The Goodyear Tire & Rubber Company today revised its earnings outlook for the second half of 2000, based on continued deterioration of global economic and industry-wide conditions.
The company, which had expected limited improvement over the first half of 2000, cited escalating raw material and energy costs, the continued deterioration of the euro’s value versus the U.S. dollar, weak pricing conditions in markets around the world and lower-than-expected tire industry volumes in North America and Europe.
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Goodyear said its best estimate is that net income in the third quarter of 2000 will be breakeven or a small loss. Assuming economic and market conditions remain unchanged, the company anticipates similar results in the fourth quarter.
“The economic outlook for the tire industry is difficult at best,” said Samir G. Gibara, chairman, chief executive officer and president. “Against this environment, we have taken several initiatives including the announcement last week of Robert J. Keegan as president and chief operating officer, as well as placing new leaders in four of our businesses in recent months.
“In response to the continuing price/cost squeeze, corporate-driven initiatives, supported by external resources, are being initiated to realize improved revenue, margin and working capital performance. The company also is continuing its efforts to redeploy selected assets,” he added.
Net income in the third quarter of 1999 was 69 cents per share ($109.1 million), including various adjustments, most notably an after-tax gain of 90 cents per share ($143.7 million) resulting from the completion of the company’s Sumitomo joint ventures.
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By GlobalDataThe company’s North American Tire business is realizing benefits from the Bridgestone/Firestone recall as consumers select Goodyear tires as replacements. Global economic and industry conditions, however, have deteriorated even beyond Goodyear’s most-pessimistic assumptions, preventing the benefits from flowing to the bottom line.
Goodyear anticipated raw material and energy costs would stabilize in the second half of this year, when in fact they continue to escalate. The company’s raw material costs have increased more than 3 percent since June and approximately 10 percent for the year. Oil-derived products, which can make up about 25 percent of the cost of a tire, are at 10-year highs. Energy costs, especially natural gas, are up 20 percent since the beginning of the year and expected to increase further. These increases have also severely impacted results in the company’s Chemical business.
Compounding these higher costs are currency movements in Europe, where the euro fell to an historic low of 84 cents. The euro’s value versus the U.S. dollar has dropped 16 percent this year and 28 percent since its inception in 1999. The company had expected a euro-dollar exchange rate of 94 cents for the second half of 2000.
Further, Goodyear had planned for sales volumes to outpace an expected industry growth rate of between 2 and 3 percent in the second half. The tire industry, however, has slowed since June. Production cutbacks by original equipment customers in the auto and commercial truck industries are negatively impacting shipments.
In response, the company has reduced third quarter tire production beyond original expectations to maintain proper inventory levels, resulting in manufacturing inefficiencies and higher costs. The current phase out of a manufacturing facility in the United Kingdom has further increased European costs in the quarter.
The company’s expectations were that pricing would stabilize at second quarter levels during the second half of 2000. In North America, pricing continues to weaken for commercial and value-priced consumer tires. Net price reductions continued in Asia as well as in selected tire lines in European countries. In Latin America, pricing has also not kept pace with rising raw material costs.
Goodyear’s Engineered Products sales weakened further, especially in the conveyor belt business and in the replacement market for hose and power transmission products. Higher costs due to reduced capacity utilization and raw material costs are negatively impacting margins.
The company continues to move forward on plans to divest non-strategic assets and to reduce working capital requirements. Shortfalls in net income, however, will likely result in negative cash flow for the year.
Goodyear’s actual third quarter results are scheduled to be released October 24.
Goodyear is the world’s largest tire company. Headquartered in Akron, Ohio, the company manufactures tires, engineered rubber products and chemicals in more than 90 facilities in 27 countries. It has marketing operations in almost every country around the world. Goodyear, with the addition of its Dunlop tire joint ventures, employs more than 105,000 people worldwide. For more information about the company, visit www.GoodyearNewsRoom.com on the Internet.
