Sumitomo executives optimistic for rebound in tire sales

RANCHO CUCAMONGA, Calif. — Sumitomo Rubber North America Inc. (SRNA) predicts U.S. tire sales will improve going forward after suffering a slump during the pandemic.

"The good news is increases are being reported and realized across the board," Matt Leeper, SRNA's director of sales — consumer, said during the tire company's second COVID-19 Dealer Resource Forum, held online April 30.

"In almost every instance, as far as the channel dealer area, there has been an improvement in business. The most accepted explanation is government support, incentive checks or stimulus checks. There's also probably a relaxing or fatigue of shelter-in-place. So we're starting to see that in miles driven as well."

SRNA predicts replacement tire sales for the U.S. industry will drop about 21% for the first half of 2020 but expects a slight rebound in the second half, with a sales decrease of about 13%-14%.

The tire industry could return to a somewhat normal monthly pace by the end of the year, down about 8%-10%, in November and December.

"Our biggest challenge is that the picture changes every day. It's still very unclear on when states will open up," Rick Brennan, vice president of strategic planning, said.

About two-thirds of the states have no official dates for reopening businesses, and much of Canada is in a similar situation.

"These uncertainties really are having an impact on when we see things will open up and when things will get back to normal, which is impacting our vision of what the go-forward looks like," he said.

Nationwide, vehicle miles traveled, which dropped 48% in March, increased during April, he said.

During the last week of April, vehicle miles traveled were off 35%, "so people are starting to move again, and a little bit of it is caused from states opening up. But for the most part, it is people just starting to move around a bit more. But it's so erratic, not just state by state but city by city," Mr. Brennan said.

Commercial truck travel has been impacted less than passenger car travel during the shelter-in-place orders in March and April.

Long-haul trucking mileage was down 9% in early April but has been increasing daily, according to Mr. Brennan.

"So we're seeing an improvement of freight being moved across the country, but it depends on where the manufacturing and the oil people are," he said. Regions with vehicle manufacturing plants and oil refineries that temporarily closed have experienced a greater drop in commercial trucking.

In some states, trucking is down 13% or more, while in other states trucking slipped only 6% or less.

"The regional differences in freight travel are dramatic, from 16-17% fluctuation. Some are down 0-6% and some are down 17% or more, mainly due to the impact of closures of factories or the impact of oil," he said.

Using U.S. Tire Manufacturers Association (USTMA) and non-USTMA manufacturers' data, SRNA determined that replacement passenger/light truck tire sales in the U.S. fell 18% in March and were down 63% in the first half of April. Medium truck tire sales rose 10% in March and fell 0.7% in the first half of April.

Tire sales in Canada in the first half of April mirrored the U.S. market: passenger tire sales plummeted 60%, light truck tire sales dropped 62% and medium truck tire sales fell 35%, according to SRNA.

Mr. Brennan said the drop in truck tire sales was mainly due to the impact of the low oil prices and a slowdown in vehicle manufacturing, causing freight movement to slow much more than in the U.S.

Sales of passenger/LT tires in January-March were down compared with the same period in 2019, Mr. Brennan noted, and he expects a big drop in sales for the full month of April.

"If we normally run 17 (million) to 18 million (tire sales) per month as a total industry replacement, we're going to see numbers around 10 (million) or 11 million, if we're lucky. So it's a big drop for April," he said.

"We're going to see it come back in May as things start to open up. We already see some signs of life," he said, noting the slow rebound in vehicle miles traveled.

"At the end of the year, if we look at the positive view, as an industry we'll be down about 16.4%. If we look at a pessimistic view, we could be down close to 20% (19.6%). This is a big drop. That 20% number is actually around 220 million versus 274 million that we projected at the beginning of the year as an industry. So it's a pretty big drop, but we see that it will improve as we go through the year."

SRNA looked at the monthly pricing of 11 tire brands and noted that, for the most part, industry pricing has remained flat.

"Overall, we don't see a lot of change. Again, this is average advertised prices. What the tire actually gets sold for may be less," Mr. Brennan said.

"For the replacement business, frankly speaking, we aren't seeing changes at the moment at wholesale or retail in terms of price stability," Darren Thomas, senior vice president of sales and marketing for Falken Tires, added.

While oil prices have bottomed out, other raw materials have increased in price, he said.

"There are actually areas where we see our costs going up, that would be in terms of outside storage, and things like that, of tires we had on the water or in production and now we need to find a place for. So there are definitely places where SG&A costs have increased."

He said if lower tire prices were to occur in the marketplace, it would probably be demand-driven.

"At this point in time, a sharp decline in demand has not changed those prices. My belief is a decline in crude oil probably will not have a significant affect, at least in the short term."

"If the assumption that government support is responsible for the recovery, there's speculation that this would be what we call a W recover," Mr. Leeper said, "meaning we're seeing a pretty good recovery now, potentially sales could decrease again before really recovering when the country normalizes as people get back to life as normal, when the shelter-in-place restrictions are lifted."

