Modern Tire Dealer

JUN 2019

Magazine for the professional tire industry

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M T D J u n e 2 0 1 9 18 Y o u r M a r k e t p l a c e R ecent conversations with dealers leave us with a view that retail sell-out trends continue to remain on the positive side of the ledger. From a volume standpoint, surveyed dealers reported they saw unit sales volumes improve marginally compared to the prior year's period aer improving in the low single-digit range in 1Q19. Looking back on the tax season that ended in mid-April produces results that look to come in much better than expected, especially considering the lackluster performance through the first few months of the year. Although the number of individual income tax returns received was only up 0.2% compared to 2018's tax season, it was encouraging to see that number come in positive as total returns received was down 3.2% at the end of February and down 1.4% at the end of March. However, despite an increase in total returns received, the total amount of refunds issued and the average refund issued were both down on a year-over-year basis by 1.7% and 2.0%, respectively. Again, although the percentage comparisons may not seem significant at first glance, we note that there was over $4.4 billion less returned to American consumers this year when compared with 2018's tax season. Despite the reduced cash flow levels consumers are normally accustomed to seeing from their tax returns early in the year, it remains encouraging that tire retailer volumes have been able to keep improving despite a reduction in the dollar amount of refunds paid out as many consumers use that additional cash flow for big- ticket purchases like tires. Slicker road conditions may have also provided a slight tailwind to sell-out trends last month. We note that every region of the country experienced warmer temperatures on a year-over-year basis in April and likely lead to a greater increase in miles driven activity. Regarding rainfall levels in April, precipitation was elevated for most of the country with 10 states recording a month that was in their top 10% wettest Aprils on record. Additionally, much like average temperatures in April, each region experienced higher precipitation levels year-over-year with rainfall most pronounced in the midwest region as this part of the country saw a nearly 50% increase in precipitation levels compared with April 2018. Looking closer at the recent trajectory of raw material costs, the basket of raw materials to make a common replacement vehicle tire rose 1.7% on a year-over-year basis in April while increasing 2.8% from March. From a quarterly perspective, preliminary cost readings indicate a 1.1% increase in raw material costs in 1Q19 while holding current spot prices flat would yield a 1.2% year-over- year increase in input costs in 2Q19 to "build a tire" (+3.4% on a sequential basis from Q1 to Q2). We note that it is worth monitoring raw material cost inflation closely through the next two quarters to gauge the trajectory of raw material prices as that could foreshadow if manufacturers have to exercise pricing actions to offset higher costs like the industry experienced in 2H18. MONTHLY SURVEY A number of independent tire dealers were surveyed concerning current business trends. The results of the April 2019 survey are compared with those of April 2018. See the report on www. moderntiredealer.com. SELLING ENVIRONMENT SUGGESTS DEALERS PLEASED WITH RECENT TRENDS Dealer commentary suggests consumer demand for PLT replacement tires rose in April compared to the same period last year. e net number of respondents indicating they saw an increase in demand year-over-year was 25% of contacts. We note that our tire demand index increased nearly 20.4% year-over-year and we continue to hold the view that volumes are becoming more closely aligned with the current level of GDP growth as our dealer contacts have seen 10 straight months of positive volume growth. A LOOK AT MIX TRENDS IN THE MARKET In response to the best and worst performers, our recent survey revealed that Tier 1 brands were the segment of most significant growth among our surveyed contacts for the second straight month. Conversely, aer spending three straight months atop our rankings, Tier 3 remained in the bottom ranking for the second consecutive month. Aer the delayed tax refund season concluded in mid-April and filers finally pocketed their tax return, it seems the additional influx of cash in consumers' pockets may have impacted buying behavior causing a trade up to higher-quality, legacy nameplates the past two months (see chart). When examining the landscape from a longer-term view, we continue to believe that the pricing environment in North America will remain rational and in-line with raw material costs. ■ 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. Dealers saw 10 th straight month of positive volume growth John Healy By Tier Feb '18 Mar '18 Apr '18 Feb '19 Mar '19 Apr '19 Tier 1 3 3 3 2 1 1 Tier 2 1 1 2 3 2 2 Tier 3 2 2 1 1 3 3 SOURCE: NORTHCOAST RESEARCH ESTIMATES Average tire tier rankings

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