A March 11 report from DB Equity Research Automotive observes that the cost of “certain key raw materials” used by tyre manufacturers have begun to decline. The Deutsche Bank equity research team states: “Most notably, we estimate that natural rubber prices have declined by nine per cent since last Friday…and rubber has declined by approx. 15 per cent (from the $2.45-$2.50/lb level) since US tyre companies reported their Q4 results. If this decline in natural rubber costs is sustained, total raw material costs could decline by 4.0 per cent compared with Deutsche Bank estimates.”
Analysts chided Hankook Tire’s fourth quarter financials as “as expected…weak fourth quarter results.” In an investor’s note published during the week commencing 31 January, Deutsche Bank wrote that the figures were “in line with our expectations, but…30 per cent lower than consensus.”
The underwhelming performance was put down to the continually rising natural rubber prices: “Tyre makers are generally guiding for rubber prices to remain strong over the next 6-12 months and average selling price hikes remain the only way to protect margins.”
Continental AG’s adjusted EBIT is reportedly 15 per cent (100 million euros) above estimates produced by Deutsche Bank. With net debt below 6.5 billion euros, impressed analysts commented that “these better results are entirely attributable to the tyre operations.” The tyre division contributes 28 per cent of the group’s sales and 42 per cent of adjusted EBIT, which reported a higher result despite the significant raw materials headwind.
The cost of natural rubber price has reportedly doubled in 2010 and is said to have increased a further 15 per cent during the opening weeks of January 2011, according to an equity research note published by Deutsche Bank analysts Gaetan Toulemonde. So far this month natural rubber costs have continued to surge to US$5.7/kg, a new record high.
Continental AG reports it has further improved its debt maturity profile through the placement of a euro-denominated bond with an aggregate principal amount of one billion euros. The seven year notes are to be issued by Conti-Gummi Finance B.V. and guaranteed by Continental Aktiengesellschaft and certain subsidiaries. The coupon will be 7.5 per cent per annum interest, payable semi-annually in arrears.
Goodyear Tire & Rubber has announced it has priced its offering of an additional US$100 million aggregate principal amount of its 8.25 per cent senior notes due August 15, 2020. The notes will be senior unsecured obligations of the company. The notes will be sold at 100.75 per cent of the principal amount. Goodyear expects the offering to close on August 25, 2010, subject to customary closing conditions.
Goodyear Tire & Rubber Co. announced it has commenced a public offering of US$900 million aggregate principal amount of 10-year senior notes. The offering was increased from a previously announced offering size of $750 million.
The Goodyear Tire & Rubber Company commenced a public offering of $750 million aggregate principal amount of 10-year senior unsecured notes today (10 August 2010), subject to market and other customary conditions. According to the company, Goodyear plans to use the offer offering, together with cash and other funds to redeem $325 million in principal amount of 8.625 per cent senior notes due 2011 and approximately $388 million in principal amount of 7.857 per cent notes due 2011.
Continental AG reports its €750 million euro-denominated bond has been successfully placed with qualified investors in Germany and abroad. With this, says Conti, the company has completed a further step in improving its debt maturity profile. The notes have a term of five years and will be issued by Conti-Gummi Finance B.V. and guaranteed by Continental Aktiengesellschaft and certain company subsidiaries. The coupon will be 8.5 per cent, with interest payable semi-annually in arrears.
Pirelli Tire North America (PTNA) has announced plans to expand its sales and marketing operations with a new office in New York City. According to the company, this office will complement its North American headquarters in Rome, Georgia. The expansion is intended to assist the company’s sales growth and will reportedly only involve “the outward facing parts of the sales and marketing departments.”
Pirelli’s latest “Tyre Market Watch” trend figures report strong global demand during April. According to Pirelli’s figures, volumes increased by approximately 15 – 20 per cent in passenger tyres and by approximately 30 in the truck tyres segment (up 60 per cent in OE and 20 per cent in the replacement market). Commenting on the Tyre Market Watch numbers, Deutsche Bank analysts highlighted the fact that in Latin America where 34 per cent of Pirelli’s sales and 43 per cent of its production is based, tyre demand “remains strong, in excess of 25 per cent up both in passenger and in truck tyres.” In summary the analysts characterised the second quarter as: “a good start even if volumes growth is mostly attributable to less profitable OE markets.”
Pirelli & C SpA is scheduled to reports its fourth quarter results and 2010-11 guidance on March 10. Deutsche Bank Equity Research anticipates that in the fourth quarter Pirelli Tyre revenues should benefit from a volume increase (Deutsche Bank estimates a 15% increase) compared with decreases in the previous nine months, a negative price mix (a price mix of -2% versus +6.9% in Q1, +5.6% in Q2 and +4.7% in Q3) which Deutsche Bank believes has allowed Pirelli to gain market share on the continued discipline of manufacturers, and a 2 per cent positive foreign exchange impact. Furthermore, says Deutsche Bank, margins should benefit form low raw material prices, as the large price increases for these commodities took place in 2010.
Continental AG reports that its capital increase and the 31 million new shares it released have been met with “great interest” by free float shareholders. The company announced on January 26 that free float shareholders purchased 99.4 per cent of the 3,408,130 new shares allotted to them. The remaining new shares for, which subscription rights were not exercised and which were placed already with investors on January 6 and 12 under a reservation of rights being exercised by a bank syndicate headed by Deutsche Bank AG, Goldman Sachs International and J.P. Morgan Securities Ltd., will now be issued. The final delivery and settlement will be executed on January 28, 2010. With the capital increase, Continental AG achieved gross proceeds of some €1.114 billion.
Assuming foreign exchange rates remain stable, the sky-rocketing natural rubber price means the tyre industry will have to increase selling price by 3-4% to offset this raw material. That’s the view of Deutsche Bank analysts who report in a recent investors note that the natural rubber price has doubled over the last 12 months from US$1.5/kg to US$3.0/kg (RSS3 grade). “This increase will have a four to six months lag effect on tyre companies’ profit and loss…So far, we have no reason to be worried since…end market volumes are recovering (especially on passenger car tyres…inventories at dealers are low (sell in markets have been worse than sell out markets),” they analysts explained.
The issuance of 31 million new Continental AG shares, valued at 35 euros apiece, is anticipated to increase the company’s capital by approximately 18 per cent. This rights issue, approved by Conti’s Supervisory Board on the evening of January 6, has been described by Continental as “another significant milestone” in its plan to improve its capital and financing structure, and the capital raised along with the 2.5 billion euro loan announced last month will be used to repay the company’s 3.5 billion euro Tranche B debt, which is due in August.