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ATD and the Impact of TireHub Deal

Update: This story has been updated with more information regarding Goodyear and its aligned distributors. 

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Updated 4/23: American Tire Distributors announced late last week that the Goodyear Tire & Rubber Co. will no longer be one of its distributors going forward.

The decision comes on the heels of Goodyear and Bridgestone’s announcement of its joint distribution venture called TireHub. See more of ATD’s response to TireHub and how it plans to go forward without Goodyear’s product portfolio here.

Updated 4/19: Wall Street analysts see the creation of TireHub as potentially damaging for ATD. Both Goodyear and Bridgestone told Tire Review that the new distribution partnership is actually intended to work within their existing distribution relationships, as an extension of them. Goodyear stated they see TireHub as becoming the organization’s national “aligned” distributor, complementing the company’s aligned regional wholesale distributors. When later asked about ATD as part of that network, Goodyear representatives said that they were not able to comment on specific customer relationships. 

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“We see this (TireHub partnership) as something that’s complementary to what our other aligned distributors are doing every day,” said Andy Traicoff, vice president of consumer sales for Goodyear. “When you think about it, it expands our company-owned wholesale to a national level where before it was semi-national or in certain pockets of the country.”

 

When asked about having conversations prior to the April 16 announcement to get a plan in place so that major accounts like ATD would be minimally impacted, Traicoff responded that all parties are covered under non-disclosure agreements, but “it’s very core to our values.”

In an interview with TJ Higgins, president of Bridgestone’s North America Integrated Consumer Tire Group, he confirms that distributors – strong ones – are an important part of the overall plan moving forward.

“My expectation is that strong wholesalers are going to be a critically important future part of our network,” says Higgins. “We see TireHub as being a compliment as stocking the full line of our products, but we also want to make sure that in the marketplace, other wholesalers that are serving other dealers and retailers have the right access to the right products as well. So we intend to have a very strong network of wholesalers long into the future.”

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ATD is not alone in its challenges. Goodyear’s response to a weaker than expected earnings in 2017 was a promise to make up for lost volume in 2018. Tire Review asked Scott Rogers, Goodyear’s president of consumer products in North America how the TireHub deal helps the global tiremaker in the recovery of that lost volume moving forward.

“I think for us this is really about growth moving forward, meeting our customers’ and consumers’ needs,” Rogers says. “We’re going to work as hard as we can with our aligned wholesale distributors and TireHub…. We want to work to drive up growth moving forward, again, by bringing ourselves – and our customers’ growth in the industry –closer to the consumers as they continue to evolve.”

From an investment perspective, Tire Review industry analyst Anthony Deem with Longbow Research sees the TireHub deal as a win for Goodyear. He says that financial and operational benefits are compelling, though 2018 will show additional lost unit volume as TireHub comes online.

“The reason for lost volume in 2018 is that [Goodyear] will move a lot of volume around in conjunction with the transaction as they’re changing out customers from buying with others, to buying from the JV,” says Deem in a published research note on the deal. “As TireHub won’t be in operation until June, there will be a runoff of existing third-party channel inventory until they start stocking at the new company. Therefore, [Goodyear] will be running a lower level of inventory until the new JV comes online. At this time, we are unsure of the impact to regional vs. national wholesalers.”

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Financially, 2019 segment operating income (SOI) benefit is $80-$100 million as Goodyear should recover the $40 million in 2018 lost volume, and also add an incremental $40-$60 million or 3% of SOI benefit from improved costs, as [Goodyear] won’t be paying third-party distribution margins and should be able to go to market more efficiently,” Deem shares. “Operationally, this is an extension of aligned distribution at [Goodyear], and we believe the scale of the JV at 10 million units combined should help to mitigate demand volatility as seen in 2017 with volume gyration from buy-low sell-high mentality at wholesale…. Also, the JV can help Goodyear’s visibility into manufacturing given better data from company-owned wholesale operations. Lastly, there is an expectation to grow this business from the initial 10 million unit target as the 80 distribution/warehouse locations have greater capacity versus [target].”

 

Updated 4/18: Goodyear and Bridgestone are the latest tiremakers to join forces to distribute their tires in a 50/50 joint venture partnership called TireHub. The move combines Goodyear’s corporate-owned wholesale distribution with Bridgestone’s Tire Wholesale Warehouse (TWW) to create a network of about 80 points of distribution across the U.S.

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Earlier this year, Michelin North America and Sumitomo Corporation of America combined their distribution services in North America to form National Tire Wholesale (NTW). Under that 50/50 joint venture, 144 Michelin-owned TCi Tire Centers and Sumitomo-owned Carroll Tire Company combined under the NTW brand. Michelin also secured a 50% stake in Sumitomo’s TBC Corporation and its 2,400 affiliated retail locations under the deal. TBC’s retail locations include Tire Kingdom, NTB, Merchant’s Tire, Big O and Midas.

While tiremakers take on strange bedfellows in distribution deals to ensure market coverage and product availability, the nation’s largest tire distributor, American Tire Distributors (ATD) and its parent company, American Tire Distributors Holding Inc., may be weakened by the news. ATD is a distribution powerhouse with over 140 distribution centers across the U.S. and Canada serving tens of thousands of tire dealers and retailers and parent company to the roughly 700 tire dealers within the Tire Pros franchise.

Upon news of the TireHub deal, Moody’s Investor Service has placed its rating for ATD (referred to as ATDI) under review for a downgrade. According to an April 17 report, Moody’s analyst Inna Bodeck states that following the Goodyear-Bridgestone joint venture formation, “ATDI’s fundamental creditworthiness is likely to erode, potentially materially but in any event to a level that is likely no longer consistent with the company’s current ratings.”

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The statement also noted that ATD relies heavily on its various forms of revolving credit, with one-year average usage of approximately $670 million.

“ATDI’s ability to quickly respond to the evolving competitive landscape, including potential renegotiation of terms with Goodyear-Bridgestone to mitigate if not fully restore likely lost sales, remains highly uncertain, in our estimation,” said Bodeck, Moody’s lead analyst for the company. “The credit profile of ATDI is already relatively weak, as evidenced by the company’s underlying B3 corporate family rating and owing to its high leverage and only modestly positive cash flow profile – before the potential loss of one of its biggest suppliers.”

 

 

 

 

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