The 2017 financial results reported from tire manufacturers disappointed relative to initial expectations set for the year. Raw material volatility disrupted pricing strategies, and total 2017 volumes in the U.S. market declined by 0.5% due to flat consumer replacement shipments and weak consumer OE demand. More recently, 2017 fourth quarter financials were mixed with winners and losers driven in part by varying promotional efforts that impacted market share and inventories.
Highlights Worth Sharing
• Goodyear’s U.S. consumer replacement tire shipments recovered strongly in the quarter up 8%, which helped the Americas segment grow volume by 4%, which led to a relatively high inventory position in the channel. The company’s total price/mix growth was 3% during the fourth quarter of 2017, consistent with prior quarters in the year. As it relates to the domestic trend, Goodyear was clearly promotional, with revenue per tire in the Americas segment dropping to $93 during Q4 of 2017 vs. $99 in the two preceding quarters and $95/tire during the first quarter. Based on our conversations, Goodyear has continued to be very promotional during the first quarter of 2018 as they seek to grow volumes by 3% in 2018.
• Michelin’s 2017 fourth quarter light vehicle volumes grew by 1% with solid demand in the North American replacement channel. Michelin’s prices grew 4% in both the third and fourth quarters of 2017 against a 1% growth during the first half of 2017. Michelin seeks to grow in line with total market growth in 2018.
• Cooper Tire’s fourth quarter of 2017 for its U.S. light vehicle volumes declined by 8%, which led to a 6% decline in the Americas segment. The company’s price/mix grew 0.1% during the fourth quarter of 2017 against approximately a 2% average in prior quarters throughout the year. Cooper Tire assured investors they will be competitive in 2018 and guided to total company volume growth this year.
• Continental’s light vehicle volume posted 3% growth in the fourth quarter of 2017. The price/mix growth in the total Rubber Group during the fourth quarter was the highest for the year at 5% compared to 1-3% in preceding quarters. Continental expects 2018 industry light vehicle tire volumes to grow 2% in North America compared to 3% globally.
The Start of 2018
This year is starting out weaker than expected with a 3% decline in year-to-date (YTD) shipments through February, including a 4% decline in consumer replacement shipments. The culprit is likely high inventory as we believe sell-out is trending flat YTD. In response, we have seen manufacturers intensifying their promotional activity, which may add to the inventory problem, should sell-out not improve. This is clearly an opportunity for retailers to take advantage of purchasing opportunities, with hopes that the consumer market can get back to growth mode. For those who sell tires, purchasing costs per tire may improve in 2018 as manufacturers seek to fill capacity in a weak end market.
Large tire manufacturers released low single-digit volume growth expectations for 2018. Goodyear and Continental have laid out global volume guidance of +3% year-over-year, while Michelin and Cooper are both expecting growth in line with the market. To achieve 2018 volume targets in a weak end market, manufacturers will need to rely on aggressive pricing strategies, such as those we saw in the second half of 2017. Our recent conversations with dealers and distributions nationally revealed that most major tire manufactures have approached the beginning of 2018 with promotional intensity. We have seen a combination of base pricing realignments, aggressive SKU-specific offers for higher rebates in return for minimum volume commitments, and greater consumer rebates at the retail level. Notably, we believe Goodyear’s price position has become significantly more competitive in the U.S. channel YTD following a disappointing 2017 when wholesalers destocked the brand due to too many price increases. It appears they are working hard to mitigate near-term share loss risk. We expect most manufacturers to respond similarly in the coming quarters, based on negative developments on the demand front.
Exacerbating pricing concerns at the manufacturing level is the battle over market share in the U.S. due to demand beginning to fall behind new capacity coming online. The supply-demand equation in North America is becoming more imbalanced each month we see negative shipments. Overall, we have calculated a 4% compound annual growth rate (CAGR) in North American consumer tire capacity through early next decade. Under a 1.3% industry growth CAGR scenario (industry growth CAGR has been 1.3% since 2010), capacity in North America could reach over 100% of U.S. shipments by 2020, resulting in negative pricing consequences for manufacturers over the next several years.
To conclude, investor sentiment towards the tire industry is subdued given weak fundamentals in the U.S. market. There is optimism around the second half of 2018 expectations, but the near-term trend continues to be concerning on the demand and pricing fronts.
Anthony J. Deem serves as vice president and senior research analyst at Longbow Research and covers publicly traded light vehicle suppliers and tire manufacturers. Prior to joining the firm, Anthony spent six years as an associate analyst at KeyBanc Capital Markets with a focus on light vehicle suppliers, tire manufacturers and automotive retailer stocks.
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