After experiencing 31 per cent growth in the first quarter of 2010, market analysts are predicting that second quarter car production could have increased by as much 10 per cent for the second quarter and may increase 20 per cent for the first half as a whole. Current estimates suggest European production will increase 3 per cent in the second quarter.
Shares in tyre manufacturers outperformed most of the various European OEMs’ stock between 26 April and the end of May, in the wake of the Greek debt crisis. That’s the verdict of Deutsche Bank analysts, who wrote that tyre manufacturer’s resilience has on the whole been supported by their aftermarket sales.
In an investor’s note published on 28 May, the analysts pointed out that share prices in general dropped by an average of 12 per cent, in line with the market, with “a significant discrepancy” in the automotive sector: “On one side, the share price of tyre companies (namely Michelin, Continental and Pirelli) and of German OEMs (BMW, Daimler, VW) has been very resilient. On the other side, mass market OEMs (Fiat, PSA and Renault) have underperformed massively,” the report read.
Kwik-Fit, the UK’s leading tyre retailer, has reportedly been put up for auction by its owners PAI Partners. PAI, a French private equity group, bought Kwik-Fit from CVC Capital Partners for roughly £800 million in 2005 after seeing off competing bids from suitors including global tyremaker Bridgestone. Newspaper reports from sources including The Guardian and The Scotsman published on the 30 and 31 May respectively suggest that Kwik-Fit has once again attracted the attention of private equity groups including Blackstone, KKR and Permira. However both reports also speculate about the likelihood of Bridgestone’s involvement in bidding for Kwik-Fit’s latest change of ownership. A source close to Kwik-Fit’s owners told Tyres & Accessories that the press reports were inaccurate and “there is no formal sale process,” but confirmed that there is a formal sale process for the firm’s insurance arm.
Kwik-Fit, the UK’s largest tyre retailer, is running a promotion offering Bridgestone tyres at discounts of up to 35 per cent for eight days between 24 and 31 May. All sizes of Bridgestone – the sole tyre supplier for Formula 1 since 2007 which appears to be ending its supply deal at the end of 2010 season – are said to be included. According to a press release publishing details of the deal, retail prices start from just £27.30 each and the tyres are being marketed as “a premium tyre without the price premium.”
Pirelli’s latest “Tyre Market Watch” trend figures report strong global demand during April. According to Pirelli’s figures, volumes increased by approximately 15 – 20 per cent in passenger tyres and by approximately 30 in the truck tyres segment (up 60 per cent in OE and 20 per cent in the replacement market). Commenting on the Tyre Market Watch numbers, Deutsche Bank analysts highlighted the fact that in Latin America where 34 per cent of Pirelli’s sales and 43 per cent of its production is based, tyre demand “remains strong, in excess of 25 per cent up both in passenger and in truck tyres.” In summary the analysts characterised the second quarter as: “a good start even if volumes growth is mostly attributable to less profitable OE markets.”
Indian business journal Mint asks the question – will the nation’s tyre makers be able to retain their margins during the 2011 fiscal year? The publication comments that, after falling in the March quarter, profit margins are looking set for another battering at the hands of rising rubber prices (up 70 per cent in one year and 150 per cent within the last 18 months, notes Mint) in the following quarter.
Analysts have reported that Continental’s first quarter financial results (released last week) show a “100 per cent increase in numbers.” This means that, in Morgan Stanley’s view, the company’s net debt is now “under control at 8.2 billion euros,” approximately 200 million better than they expected.
“Excluding the 1.1 billion capital increase during last quarter, the net financial position deteriorated by 413m in the first quarter 2010, which was largely expected due to seasonality of working capital,” the analysts explained in an investor’s note dated 4 May, adding: “[Capital expenditure was unsustainably low, however, decreasing by 62 million euros year-on-year and represented just 63% of depreciation and amortization and 3 per cent of sales.”
BusinessWeek.com reported on 7 May that the price of rubber fell to its lowest price in more than four months, erasing this year's gains, on concern that Europe's debt crisis may slow the global economic recovery. However, while financial analysts agree that tyre raw material prices have “ticked down for the first time since March 2009,” they say the full year effect in 2010 is still likely to be 15 – 20 per cent higher than last year.
Pirelli & C. SpA confirmed yesterday (3 May 2010) that its board of directors is meeting today “to examine, among other things, the transaction for separation of Pirelli Real Estate from the Pirelli Group.” According to various sources, the timing of the meeting (a day before the company’s first quarter 2010 results presentation) suggests that the company is likely to announce a spin-off of the real estate business tomorrow 5 May. Deutsche Bank analysts estimate that the move is worth 0.04 euros a share or 8.5 per cent of market capitalisation.
Nexen Tire Corp.’s first quarter earnings jumped 43 per cent from a year earlier on the back of increased prices, reports Tire Review. Net profit reached 25 billion won (US$22.4 million) in the January-March period, compared with a profit of 17 billion won a year earlier, the company said in a regulatory filing. Sales increased 8.6 per cent to 249 billion won over the cited period, while operating income fell 5.1 per cent to 32.4 billion won, it said.
Delticom AG has published preliminary figures for the first quarter of 2010, which provide further evidence for the increased influence of the Internet on the tyre business. According to a preliminary results statement published 20 April, Delticom achieved first quarter 2010 revenues of 74 million euros (£64.5 million; $99.44 million), up 45 per cent compared with the 51.0 million euros reported in the same period in 2009. However, e-commerce revenues for the first quarter great faster still, totalling 70 million euros (£61 million; $94.08 million), up 50 per cent from 46.7 million euros in the first quarter of last year.
Nokian Tyres has opted to raise prices in June after almost doubling estimates for the cost of raw materials this year. Nokian Tyres estimates that its raw material cost (EUR/kg) in 2010 will increase by 10-12 per cent compared to 2009 (the company’s previous estimate was 6 per cent) due to significantly increasing raw material prices. According to the company, this will affect its financial results in the second half of the year.
Continental AG has reportedly revived plans to sell bonds to help it repay large debts. Citing “two people familiar with the matter,” Business Week reported that the planned sale of about 1.5 billion euros ($2 billion) in notes may take place as early as May.
Will the leading global tyre manufacturers be able to increase product prices during the course of 2010? Yes, but not by much. That’s the view of Morgan Stanley’s financial analysts who published their assessment in an investor report published yesterday (16 March). Affirming the position, widely held amongst financial analysts, that the tyre industry is historically able to maintain “price discipline,” they commented that: “All major companies have already released price increase announcements – the industry is disciplined.”
Financial analysts responded positively to the results, describing second-half 2009 financial position as a “major positive.” However, some key coverage decided against giving forward-looking outlook advice, citing fluctuating raw material costs (specifically natural rubber) as their reasoning.
Writing in an investor’s note dated 12 February, Morgan Stanley representatives commented: “Operating profit was 5 per cent better than consensus, but 3 per cent below our estimate…Net debt was significantly better than expected, ending 2009 at 3.05 billion euros versus our 3.5 billion euros estimate (consensus at 3.6 billion euros).”
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