"I always avoid prophesying beforehand because it is a much better policy to prophesy after the event has already taken place." -- Winston Churchill
"In theory, theory and practice are the same. In practice, they are not. -- Albert Einstein
"Forecasts are often wrong but never in doubt!" -- Saul Ludwig
Analysts don't have to be right all the time. They just can't be wrong all the time.
The key is patience, and the ability to adapt to ever-changing, and often unexpected, market conditions.
According to Saul Ludwig, a managing director with KeyBanc Capital Markets in Cleveland, Ohio, that was especially true in 2006, "a tumultuous year for the tire industry."
He says the labor strife between the United Steelworkers of America and Goodyear Tire & Rubber Co. was not entirely unexpected. However, when preparing last year's predictions, he did not assume there would be a strike.
As the year came to a close, the strike did more than hurt Goodyear's bottom line. It also benefited other manufacturers, as Goodyear dealers scrambled for premium product.
Did the sometimes nasty mood of the negotiations foreshadow problems with the next tire manufacturer to go to the bargaining table with the union -- Bridgestone Firestone North American Tire LLC? Ludwig doesn't think so. "I do not expect a strike at Bridgestone," he says.
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Ludwig's list of defining moments in 2006 is lengthy:
* the untimely death of Edouard Michelin, co-managing partner of Groupe Michelin.
* the resignation of Chairman, CEO and President Tom Dattilo at Cooper Tire & Rubber Co. and the appointment of Ray Armes to succeed him.
* the doubling of natural rubber prices from December 2005 to July 2006.
* the sharp fall-off of light vehicle sales at Ford Motor Co. and General Motors Corp.
* another new CEO at Continental Tire North America Inc.
* the Bridgestone Firestone purchase of Bandag Inc.
The unprecedented increase in gasoline to more than $3 a gallon during the peak summer driving season -- "which caused replacement tire demand to tumble," he says -- may have had the greatest effect on the marketplace. Ludwig predicts average gas prices in 2007 will be lower than they were in 2006, which bodes well for replacement tire demand.
For the 36th consecutive year Modern Tire Dealer sat down with Ludwig to get his take on the previous year. We also put him on the spot by asking him to predict the future.
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MTD: What were the U.S. replacement shipment highlights in 2006 vs. 2005 for passenger, light truck and medium truck tires?
Ludwig: Replacement passenger tire shipments totaled 195 million units in 2006. A year ago, I predicted they would come in at 206 million units, which would have been only a 0.4% increase over the previous year. Primarily because of the surge in gasoline prices during the summer months, however, the number finished lower than expected. It shows just how frail some forecasts can be.
For the same reasons, light truck tire shipments were down, from 36 million in '05 to 34.5 million units last year. I predicted a flat market in '06.
In the medium truck segment, I predicted replacement shipments would be down by 600,000 units, and they ended up down by 1.3 million. It occurred because early in the year, there was a precipitous growth at the OE truck level. Fleets were buying trucks before the 2007 emissions regulations go into effect.
MTD: Speaking of the original equipment segment, how did the consumer and commercial numbers shake out in 2006?
Ludwig: Medium truck shipments were up 8.5%, from 6.2 million units to 6.6 million. But OE passenger and light truck tire shipments fared worse than replacement shipments. Passenger tire units decreased 9.6% compared to 2005, from 52.7 million units to 48 million, while light truck tire units fell 12.8% to 5.8 million.
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MTD: What are your shipment predictions for this year?
Ludwig: For 2007, I see a 3.5% increase in both replacement passenger and light truck tire shipments as gas prices stabilize. I predict passenger shipments will total 201.2 million units, and light truck shipments 35.5 million. Medium truck shipments will grow 4.3% in '07 compared to '06, from 15.3 million units to 16 million.
At OE, tire shipments in all three categories will drop. Passenger shipments will decrease 2% to 47 million units. Light truck units will decrease 4% to 5.6 million units. And OE medium truck shipments will feel the effects of increased truck purchases in 2006. They will decrease 36% to 4.2 million units.
MTD: Perhaps the most far-reaching news in 2006 was the strike at Goodyear Tire & Rubber Co. How specifically has this affected Goodyear's financial wherewithal and image?
