Speaking at a Deutsche Bank conference, Continental AG chief executive, Karl Thomas Neumann has said he is ready to resign if the restructuring solution Conti and 90 per cent shareholder Schaeffler come up with is against Contienental’s best interests. According to Deutsche Bank analysts, Continental is “doing a good job in adapting the company to the current environment, especially in transferring fixed into variable costs (by approximately 50 per cent), mostly concerning labour costs.” However the analysts also point out that a lot of uncertainties remain including: the restructuring of the balance sheet specifically regarding a rights issue to reimburse a 3.5 billion euro debt which expires in August 2010; whether to acquire Schaeffler assets or not, and eventually the disposal of assets to accelerate debt reduction. Continental’s board is expected to present its solution around the end of July.
The US senate dotted the final “i” on its “Cash for Clunkers” scheme – an answer to the UK’s own scrappage deal dubbed, with equal panache, “Bangers for Cash” – on 19 June. The scrappage bill will allocate $1 billion for vouchers worth between $3,500 and $4,500 when a customer trades in an old vehicle for a new one. However, unlike the British government’s reliance on customers to make the decision to buy more ecologically friendly products, the US programme is contingent on the fact that the traded-in vehicle achieves 18mpg or fewer and the new one supersedes the original figure by 4mpg (car), 2mpg (small truck or SUV) or 1mpg (large truck or van).
Deutsche Bank reports estimate that 28 per cent of the relevant US car parc will qualify for the deal, while it also calls the potential benefits to the US auto industry “relatively modest”. It continues, “Given the fact that most eligible vehicles will be trucks, we believe that a disproportionate benefit will accrue to the US automakers (and to suppliers such as American Axle).”
Michelin’s domestic labour reorganisation program, (announced on 17 June) will save the company between 100 and 150 million euros a year, according to Deutsche Bank research analyst Gaetan Toulemonde. Restructuring charges are estimated at a maximum of 200 million euros to be accounted for in the first half of 2009 of which half will be paid for in cash and the other half as assets write offs.
In an investor’s note published today, the financial analysts explained that while the company’s complex statement appears to have been designed to avoid to much clamour after Continental and Goodyear’s recent difficult plant closures, “it looks like they aren’t doing much.” The bank’s take on the situation is that “some plants will be downsized, and the restructuring program involves 1,100 people on top of a pre-retirement program of 1,300 people. Thus, when normal attrition is included, approximately 3,000 people will leave the group by the next 18 months out of a French workforce of 25,000…of which 12,000 in production.”
Michelin’s decision to pay down a 350 million euro loan borrowed at 6.7 per cent interest and maturing in 2033 is said to be an early sign that the tyre manufacturer is beginning to generate free cash flow. According to a Deutsche Bank report, despite the fact that analysts are expecting Michelin to publish first half net losses of 230 million euros, the fact that the company is buying back a loan that is more expensive than the group’s average debt (5.9 per cent) is “a strong positive signal that Michelin is currently generating free cash.”
Deutsche Bank upgraded Pirelli to buy in London today. According to The Wall Street Journal the broker said that the stock is likely to outperform estimates. While a capital increase at Pirelli Real Estate is partially to thank for the prediction, it is the improvement forecast in the company’s tyre division from the second quarter that explains the new categorisation. Deutsche also believes that steps will be taken to reduce the holding discount. Shares climbed 4.7 per cent in Milan.
European truck tyre OE sales reportedly fell an enormous 74 per cent in April, while replacement tyre volumes were down 44 per cent. The figures, which are sourced from leading tyre manufacturer Michelin, show that most global markets are affected (China aside). As far as truck tyre sales are concerned, the good news is that everyone’s best guess is that this segment cannot remain under this “particular pressure” forever and that there is still a good chance of improvement, or at least a slowing in the downward trend in time for the second half of 2009.
On May 5 Goodyear Tire & Rubber gave word of its intention to initiate a public offering of 7-year senior notes to the aggregate principal amount of approximately US$500 million, subject to market and other customary conditions. The notes, adds Goodyear, will be senior unsecured obligations of the company.
The company reports it intends to use the net proceeds from this offering, together with current cash and cash equivalents and unused availability under its credit facilities, for general corporate purposes, which will include the repayment on or prior to maturity of $500 million in aggregate principal amount of its senior floating rate notes due December 1, 2009. Joint book-running managers for the offering will be J.P. Morgan Securities Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Goldman, Sachs & Co.
European heavy truck deliveries may have fallen by as much as 50 per cent in the first quarter of 2009, “the steepest fall for many decades,” according to Deutsche Bank. Citing anecdotal evidence, the market watchers suggest that demand may be stabilizing at the current level, which could lead to a 50 per cent fall in full-year 2009 totals. This would reportedly return demand to 1995 levels. “There are some signs that European industrial production may trough as soon as Q3, also at 1995 levels. We do not expect truck sales to recover until late 2010/early 2011,” the analysts commented. In the meantime truck stocks are said to be up 23-35 per cent over the last month.
Global tyre demand fell by approximately 35 per cent in January, according to manufacturer data. The figures, supplied to Deutsche Bank by Michelin, show the huge fall was prompted by a 50 per cent drop in OE demand, but could also be seen in a 20 per cent drop in replacement sales.
