Goodyear Tire & Rubber Co on Friday posted a stronger-than-expected quarterly profit as lower raw material costs and increased sales of higher-priced tires offset weakness in Europe, but the company warned industry demand would remain weak.
Shares of the tire maker were off 3.2 percent at $12.52 in afternoon trading on the Nasdaq.
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"This is reminiscent of the last few quarters," Citi analyst Itay Michaeli said. "It's sort of a half-empty, half-full valuation, where the earnings and profit margins are good and the company's doing a very good job managing its product mix through a tough environment, but the volume is weak."
Goodyear's tire sales volumes in the first quarter fell 8 percent, while Michaeli had expected a 7-percent decline. He pointed out that French rival Michelin's volumes fell only about 4 percent.
Goodyear Chief Executive Richard Kramer said on a conference call the company expects consumer demand in the industry to remain weak, particularly in mature markets, and sales volumes will remain depressed.
The company maintained its full-year financial outlook and said it was targeting additional savings of up to $100 million in Europe over the next three years. Kramer said the effects of the economic crisis in that region will be felt for an extended period of time.
Europe has been a weak spot for the auto industry as demand has slumped in that region. U.S. automaker Ford Motor Co on Wednesday reiterated that it expected to lose $2 billion in Europe this year.
Goodyear reported first-quarter net income available to common shareholders of $26 million, or 10 cents a share, compared with a year-earlier loss of $11 million, or 5 cents a share.
Excluding a 37-cent loss resulting from the devaluation of the Venezuelan currency and other one-time items, Goodyear earned 45 cents a share. That was 15 cents above what analysts polled by Thomson Reuters I/B/E/S had expected.
"We see the first quarter as a good quarter for Goodyear, but probably not quite as strong as the headline numbers suggest," Morgan Stanley analyst Ravi Shanker said in a research note. "Corporate costs came in significantly worse than expected."
He said the quality of the earnings outperformance was not the best as it came from cost savings net of inflation, which he said can be timing driven.
The results benefited from a $230 million drop in raw material costs. However, Kramer warned those costs will increase over time.
Goodyear's North American and Asian units reported record first-quarter operating income.
While North America's sales volumes fell by 1 million tires, the segment's operating income jumped almost 59 percent, and operating margin rose to 5.9 percent from 3.2 percent, helped by more sales of higher-priced tires.
Overall sales fell 12 percent to $4.85 billion, below the $5.1 billion analysts had expected. Volume fell 8 percent to 39.5 million tires, mostly due to the weakness in Europe.
The quarter's sales reflected $364 million in lower tire unit volumes, $178 million in lower sales in other related businesses, and $115 million in unfavorable foreign currency translations.
Goodyear affirmed its full-year outlook, saying it expected segment operating income - the combined results of its four business units - to come in at $1.4 billion to $1.5 billion. In February, the Akron, Ohio-based company cut that forecast from $1.6 billion, citing weakness in the Europe automotive market and the currency devaluation in Venezuela.
The company said it was still targeting positive cash flow this year, excluding pension funding. It expects the company's tire unit volumes to be essentially flat with last year due to the weakness in Europe, down from its previous forecast an increase in the low single-digit range.
Goodyear said it was implementing a three-point plan to return its European business to historic profit margin levels, including seeking productivity improvements of $75 million to $100 million over the next three years.
Company officials said that would occur through reduced work days, increased output of high-tech products like run-flat tires and other cost cutting they did not specify.
It also wants increased share in Europe in targeted market segments such as high-performance tires and is seeking more growth from the region's emerging markets, including in the commercial truck business.
(Reporting by Ben Klayman; Editing by Lisa Von Ahn and Marguerita Choy)