An Interview with Marangoni's Giuseppe Ferrari and Brenno Benaglia

Marangoni recently restructured and as always when a company takes such steps the rumour mills start working overtime. The name Marangoni is synonymous with retreading throughout Europe, and increasingly so in North and South America. In Europe Marangoni may have lost out when Bridgestone bought Bandag, but the Qualitred operation was small and has now been replaced with a re-established contract with Continental, and a renewed deal with Pirelli to ensure Europe-wide retreading provision for two of the top tyre manufacturers in the world.

Retreading Business took the time to talk with Marangoni's Giuseppe Ferrari and Brenno Benaglia about the reasons behind the recent restructuring and the challenges that the company faces in the coming years.

Retreading Business asked direct questions and setting aside long standing acquaintances started out with the key question that people were speculating about the answer to.

Marangoni has restructured its retreading business recently. Can you explain why this was required? Was this a logical development that would have come about in due course, or was this a restructure enforced by tough economic conditions?

Mr. Giuseppe Ferrari Marangoni S.p.A - Retreading Systems Managing Director responded: "The downturn in 2009 affected all sectors of the economy without distinction, however most of all it affected industrial, durable goods. This economic crisis has had an impact above all on new truck and industrial tyres.

"At a European level (European Union), there has been an average fall of around 15 to 20% in new truck tyres, with retreaded tyres falling to a somewhat lesser extent, around 10 to 15% according to our estimates.

"Like all downturns, this has led to a strong rationalisation of transportation industry and of the use of tyres, and even when the economy will have recovered the pre crisis level , which we hope will be in one or two years, the tyre market will be anyway smaller than before.

"In the current year, we expect the retreading market in Europe to experience a slight recovery, estimated at around 5%, nonetheless the market will still be smaller than it was when the economic crisis began.

"Not only have we brought forward the actions that need to be implemented in this industry to stay competitive, but we have also had to downsize across the board, reducing stocks in the store, reducing production capacity, sales force and overheads so as to bring these in line with the lower future market level we expect.

"As a group, our rationalisation process has involved three main actions.

1/Reduction of the retreaded car passenger operations, already in decline for some time, hence the move of production from Feltre to Rovereto.

2/We have setup in non-EU countries the manufacture of products that were previously exported, specifically the production of tread strips, which we have moved to Brazil. This has allowed us to shift the production of treads to Ferentino, bringing rationalisation of costs and closing the factory in Frosinone.

3/We have moved production of hot retreading materials from the Parma factory to Rovereto. The Parma factory is been retooled to specialise in the production of compounds for industrial products."

Mr. Brenno Benaglia Marangoni S.p.A - Commercial & Industrial Tyres Sales and Marketing Director added, "We have seen a drop in sales above all in our foreign markets, rather than in Italy. "On the positive side I should underline how our contraction loss in percentage terms has been much lower than the contraction recorded in the domestic market as a whole, and so we have in essence gained market share.

"Our main objective is to significantly increase our presence in Italy, and to do this we have strengthened our sales structure.

"Our target is to reach higher volumes and not only market share increase. As already mentioned, by transferring production from Feltre to Rovereto, we have considerably resized our operations in the sector of retreaded car tyres, however our intention is to grow the 4 x 4 and light transport tyre segments.

" Moving on to the impact the crisis has had on trade. Retreading Business asked how Marangoni saw the sector reacting to the crisis. Commercial tyre sales in Europe have been reduced by a considerable amount, manufacturers have admitted to a 17% drop in new tyre sales. This reflects a drop in truck sales and also in delivery mileages being made by the fleet operators. Some retreaders (usually lower end companies) have suggested that the economic crisis has driven operators to buy more retreads. Others, usually higher end, have said that there has been a reduction in the sales of truck retreads, although not as dramatic as in new tyre sales.

What is Marangoni's experience both as a retreader and as a retread materials supplier?

Giuseppe Ferrari responded, "At a European level I can confirm the negative trend in sales in 2009 in the new truck tyre segment, attenuated by a stable last quarter.

"In recent years, too many fleets have preferred to purchase low cost new tyres for price reasons, but also due to quality problems with retreads.