Deutsche Bank analysts pointed out that the figures are the worst for 30 years, compared to a -3.5 per cent fall in 1991 and a 16 per cent drop in the fourth quarter of 2008. The analyst put the falls down to people driving roughly 5 per cent less; postponing their tyre purchases; and dealers reducing their inventories. Michelin sales volumes are expected to be approximately 15 per cent lower than 2008 in the first quarter of 2009, according to Deutsche Bank.
The marked collapse in demand is said to be reflected across both the truck tyre and passenger car tyre segments and in both Europe and North America. Only China attained single digit growth.
Pirelli is interested in “analysing” the possibility of a friendly deal with Continental AG for at least part of its tyre business, despite denying this only last week. Pirelli chairman, Marco Tronchetti Provera, made his soft offer of interest in the company in a video interview given to the Financial Times and published online today (20 February). When asked if Pirelli had any interest in Continental/Schaeffer Tronchetti Provera answered: “It’s too early to say. But if the price is right, if we are asked to be part of a transaction, it could be interesting to analyse it – but only if it’s a friendly transaction.”
Re-iterating the early stage of Pirelli’s interest in Continental, the company’s press office issued the following brief statement later that afternoon: “With regard to comments on possible Pirelli transactions on Continental, the company declares that no transaction has been defined even along general outlines. The company also points out that, consistent with the financial rigor foreseen by the guidelines of the recent 2009-2011 industrial plan, any possible future transaction of a strategic nature would not comport any recourse to the market.” However, while the press department’s statement may have played down Tronchetti Provera’s words, earlier in February Il Mondo claimed Pirelli executives had conducted – on separate occasions – meetings with JP Morgan, Deutsche Bank, Mediobanca and a number of advisers.
Noting the “larger than expected” production cuts in Goodyear’s 2008 fourth quarter and a “sharp decline” in the manufacturer’s profitable South America and Asia regions, Deutsche Bank analysts have adjusted its estimates for the company’s 4Q 2008 and 1Q 2009 results. In a report released this week (commencing 9 February), Deutsche lowered its estimates to -$1.30 from -$0.86 for 4Q 2008 and to -$1.86 from -$1.50 for 1Q 2009.
Deutsche’s statement said that as well as the production cuts, Q4 had seen raw materials rise further than was previously expected. In addition it continues, “Some of the downside appears to be derived from a sharp decline in Latin America and Asia, two regions that have produced a disproportionate share of GT’s [Goodyear’s] profitability in the past.”
Shares in Continental AG rose 11 per cent on February 6 in response to circulating rumours that Pirelli & C SpA may wish to acquire the company’s tyre business – a move that, should it take place, would give the erstwhile competitors a comprehensive product portfolio. Reuters quoted an unnamed trader as saying “There is a rumour that Pirelli may be interested in Conti’s tyre business.”
Italian magazine Il Mondo has reported that banks have approached the Italian company about buying the Conti business, however neither Pirelli nor Continental have confirmed or denied any such activity. The Il Mondo article claims that Pirelli executives have conducted, on separate occasions, meetings with JP Morgan, Deutsche Bank, Mediobanca and a number of advisers.
German Chancellor Angela Merkel yesterday (13 January) announced a 50 billion euro package of measures designed to give the country’s economy a financial stimulus. One key measure sees the German government offer motorists 2500 euros to trade in over 9 year-old cars for new or 1 year-old vehicles. With 40 per cent of the German car parc (46 million vehicles) fitting into this category, Deutsche Bank analysts suggested that the measure could have a significant impact on automotive demand. This, in turn, is likely to impact replacement tyre sales.
“If 2 per cent (the estimated participation in the French scrappage scheme) were to take up these incentives, it implies a 12 per cent gross impact on demand (vis-à-vis 08 levels)…Given the substantially increased age of the parc, our current estimate of 2.8 million vehicle sales in 2009 (versus 3.1 million in 2008) might well prove too pessimistic,” the analysts commented. Deutsche Bank’s predictions are based on the assumption that the proposed measures get implemented quickly. This means a swift approval from Germany’s second house, the Bundesrat.
Financial analysts have cut their 2008 operating income estimate for Michelin from 1.15 billion to 1.05 billion (-37 per cent compared with 2007). Deutsche Bank’s reduced estimate comes off the back of sharp falls in tyre demand in mature markets.
According to the analysts, mature markets (such as Europe and North America) represent 70 per cent of Michelin’s volumes. “We estimate tyre demand fell sharply in the fourth quarter (-15 per cent) both in OE and in replacement – in passenger as well as truck markets. We believe this weak demand, coupled with a destocking effect, led to a high 25 per cent production cut in the fourth quarter,” the analysts commented, explaining that the magnitude of this volume drop is not sustainable:
Nokian’s decision to reduce its Finland-based tyre production output from 6 million to 4.5 million tyres will be coupled with increased Russian capacity, financial analysts have reported. According to a recent Deutsche Bank report, “[Although] current demand is smaller than Nokian’s capacity…Nokian is reacting quickly by reducing capacity in order to maintain a high proportion of high priced products.”