Modern Tire Dealer

NOV 2018

Magazine for the professional tire industry

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Page 21 of 111

M T D N o v e m b e r 2 0 1 8 18 Y o u r M a r k e t p l a c e O ur recent discussions with dealers continue to leave us with a view that retail sell-out trends have continued their encouraging trajectory. We note this trend of improved sell-out conditions at retail marks the sixth consecutive month of improvement, according to our dealer contacts. From a volume standpoint, surveyed dealers reported they saw unit sales volumes improve marginally (approximately 0.5%) compared to the same period last year. Over half our respondents saw tire manufacturers implement price increases in September and out of our pool of dealers, over 78% of dealers surveyed expect price increases to hold. As the month of September progressed, we continued to see more manufacturers following the industry leaders' signal and push through price increases of their own. Looking closer at the recent trajectory of raw material costs, the basket of raw materials to make a common replacement vehicle tire increased nearly 11% year-over-year in September and 0.41% when compared to the second quarter of 2018; preliminary read- ings for the third quarter as a whole indicate that raw materials prices increased 9.8% year-over-year when compared to 3Q17. We note that if raw material prices were to hold steady through 2H18, the cost of producing a tire would be up 9.8% over the average price during 2H17. In assessing raw material price movements, we note materials such as carbon black, tire cord, tire fabric and crude oil and have been seeing meaningful multi- period increases on a sequential or y/y basis (mainly since the beginning of 2018) while the price of natural rubber continues its decline amid a global supply glut. Although we have been noticing these rising raw materials costs since early 2018, we note there is a lag time of four to six months for many of those input costs to truly impact tire produc- ers, which is why we just began seeing price increases within the past couple months. As we now turn the page on the third quarter, it was reassur- ing to see sequential improvement each quarter as we moved throughout the year and that leaves us encouraged that the fourth quarter will yield healthy results, especially considering the easy comparable figures the industry will be facing from 4Q17. Absent any ground-breaking events that change the fundamental nar- rative of the current tire industry backdrop, we expect volumes to continue improving and becoming more closely aligned with this level of GDP growth. MONTHLY SURVEY A number of independent tire dealers were surveyed concerning current business trends. e results of the September 2018 survey are compared with those of September 2017. See the report on DEMAND FOR PASSENGER/LT WAS UP IN SEPTEMBER Dealer commentary suggests consumer demand for passenger and light truck replacement was up in September compared to the same period last year. e net number of respondents indicating they saw an increase in demand year-over-year was 17.1% of contacts. September results also displayed the sixth consecutive month where contacts saw a net increase in volumes. September's results make us hopeful that recent results will continue their positive trend as we believe there is still pent-up demand flowing through from markets that struggled at the beginning of the year. However, many price increases that have been announced within the past couple months will begin making their way to retail channels throughout October. If dealers can pass along these price increases and how consumers respond to these higher prices on tires will be very telling as to how the tire industry will roll through the rest of the year. A LOOK AT MIX TRENDS IN THE MARKET In response to best and worst performers, our recent survey suggests that Tier 1 brands have maintained their footing and remained at the top of our rankings for the third consecutive month. A continual theme in our research is the fortitude of Tier 2 brands. Even though consumers may desire a recognizable brand, the combination of price and performance that Tier 2 tires provide continues to be a winning formula among shoppers as value-conscious consumers continue to gravitate toward this segment. ■ P.S. If you would like to be included in our monthly discussions with dealers, please do not hesitate to reach out to me directly at John Healy is a managing director and research analyst with Northcoast Research Holdings LLC based in Cleveland, Ohio. Healy covers a variety of subsectors of the automotive industry. Fourth quarter will yield healthy results for tire retailers John Healy By Tier Jul '17 Aug '17 Sep '17 Jul '18 Aug '18 Sep '18 Tire 1 1 3 3 1 1 1 Tire 2 3 1 1 2 2 2 Tire 3 2 1 2 3 3 3 SOOURCE: NORTHCOAST RESEARCH HOLDINGS LLC Average tire tier rankings

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