Q1 performance ‘well above target’, says Cooper Tire

Although the absence of Cooper Chengshan Tire (CCT) was noticeable in Cooper Tire & Rubber’s net sales during the first quarter of 2014, the tyre maker managed to increase operating margin, and excluding the impact of CCT’s divestment, increased operating income in the opening three months of the year.

Net income attributable to Cooper Tire & Rubber between 1 January and 31 March 2015 was US$41 million, or $0.69 per share, compared with $45 million, or $0.71 per share, in the first quarter of last year. Net sales were $663 million compared with $796 million in the first quarter of 2014. Cooper says this decline in sales was “more than attributable” to CCT’s divestment in the fourth quarter of 2014; the joint venture operation in China contributed $157 million to net sales, net of intercompany eliminations, in the first quarter of 2014. Excluding CCT, first quarter 2015 sales rose four per cent as a result of higher unit volume of $35 million, which was partially offset by negative foreign exchange of $7 million.

“Our first quarter performance continued the positive trends we saw last year. The Americas segment posted outstanding results, with solid unit volume growth and an operating margin of 15 per cent, well above our target. With the strong Americas performance, we came close to last year’s earnings per share despite the absence of CCT in the quarter,” said Roy Armes, Cooper’s chairman, chief executive officer and president.

First quarter 2015 operating profit was $70 million compared with $81 million for the same period last year, which included $21 million from CCT. First quarter operating margin was 10.6 per cent versus 10.2 per cent in 2014. Excluding the impact of CCT, operating profit increased $10 million from favourable raw material costs of $46 million and higher volume of $4 million. These benefits were partially offset by $16 million of higher manufacturing costs, unfavourable price and mix of $15 million, higher product liability costs of $4 million, higher selling, general and administrative (SG&A) costs of $3 million, and an increase in other costs of $2 million, including negative foreign exchange impact.

Americas Tire Operations

Thanks largely to $27 million in higher volumes, net sales within Cooper’s America Tire Operations business rose six per cent to $599 million in the first quarter. Unit shipments increased five per cent compared with the same period last year, driven primarily by sales of higher margin light truck products introduced in the past two years, as well as higher sales of truck and bus radial tyres.

Cooper’s total light vehicle tyre shipments in the United States increased 2.4 per cent during the quarter. Tyre shipments for Rubber Manufacturers Association (RMA) members were up 2.5 per cent during the same period, and according to the RMA total industry shipments (including an estimate for non-RMA members) decreased 7.9 per cent.

The segment’s operating profit for the first quarter was $90 million, or 15.0 per cent of net sales, compared with $69 million, or 12.2 per cent of net sales, last year. The higher operating profit primarily reflected favourable raw material costs of $37 million, higher unit volume of $6 million, and reduced SG&A expense of $5 million. These favourable items more than offset higher manufacturing costs of $14 million, unfavourable price and mix of $9 million, and higher product liability costs of $4 million. The higher manufacturing costs are due to US plant reconfiguration to meet demand for higher value tyres, as well as higher medical costs, pension expense, and technical spending.

International Tire Operations

First quarter sales for Cooper’s International Tire Operations business declined to $107 million from $310 million in 2014. The decrease mainly reflected $185 million, before intercompany eliminations, from the absence of CCT. Excluding CCT, volume declined $7 million based on a difficult comparison in Europe, which had promotion-driven sales in 2014 of a product line that is being phased out. Volume in China was lower due as tariffs in the United States meant fewer tyres were shipped there, and this more than offset an increase in sales within China’s domestic market. International operations also had $15 million of unfavourable price and mix and $7 million of negative foreign exchange in the first quarter of 2015.

International operations recorded a first quarter operating loss of $3 million compared with an operating profit of $23 million for the same period a year ago. The primary drivers of the operating loss were the absence of CCT, which contributed $21 million to 2014 first quarter operating profit, and unfavourable price and mix of $10 million. This more than offset the benefits of lower raw material costs of $11 million.

Full-year outlook

First quarter raw material costs declined approximately 14 per cent from the fourth quarter of 2014. Cooper Tire anticipates that raw material costs will decline slightly in the second quarter compared with the first, but they will generally trend slightly higher during the second half of 2015.

The company expects its full year tax rate to be in a range of 30 to 35 per cent. SG&A expense is forecast to be in a range of $260 million to $270 million in 2015. Capital expenditures for 2015 are expected to be between $205 million and $215 million.

“We expect global tyre markets will remain highly competitive. Our focus on innovation and new products positions us well in such an environment. The Americas segment volume growth has been solid thus far in 2015, and raw material costs have continued to decline. In the United States, it appears the inventory purchased ahead of the tariff announcements largely has been worked through. We anticipate seeing more normal order patterns and will build inventory in our seasonally weak second quarter for sell through in our typically stronger third and fourth quarters. For the full year, we continue to expect to meet or exceed industry unit volume growth in the US,” Armes noted.

“In Europe, the economies remain sluggish. While the outlook for tire growth in China is strong longer term, the domestic market currently has been impacted by oversupply due to fewer exports to the US because of the tariffs. For the full year, we anticipate operating profit in our International businesses will be approximately breakeven. For the company overall, we expect to deliver full year operating margin in a range of eight per cent to ten per cent,” Armes concluded.

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