He said there has been about a 50% drop in sales among tire retailers, though experiences vary by channel and region of the country.

Online retailers and car dealerships have been doing well, while urban wholesalers have been struggling, he said.

"Data from dealers is that Tier 1 (brands) is taking a hit, Tier 4 is going up. In the middle is a mixed bag. Diversified dealers fared pretty well during the first three-week period," he said.

Mr. Leeper noted that based on input from tire dealers, some had to furlough employees, some put a stop to ordering tires and others had to temporary close during March.

"Going back two weeks from today (mid-April), we started to see some really hardy order activities. ... Last week the general consensus was about 20% down (in tire sales). … A lot of order activity, a lot of business being had — what we can only assume was around the government support," he said.

"The Northeast is struggling as far as what we're able to ship and sell to our distributors that service that area, The Southeast, the Northwest and the West are doing the best," Mr. Leeper said.

"As far as SRNA, the activity amongst our dealers has increased dramatically. They are placing and accepting shipments almost to a dealer. Container orders have increased. And some have gone and increased their marketing efforts.

"We have several dealers that are going to go to market with conventional type promotions, instant rebates and those types of things. Those are fresh promotions that we haven't seen.

"And then we're hearing of staff being rehired, warehouse staff, where they just find themselves short on labor resource to process orders, execute on orders. All of this paints a really nice picture of at least a temporary recovery, being what we hope, we all hope, will be a more permanent recovery."

In early April, Mr. Leeper expected back orders to improve due to a downturn in tire sales. But the fill rate for Falken's popular Wildpeak A/T3W all-terrain light truck tire is still lagging.

"That is because we are probably going to have one of the best months of sales ever for the A/T3W," he said. "So the demand on that tire, that particular line, has not subsided as much as we would have thought. We're actually selling a really large quantity of them in April. So the back orders on that line, and thus all of our back orders, are not coming down as rapidly as we'd hoped."

Generally, commercial truck tire sales are fairing better than passenger tires due to sustained long-haul and local transportation.

"What we're seeing, what we're hearing, some segments of the transportation industry are still in the good category, such as refrigerated trucking, agriculture and, of course, local delivery, which is still doing quite well in most areas," Bob Klimm, director of sales – TBR, said.

He expects improvement in certain areas of the commercial business as states loosen stay-at-home orders.

"We continue to see a slowdown in sales volume, although it varies greatly by dealer and region. But overall, most dealers are stating a 15-25% decrease in commercial sales volume. … We're going to end up about 12% behind last April," Mr. Klimm said.

"We did see a spike (in TBR orders) in March and again we attribute some of that spike to dealers trying to protect their inventories when they heard about all the plant closings. So, of course, that's leveled off. ... The last half of the month we saw our orders get back on track. So we've had a fairly strong second half of the month (April) and we're encouraged by it," Mr. Klimm said.

"There's going to be some permanent bruises in some segments of the transportation industry, trucking in particular, deliveries to bars, restaurants, gaming facilities, that sort of thing. That's still going to be a challenge," he said, adding, "It's going to be a challenge throughout the year but we're encouraged by what we've seen so far just in the second half of April. I think the next couple of weeks, as some of these states and counties relax their business restrictions, we're going to have a better sense of how construction gets back on track and some of the areas that have been hit pretty hard. ...

"Overall for the year, there's going to be a downturn just because of the shortfall we have to overcome so far. But going forward, we're pretty optimistic," he said.

The local delivery segment is going strong and offers a growth opportunity for SRNA's commercial tire business, he said.

The company will soon be offering the Falken RI151 Plus for utility vehicles and the Falken RI191 for local delivery fleets.

The RI151 Plus, in sizes 225/70R19.5 and 245/70R19.5, is an upgrade to the RI151 in terms of mileage and durability, he said. Sumitomo will begin production of the tire in July.

The RI191, in sizes 225/70R19.5 and 245/70R19.5, offers improved mileage in high-scrub delivery applications. Production is expected to begin in August.

He noted that tire inventory is in good shape and the drop in OE tire business for some tire manufacturers has allowed them to have a cushion in replacement capacity and inventories.

"So overall, the (tire) plant closings have not had much effect on inventories. As far as the dealer standpoint, they seem to continue to take a conservative approach to their overall inventory."

SRNA predicts new vehicle sales will suffer a decline in units sold for the year, due to the pandemic and the temporary closure of manufacturing facilities.

"Assuming the car companies can get back to producing vehicles in May, the vehicle sales should pick up and reach close to 14.5 million vehicles sold in the U.S. this year," David Colletti, vice president, OE/technology and QA, said.

"That's significantly down from the 17 million vehicles we saw last year, but with over 2 million vehicles taken out of production in the last 1½ months, this sales number is not surprising.

"The recovery will most likely linger into 2021 and it will take some time to get back to 16 million vehicles sold in the U.S. Although vehicle sales numbers are not great, they are not close to the declines we saw in 2008-2009, where we were selling about 10 million vehicles."