consummated in 2003, but it will be a while before the next major consolidation occurs.
You want to leverage your distribution with more products, which is why wholesalers are evolving. There's always going to be a role for, say, the American Tire Distributors and TBCs of the world, who, as they get larger, get a greater part of a declining market.MTD: Thanks, Saul.