Cooper Tire & Rubber: Sales stable, net income down 37% in Q2 2017

While unit volumes and net sales at Cooper Tire & Rubber remained little unchanged compared with the second quarter of last year, rising raw material costs ensured that income was significantly down in the three months to 30 June 2017. And although raw material costs are rescinding from the peaks seen earlier in the year, the tyre maker is keeping an eye out for further fluctuations.

Second quarter net sales were US$721 million, a year-on-year decrease of 2.6 per cent; net sales were negatively affected by $33 million of lower unit volume and $9 million of negative foreign currency impact, partially offset by $23 million of favourable price and mix, primarily due to net price increases related to higher raw material costs.

Second quarter unit volume was 0.5 per cent lower than a year earlier, with unit volume in the Americas segment down 4.4 per cent thanks to decreases in North America. The 11.1 per cent increase in unit volumes achieved by Cooper’s International segment was unable to entirely offset the decline.

Second quarter 2017 operating profit was $75 million, 31.8 per cent lower than a year earlier, and operating margin decreased from 14.8 per cent to 10.4 per cent. Operating profit decreased as a result of $35 million in unfavourable raw material costs (net of price and mix), $9 million of higher manufacturing costs due to increases in the Americas segment, and $9 million of lower unit volume. These higher costs were partially offset by $14 million of lower SG&A expense, $3 million of lower product liability costs, and $6.5 million of other costs.

Net income declined 36.6 per cent year-on-year to $45 million, or diluted earnings per share of $0.85.

“The tyre industry continues to face turbulence in the US market in the form of raw material cost variability, weak trends in retail sell-out of tyres to consumers, elevated inventory in the channels and a fluid pricing and promotional landscape,” commented Brad Hughes, president and chief executive officer of Cooper Tire & Rubber. “As we continued to respond to these challenges and remained market facing with pricing and promotions, Cooper improved volumes in the US from the first quarter to the second quarter. Importantly, we ended the quarter on a strong note, growing US volume over the prior year and outperforming the industry in June. Cooper also achieved strong year-over-year second quarter unit volume increases in Latin America and Asia, as well as in truck and bus radial tyres.”

Americas Tire Operations

Second quarter net sales in the Americas segment declined 6.0 per cent as a result of $44 million of lower unit volume and $1 million of negative foreign currency impact, partially offset by $5 million of favourable price and mix, primarily due to net price increases related to higher raw material costs. Segment unit volume decreased 4.4 per cent from the prior year, with a modest unit volume increase in Latin America that was more than offset by decreased unit volume in North America.

Second quarter operating profit was $83 million, or 13.5 per cent of net sales, compared with $116 million, or 17.7 per cent of net sales, a year ago. Operating profit was impacted by $31 million of unfavourable raw material costs, net of price and mix, $11 million of lower unit volume, and $9 million of unfavourable manufacturing costs. These were partially offset by $14 million of favourable SG&A costs primarily as a result of decreased incentive compensation, $3 million of lower product liability costs, and $1 million of reduced other expense, including foreign currency impact and insurance recoveries. The segment’s $9 million of unfavourable manufacturing costs in the second quarter was primarily the result of curtailed production levels to manage inventory based on lower unit volume in the US.

International Tire Operations

Second quarter net sales in the International segment increased 22.4 per cent as a result of $27 million of favourable price and mix, primarily due to net price increases related to higher raw material costs, and $8 million of higher unit volume, partially offset by $8 million of negative foreign currency impact. Segment unit volume was up 11.1 per cent, with increased unit volume in Asia that was partially offset by decreased unit volume in Europe.

Second quarter operating profit was $1 million compared with operating profit of $3 million in the second quarter of 2016. The decline was driven by $2 million of unfavourable raw material costs, net of price and mix, and $1 million of other costs, including foreign currency impact, which were partially offset by $1 million of higher unit volume.

Outlook

The tyre maker anticipates that current industry conditions will most likely linger into the third quarter. “Cooper will continue to manage our inventory levels in line with demand,” shared Hughes. “Raw material costs are trending down at present, but may remain volatile, and we expect that uncertain consumer demand may contribute to continued high levels of promotional activity. In this environment, we will remain market facing in our pricing and promotions and expect to deliver year-over-year unit volume increases in both the Americas and International segments in the second half of 2017.

“Cooper reaffirms our guidance for full year 2017 operating profit margin to be at the high end of our previously projected 8 to 10 per cent range,” continued the president and CEO. “This is based on a better than expected second quarter operating profit margin of 10.4 per cent, and a second half that we believe will also come in at the high end of that range.”

Management expectations for the full year 2017 include:

• Raw material costs are forecast to be down sequentially in the third quarter of 2017, and then to stabilise throughout the balance of the year.
• For the full year 2017, unit volume growth is expected in the International segment and in Latin America. Unit volume in the U.S. is expected to be in line with the industry for the second half of 2017.
• Full year 2017 consolidated operating margin is expected to be at the high end of the company’s previously announced mid-term target of 8 to 10 per cent.
• The International segment is expected to continue to improve profitability relative to 2016, inclusive of the recently acquired majority interest in Qingdao Ge Rui Da Rubber Company (GRT).
• The effective tax rate for full year 2017 is expected to be in a range between 30 per cent and 33 per cent.
• Capital expenditures are expected to range between $200 and $220 million for the year.

Full details of Cooper Tire & Rubber’s Q2 2017 results can be found in the Tyrepress.com company profiles and reports section.