Goodyear CEO on getting back to pre-pandemic levels: People are 'replacing tires right now'
Goodyear Chairman and CEO Richard Kramer — the second longest serving CEO in the tire maker’s 123-year history — says the good times are likely to keep rolling for his industrial giant over the next year.
Credit for that will probably come from consumers continuing to reinvest in their vehicles amid sky high used car values and limited inventories of new cars on dealer lots thanks to the chip shortage roiling the likes of Ford, General Motors, and others.
“Our OEM [original equipment manufacturer] business has gone down. But the benefit of that is our ability to service our replacement customers more robustly. All channels, distributors and retailers saw inventories go down [in the second quarter],” Kramer told Yahoo Finance Live in an exclusive interview inside Goodyear’s Akron, Ohio, headquarters.
Added Kramer, "The worst we saw on tread wear was in the Great Recession. We saw cords coming through a lot. It has not been as bad now. I think people are saying I am getting out and driving and my tires are key to the safety of the family and they are replacing tires right now. There is pent-up demand."
To be sure, the tire-making giant picked up considerable speed in the second quarter as those consumers purchased new tires for their existing cars, trucks and SUVs at a speedy clip. Other tailwinds included a rebound in Goodyear's commercial business, where it makes tires for everything from airplanes to mining equipment.
For Goodyear — which does business in North America, Europe and China — all of these factors generally playing out at the same time had a major impact on the company's top and bottom lines in the second quarter. Wall Street analysts must have missed the clues ahead of the results.
Goodyear's second quarter sales surged 86% from a year ago to $4 billion. Analysts had modeled for $3.8 billion. Adjusted earnings clocked in at 32 cents, a sharp improvement from the $1.87 a share loss a year when the pandemic brought the world to a stop. Analysts had estimated 17 cents.
Goodyear shares popped 11% on Aug. 6 following the results. The stock is up 71% over the past year, outperforming the 31% gain for the S&P 500.
Goodyear 'close' to pre-pandemic volume
The Street has quickly wised up on Goodyear in the wake of its very surprising quarter. Analysts see Goodyear's earnings power continuing to strengthen as carmakers rebound from the chip shortage, an improving labor market spurs investment in one's car and commercial companies such as airlines buy more tires to meet renewed post-pandemic demand.
Kramer told Yahoo Finance Live that Goodyear is "close" to getting back to pre-pandemic volumes in many markets.
Meanwhile, the recent $2.8 billion acquisition of Cooper Tire — and new rounds of price increases on tires — are viewed as further earnings drivers for Goodyear.
"Goodyear’s surprisingly strong 2Q results despite OE [original equipment] volume softness, and positive forward outlook comments, in our view reflect the large benefit to the company from the price/mix environment for tires which should continue amidst robust consumer demand, and also preview the accretive potential of its Cooper acquisition on future results," said Deutsche Bank analyst Emmanuel Rosner. "Price/mix materially offset raw mats in 2Q and management indicated the strong backdrop could continue in 2H and offset the big spike up in raw material headwind, which should position Goodyear well over the rest of this year and into next one as volumes continue to recover. Moreover, the Cooper contribution and synergies should ramp up notably, after digesting through initial elevated merger costs."
Kramer struck a very bullish tone on the Cooper deal in the interview.
"Cooper solidifies the company as a leader in the global tire industry. For consumers and customers they get a strong product in the light truck market, which is one of the fastest growing segments of the auto industry. From a balance sheet or financial perspective, we actually improve our leverage — it gives us more scale and gives us more earnings moving forward. And that actually helps us with some of the investments we need to make in the technologies that we see coming down the road. And then finally, there was a tremendous cultural fit between the Cooper and Goodyear teams," Kramer explained on the deal.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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