Ludwig: In terms of consumer tires, production at Goodyear's unionized plants in the U.S. was down 50% in the fourth quarter of this year. The strike probably cost Goodyear $400 million in the fourth quarter, or close to $5 million a day, in earnings. However, during a strike, companies increase their cash position. After a strike, they will consume enormous amounts of cash, because they need to refill the bin, so to speak, in this case with tires.
So the long strike will have both a short-term financial impact on Goodyear as well as a short-term impact on its market share. History suggests that once strikes are settled, companies are able to recap their losses. Just look at the 141-day strike with Bridgestone Firestone in 1995-96, and Titan's three-year strike. Post settlement, they were able to reverse lost market share, and ultimately restored their entities to financial health.
I don't think the strike had much effect on Goodyear's image at all. Based on conversations I've had with dealers, picketing and union ads have not had a big impact on demand for Goodyear brand tires. Most are supportive of management's goals to become more cost competitive in North America. The negative ramifications of the strike will be modest at best.
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MTD: Goodyear's pension obligations have been questioned by both the union and analysts. Can you briefly explain what the fuss is about?
Ludwig: Goodyear has appropriately accounted for its pension obligations. But because it has not actually put sufficient cash into the fund, it has created, in some minds, concern about its ability to actually pay the pensions when they come due. I don't want to minimize the significance of that, but a year ago the fund was under-funded by $3 billion. At the end of 2006, it was down to a little more than $2 billion. Retirees are protected by the Pension Guarantee Corp. And Goodyear's never missed a pension check to anybody.
MTD: Who gained and lost domestic market share in 2006?
Ludwig: I think the losers were Goodyear and Michelin. Both walked away from private brand business. Also, Goodyear lost some market share because of the strike. However, the Goodyear and Michelin brands held up well. I think Cooper gained after a few years of being down. It looks like Toyo and Pirelli increased market share, too. And, of course, low-cost imports continued to do well.
Bridgestone and Continental were probably stable, although Continental dealers told me they lost out to OE when supply was tight. So the company may have lost market share at the replacement level.
MTD: We've already talked about Goodyear. What are your thoughts on the status of North America's other tire manufacturers?
Ludwig: I think Bridgestone is doing a good job and is "on plan." It has strong dealer relations. Its outlook is good.
The purchase of Bandag will strengthen Bridgestone's position in the truck replacement market and possibly allow them to pick up share from Michelin and Goodyear now that BFS can offer cradle-to-grave products. I don't see a downside to the deal from a marketing standpoint.
Continental took its hits closing two union plants in the U.S. (in Mayfield, Ky., and Charlotte, N.C.). It will have no cost burden from the plants this year, and will be able to make up supply by importing tires from Brazil and Mexico. After years of red ink, Continental could finally make money in North America in 2007.
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After suffering major losses in 2005 and 2006, I think Cooper will be profitable this year. Major cost cuts have helped. So has turning its Texarkana, Ark., plant into a swing plant that manufactures tires when they are needed. And its new CEO could be a plus as well.
Pirelli is doing great. It is growing nicely from a small base by focusing on high-end tires and establishing OE fitments -- with more to come.
Michelin has done a pretty good job. It negotiated a successful contract with the union, and closed a high-cost plant in Canada (in Kitchener, Ontario). The Michelin brand is still the “don't like, gotta have” product in the minds of its dealers. The company could still do a better job with dealer relations, but the brand is so strong it transcends some of the company's sales practices.
I think dealers like the management at Toyo because they can make money on the brand. It is gaining traction in the U.S. with its new (White) Georgia plant.
I would like to add that two foreign manufacturers, Hankook and Kumho, continue to make inroads into OE that will benefit them in the aftermarket in the future. Also, the quality of Chinese imports is good; thus, many of those brands are gaining stature as well.
MTD: Any final thoughts on the events of 2006?
Ludwig: I think there were more important events in 2006 than in most years. That contributed to a higher level of uncertainty among analysts, which made our jobs more challenging.
I think there was more activity in the tire distribution segment than in tire manufacturing. The acquisition of Big 10 by Sun Capital Partners continues the trend of dealers being purchased by private equity firms. I expect that trend to continue.
I also predict tire companies will have better financial results in 2007 compared to 2006, based on a small (4%) average increase in raw material costs and increasing tire demand and better pricing.
MTD: Thanks, Saul.
