Cooper’s Albany Closure Savings Higher Than Expected – DB

Analysts at Deutsche Bank admitted on December 18 that the magnitude of cost savings from the closure of Cooper Tire’s Albany factory is higher than the bank initially expected. Cooper stands to save between US$75 million and $80 million per annum after costs linked to the closure are taken into account, however Deutsche Bank doesn’t expect Cooper Tire to achieve the full run rate of cost savings until the fourth financial quarter, as timing of employee departures and transition/inefficiency costs related to the plant shutdown, such as employee wages and benefits, mask the majority of the variable cost savings.

Deutsche Bank believes this capacity reduction could help maintain industry pricing discipline. Cooper’s Albany plant holds a capacity to produce approximately ten million tyres per annum. As a result of this and other industry capacity reductions, Deutsche Bank believes North American capacity will decline to approximately 310 millions units by year end 2009 from 370 million units in 2005.

The Bank adds that it expects the next few quarters to be difficult for the US tyre makers as peak raw material prices and dramatic declines in replacement demand are reflected in Cooper Tire’s results. However, it notes that key raw materials used in tyre manufacturing have experienced dramatic declines since peaking in July/August (Deutsche Bank reports expecting a 35 per cent decline from peak levels). The bank believes that this will likely lead to sequential declines in raw material costs (and notable earnings improvement despite continued weak replacement volumes) for Cooper Tire starting in the first quarter of 2009.