"This trend has however been reversed now, with the introduction of new rules for retreading that have brought improvements in the finished products and increased attention among fleets to even small cost differences.

"There has also been widespread disappointment with the performance of low-cost new tyres, consequently many operators have gone back to retreads on quality casings. These factors together have meant a lower drop in sales of retreads compared to new tyres.

" The global economy's contraction has had an impact at every level of commerce from retail, to the sourcing of raw materials. This has had to have shown an impact on OTR tyres. The Earthmover tyre sector has recently been booming, but with the development of new production facilities in the Far East, combined with the downturn in demand for raw materials, has this impacted on how Marangoni sees the future of its EM/OTR operations?

"The truck tyre sector has been hit, but the earthmover segment has been hit twice as bad. " admitted Brenno Benaglia.

"We have been worst affected in terms of export sales, while our extensive sales organisation in Italy and the structure of our offering on the domestic market have meant we have lost much less ground here compared to the market as a whole. I foresee 2010 as being a very difficult year.

"We are developing new compounds and new moulds for specific products in the big OTR segment, so as to be able to enter areas of the market that until now have been exclusively served by new tyres.

"The OTR sector is a strategic one for us, and as a result in recent years we have invested a lot on the production of big sizes. Unfortunately, we did this when the market was already contracting.

"In 2010 we will be selling our OTR tyres in all European markets, from Russia to Scandinavia and southern Europe."

Whilst accepting that Marangoni cannot comment directly on its competitors but would Marangoni say that the termination of their arrangement with Bridgestone following its acquisition of Bandag has been overall positive for business?

It appears to have allowed the development of an international tyre service operation and a Europewide deal with Continental, and more recently a deal with Pirelli. Giuseppe Ferrari fielded the question.

"The experience coming out of our seven-year partnership with Bridgestone has been positive for the Marangoni group along all that period.

"For global reasons, Bridgestone then acquired Bandag and consequently the reference context changed completely. Just like Goodyear and Michelin had done previously, Bridgestone decided to enter the retreading sector directly.

"For Marangoni then it was a logical move to initiate agreements with manufacturers such as Continental and Pirelli who prefer to use partners for the supply of the specialist parts of the retreading systems, while retaining control over decisions on compounds, tread patterns and marketing.

"At a worldwide level this certainly meant getting involved with Pirelli and Continental.

"Continental and Pirelli were already operating in the retreading market, albeit with different approaches, and understood that to develop their business they needed a specialist partner.

"We intend to continue operating as off take suppliers of machinery and ancillary products to all manufacturers." Brenno added, "Since the outset we have felt that Bridgestone's acquisition of Bandag was a positive thing for the retreading industry as a whole. I can also speak positively as regards the attitude towards retreading of tyre makers such as Continental and Pirelli, both in Italy and in other countries. "

Not so long ago Marangoni restructured its marketing approach and in relation to the above, that business plan was refocused on the mid-sized fleets as this was where the management felt that there was the greatest opportunity for a mid-sized firm such as Marangoni to gain market share. With the agreements with Conti and Pirelli, has this focus changed? Is there more motivation now to go for larger fleets, following the lead given by Conti and Pirelli?

"I can confirm our interest in midsized fleets, which have given and continue to give satisfactory results," explained Ferrari.

"Our target is mainly those fleets that source multibrand new tyres and then prefer to work with a retreading specialist that knows how to manage different brand casings. Our plans won't affect the agreements with Conti and Pirelli, as these makers already have their own fleet programs and will decide what to do themselves, so that won't interfere with our business. "

Brenno added, "As Commercial & Industrial Tyres, that is, the division that deals directly with retreading, we have always worked with large fleets in Italy, both private and public. Indeed, we supply some of the biggest public fleets in cities such as Milan, Genoa and Turin. Our focus covers the entire spectrum, as given our organisation in Italy we can't just look at small and mid-sized fleets. Our target is to serve large fleets both directly with products and through our organisations that offer products and services. "

Marangoni is without question the independent retread supplies market leader in Europe. That puts Marangoni under a great deal of pressure as every other player from Kraiburg down wants to grab a share of your market. Increasingly companies such as Elgi, Midas, Goodway, Vipal, and Galgo, amongst many other smaller players, are claiming to have developed sales in Europe. If the claims made by those companies are indeed true, then surely someone is losing clients to these "new" players. If it isn't Marangoni, then who? Or would Marangoni suggest that much of the sales talk is just that, just sales talk?

