"Pardon me, but why would the NTD's business be described as cyclical? You can only extend the tyre life as far as the law of physics permits. My shopping centre bald tyre index suggests no change to the 20% with questionable tyres."It's labelled a cyclical business because - at the risk of sounding frivolous - it simply is; its earnings are all over the place (see chart below), depending on what is happening in the market (not just in terms of demand, which is in fact not constant, but also in terms of supplier and competitor behaviour at various points in time).
View attachment 5587109(I've included my forecasts - for what they are worth - for the next two half-years)
So sure, from a the broad, top-down, "tyres-are-non-discretionary-items" view, it might be thought to be a non-cyclical, steady state demand business, but even then it is not the case because tyre demand varies with underlying economic conditions (at the household level people simply go to fewer places, and therefore tyre wear reduces, if they have less money to spend and at the commercial/industrial level, truck movements vary greatly, e.g., the excellent FY2021 result was boosted significantly by demand from the agricultural sector, after excellent rains had fallen).
Then there are important variations on the input side of the business which cause wide swings in the GP Margin of the business, things such as the exchange rate (since all tyres sold in Australia are imported):
View attachment 5587081As can be seen, the GP Margin is an outworking of the prevailing exchange rate (those variations might not seem like a lot, but when a business operates at single digit EBIT margins, it doesn't take much variability at the GP Margin level to make profits look either spectacular (DH2020 and JH2021), or decimate them (DH2022).
As an aside, keen followers of NTD might have noticed that the GP Margin held up very well in JH2023 (recovering on prior halves despite a continued weakening in the A$). Whether this is due so something structural, such as competitors not making any money and therefore having to be firmer on pricing, or a mere flash in the pan, will only be known in the fullness of time.
I, personally, haven't invested in NTD on the basis that the tyre distribution industry in Australia has somehow suddenly found the religion of pricing discipline, so I expect the GP Margin to ease in coming periods. So management are going to have to lean heavily on the CoDB lever again this year in order to protect the P&L.
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(20min delay)