S&P foresees differing fortunes for two tyre giants

By Patrick Raleigh ERJ On-line news editor

New York/Tokyo-Tyre makers worldwide are facing increasing competition, pricing pressures from automakers, and higher raw material costs, according to Standard & Poor's Ratings Services. However, these challenges will impact some companies more than others, two separate S&P reports on Goodyear Tire & Rubber Co. and Bridgestone Corp. show.

S&P has lowered its corporate credit rating on Goodyear to 'B+' from 'BB-'. “The downgrade reflects our view that the weak, albeit improving, operating performance of the company's North American tyre operations,” said Martin King, S&P credit analyst, in a 25 May statement.

King noted the Akron, Ohio-based firm's “heavy schedule of debt maturities, pension funding and other cash obligations during the next few years.” Goodyear has total debt of about $6000 million and $5800 million of “underfunded” employee benefit obligations, according to S&P.

For 2004, S&P expects Goodyear's domestic tyre operations to achieve “meaningful savings” from a plant closure, layoffs, and deal agreed with its unions last year.

Against this, Goodyear expects its raw material costs to increase 5%-7% during 2004 and possibly more if recent high oil prices are sustained. S&P forecasts that the group's North America operation is likely to report a “sub-par operating performance for the next few years.”

By contrast, S&P has raised its rating on Bridgestone Corp. to 'BBB+' from 'BBB'. The upgrade, it said, primarily reflected the Tokyo group's “steady recovery” from the Firestone tyre recall fiasco, which hit its profitability in the Americas in 2000 and 2001.

Bridgestone had settled about 1800 recall-related lawsuits by the end of 2003, and further costs from litigation are now expected to be limited, according to the ratings agency.

The Tokyo group's operations returned to profit in 2002 and remained profitable in 2003, backed by positive sales trends, greater emphasis on Bridgestone brands, and stronger sales network. S&P also noted Bridgestone's improving profitability in Europe, due to increased sales of high-performance tyres and financial restructuring.

"Bridgestone's operating and financial performance has recovered steadily since bottoming out in fiscal 2001," according to S&P's credit analyst Chizuko Satsukawa. “Profitability and cash flow are expected to remain solid for the next two to three years," she forecast in a 26 May statement.

Bridgestone' success will in part depend on its ability to increase selling prices, particularly in Japan, where the pricing outlook is uncertain, according to S&P. The group will also have to invest heavily to increase production capacity in Europe and China over the next two to three years, it added.

“However, given the company's dominant market position, broad customer base, and geographically diversified business franchise, its profitability is unlikely to deteriorate substantially in the medium term,” the report on Bridgestone concluded.