"There has indeed been growth in non-European products, however their results are lower than the ambitious claims would let you believe.

"Import statistics for 2008 in Europe from non-EU countries are precise and freely available, and indicate imports of around 5,000 tonnes of rubber, which on that year's market accounts for around 8% of precured and 5% of overall retreading materials (hot + precured) (European Union).

"The statistics for 2009 available thus far show a significant drop - around 40% - in these imports, which means a reasonable share yet in any case less than 5% of the global retread market.

"We feel non-European manufacturers have gained this position above all in the following areas:

o Low-value hot retreading materials

o Making gains from small European manufacturers of retreading materials that have in the meantime have downsized or closed

o To a lesser extent, they've eroded small portions of share from large manufacturers of materials in the low price segment.

"This is why Marangoni, in 2009, developed the UNITREAD line of tread strips, which offer competitive prices, albeit higher than non- European products, so as to satisfy the demand for value-for-money retreads in the market segments where performance and mileage are of less importance."

On the face of reports we have received the US market is going through some dynamic changes, both in terms of rationalisation and in supply routes. Both Michelin and Goodyear are claiming to be recovering clients from "other" retread operations. In the case of Goodyear they have claimed to have recovered a couple of "Unicircle" operations. Is Marangoni facing a concerted marketing attack by Michelin and Goodyear, or is Marangoni, joining the two big players and capitalising on the apparent inertia at Bandag and that the leakage in operations is from Bandag rather than the rest of the market?

Giuseppe Ferrari answers, "Marangoni holds a small and very specialised position on the North American market. We cover some market segments that the majors are forced to neglect, specifically multibrand mid-sized fleets. Today we have a 3% share in a market (USA + Canada) which anyway is more than 3 times bigger than the European one.

"Not forgetting then that the North American market has very different characteristics from Europe. In North America, much of the fleet market is single-brand/singlesupplier both for new tyres and retreads. Unlike Europe, North America is a very uniform market as regards the type of needs/uses/applications.

"In a new tyre market that is essentially monobrand, Marangoni occupies the small niches that are accessible to independent companies, so we are quite distinct from the business of the majors.

"Despite the downturn, our retreader customers are growing in terms of both volumes and earnings, and this is the engine of our own growth. "This helped Marangoni maintain the same production level in terms of volumes/tonnes in 2009 as in 2008. With a market recession of around 5 to 10%, we showed a small growth."

Ferrari went on, "I would like to end by underlining that Marangoni Retreading Systems has announced a 7 per cent price increase on all brands and product for retreading in force as of March 1 in European, East European and Mediterranean countries. The price increase will be differently applied according to country and/or product.

"Like all other producers we have been impacted by the increases in raw material, transport, energy. "In recent months, natural rubber has seen a continuous rise in price, overcoming the peak price of October 2008, due to global production shortfalls and demand from Asia. Also the prices of other raw materials have been increased by nearly 20 per cent.

"Finally the European Tyre Industry has suffered a cost increase connected to the introduction of the law that forces to use non polyaromatic oils in the compounds production.

"Despite the rise of the costs we are firmly committed not to come to any compromise that could negatively affect the superior quality of our products and the reliable service we offer to our customers.

"It is estimated that this increase will reflect on the tyre price by an average of 4 per cent. Brenno Benaglia added,

"Unfortunately, the increase in the cost of raw materials is plain to see. As direct retreaders we will be forced to realign our prices if cost pressures on raw materials are as strong as they are now.

"We have decided to upgrade our truck range, through new moulds with our patterns, allowing us to be more aggressive and specialised, with an unrivalled number of products/references in Europe. This will be accompanied by the continuing evolution of our compounds, aimed at reducing rolling resistance to ensure less fuel consumption, together with high reliability and increased mileage. In retreading we are behaving in the same way as new tyre makers, and, we manufacture tyres that contribute to reducing CO2 emissions."

Issue 2010/1