Cooper Q1 revenue, operating profit down year-on-year

As Cooper Tire & Rubber enters its centennial year, the US tyre maker has reported first quarter operating profit slightly below the record result achieved last year. On the back of net sales of US$796 million, 7.5 per cent lower than a year earlier, Cooper achieved a quarter operating profit of $81 million, 16.5 per cent down on the first quarter 2013 operating profit, which was the highest ever in the company’s 100-year history. Operating profit was 10.2 per cent of net sales. The company reported net income attributable to Cooper Tire & Rubber Company of $0.71 per share, or $45 million, in the first quarter. This compares with $56 million, or $0.87 per share, for the same period last year.

“Cooper is off to a strong start in 2014, which is our 100th year in the tyre business,” said company chairman, chief executive officer and president Roy Armes. “Our first quarter operating profit is the second-best for a first quarter in our company’s history, topped only by last year’s first quarter, when we set an all-time profit record,” he said. “We are pleased with the way our employees around the globe have remained focused on our goals as they continue to execute our strategic plan. Going forward, we will build on our successes and address the opportunities we have to further strengthen our business and deliver shareholder value across a wide range of economic and industry conditions.”

Factors impacting operating profit in the first quarter of 2014 included $96 million in unfavourable pricing and mix, and this was partially offset by $67 million in lower raw material costs, manufacturing cost efficiencies of $11 million, higher unit volumes of $8 million and lower products liability costs of $2 million. Compared with the first quarter of 2013, selling, general and administrative costs were $5 million higher, and other operating costs increased $3 million, including distribution costs that were higher than a year ago.

Cooper ended the first quarter $336 million in cash and cash equivalents, an increase of $64 million compared with 31 March 2013. Cash was down $62 million from 31 December 2013, which the company says is consistent with typical seasonal patterns for working capital.

North America Tire Operations

Cooper’s North America Tire Operations achieved net sales of $563 million during the first quarter, down six per cent year-on-year. Unit shipments for the North American segment increased five per cent compared with the same period a year ago, despite extremely limited shipments of Roadmaster truck and bus radials, products manufactured at the Cooper Chengshan (Shandong) Tire Company (CCT) facility in China; due to strike action prior to the collapse of the planned Apollo Tyres acquisition, fresh supplies of Roadmaster tyres did not being reaching the North American market until late in the first quarter of 2014. Cooper’s total light vehicle tyre shipments in the United States increased 7 per cent during the quarter compared with Rubber Manufacturers Association (RMA) member shipments, which were up approximately one per cent, and total industry shipments (including an estimate for non-RMA members), which increased five per cent, as reported by the RMA.

The segment’s operating profit was $69 million for the first quarter, or 12.2 per cent of net sales. This represents a decrease of $3 million compared with the first quarter of 2013. The lower operating profit reflects unfavourable pricing and mix of $70 million, which was offset by lower raw material costs of $50 million, higher unit volumes of $10 million, manufacturing cost efficiencies of $10 million, and lower products liability costs of $2 million. Selling, general and administrative costs were $1 million higher than the first quarter of 2013, and other costs were $4 million higher, including increased distribution costs.

International Tire Operations

During the first quarter of 2014, Cooper Tire’s International Tire Operations generated net sales of $310 million, a nine per cent year-on-year decrease. Lower pricing and mix of $35 million and reduced unit volumes of $7 million were partially offset by favourable exchange effects of $11 million. Unit shipments for the International segment decreased two per cent compared with the first quarter of 2013, with declines in both Asia and Europe. Lower sales volumes in Asia were driven by reduced passenger car tyre and medium truck tyre shipments, including intercompany shipments. The reduced shipments were largely attributable to the lingering effects of the earlier Cooper Chengshan labour disruptions. The decline in European sales volumes was primarily due to reduced sales of lower priced tyres, driven in part by the end of an arrangement to sell an entry-level tyre brand exclusively through a large retail chain.

The International segment achieved first quarter operating profit of $23 million, or 7.5 per cent of net sales, compared with $30 million, or 8.8 per cent of net sales, for the same period a year ago. The lower operating profit was primarily due to unfavourable pricing and mix of $30 million and lower unit volumes of $2 million, which were largely driven by the lingering effects of the earlier Cooper Chengshan labour disruptions. Partially offsetting these impacts were lower raw material costs of $22 million, manufacturing cost efficiencies of $2 million and lower selling, general and administrative costs of $1 million.

Outlook

Raw material prices declined about four per cent from the fourth quarter of 2013 to the first quarter of 2014. Cooper’s management anticipates that second quarter raw material prices will be roughly flat sequentially compared to the first quarter. The long-term raw material outlook is for prices to generally trend higher with periods of volatility. Capital expenditures for 2014 are expected to be between $165 million and $175 million.

“We have strong momentum moving into the second quarter,” said Armes. “It is expected that our TBR volumes in the United States will rebound as Roadmaster truck tyre production resumed earlier this year at CCT. While we anticipate that global tyre markets will remain highly competitive, and that underlying economic conditions will likely continue to vary widely across markets, our exciting line up of new products and demonstrated ability to execute our strategic plan makes us optimistic about the future.” Armes added: “We have successfully moved our business forward and believe Cooper is well positioned to meet or exceed industry unit volume growth rates in our largest markets this year.”

At present, it is uncertain whether Chengshan will buy out Cooper’s share in the joint venture Cooper Chengshan factory, or whether Cooper will acquire Chengshan’s share in the operation and make it a wholly-owned subsidiary.

On 31 January, Cooper Tire signed an agreement with Chengshan Group and the CCT labour union to establish a process for determining the future ownership of the Cooper Chengshan joint venture factory. Chengshan will have the first option of either buying Cooper’s 35 per cent share or selling its 65 per cent interest to Cooper. If neither Cooper nor Chengshan elects to purchase the others’ interest, the agreement allows for continuation of the joint venture as currently structured. Should Chengshan purchase Cooper’s stake in the joint venture, Cooper will continue to have offtake rights with Cooper Chengshan that cover the production of Cooper brand products, including TBR tyres, for a minimum of three years.

“Cooper continues to move forward on the path to determine the long-term ownership of CCT per the process set forth in the agreement with our joint venture partner, as announced on January 31 2014,” Armes commented. “Regardless of who owns CCT, China is and will remain an important part of Cooper’s long-term growth strategy. CCT and our wholly-owned Cooper Kunshan Tire subsidiary are continuing to operate well and contribute to Cooper’s overall performance.”