Cooper Tire: Raw material costs deflate profit in Q1 2017
Although its revenues remained at roughly the same level as a year earlier, Cooper Tire & Rubber experienced a 46.2 per cent year-on-year drop in operating profit during the first quarter of 2017. The largest contributor to this unfavourable result was raw material costs which, net of price and mix, removed $42 million from the result.
Cooper Tire & Rubber reported first quarter net sales of US$643 million, a year-on-year decrease of 1.0 per cent. Unit volumes in the three months to 31 March 2017 were up 2.9 per cent, with a unit volume decline of 7.4 per cent in the Americas business segment, which was driven by a decrease of 9.3 per cent in North America, more than offset by unit volumes in the International segment. These were up 31.4 per cent year-on-year.
First quarter 2017 operating profit was $49 million, compared with $91 million for the same period last year. Operating profit decreased as a result of the abovementioned $42 million in unfavourable raw material costs, net of price and mix, $10 million of higher manufacturing costs, $5 million lower unit volume, $3 million of higher other costs, including certain tornado damage expenses, $2 million of negative foreign currency impact and $2 million of unfavourable SG&A. These higher costs were partially offset by the $22 million reversal of preliminary TBR tariffs, which were incurred in 2016. Ongoing tariff costs are included in raw material costs in the quarter when incurred.
“As anticipated, the first quarter was impacted by a dramatic increase in raw material costs,” states Brad Hughes, president and chief executive officer of Cooper Tire & Rubber. “For Cooper, which is on the LIFO accounting method in the US, increased raw material costs reduced profits by $50 million, which was partially offset by price and mix improvements of $8 million. In addition, US unit sales volume was down as a result of the timing of price increases and aggressive promotional activity by competitors, as well as overall weaker industry sell-out volumes. We incurred higher manufacturing costs in North America as we managed our inventory levels by reducing production. On the positive side, our US TBR volume was up 32 per cent, Latin America region unit volume was up nearly 16 per cent, and International segment volume was up 31 per cent. Combined, global unit volume increased nearly three percent year-over-year, and we generated a 16.6 per cent return on invested capital for the trailing four quarters. We believe Cooper is well positioned as we head into the remainder of 2017.”
Hughes describes Cooper Tire’s inventory levels as being “in good shape” as the company entered the second quarter of the year, and he sees raw material costs as starting to level off. “We expect pricing to continue to adjust to the new raw material cost environment and promotional activity to continue,” he adds. “Our US unit volume should improve relative to the industry and we anticipate that our March price increases will deliver more benefit with a full quarter’s impact.”
Looking ahead to the second half of the year, Cooper Tire anticipates that the industry environment will stabilise, however it doesn’t express any expectation of growth. The company foresees that its US unit volumes will be in line with the industry, helping the tyre maker to achieve the “high end” of its eight to ten per cent operating profit margin range for the full year. “We are pleased with the unit volume growth in our International segment and are actively addressing the opportunities we have to improve unit volume in the US. With our strong business model, great teams around the world, and our global manufacturing footprint, Cooper remains well positioned to continue to succeed across a wide range of business conditions,” Hughes concludes.
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