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Raw Material Costs Hit Cooper Tire Hard in the 1Q

Posted on April 27, 2017
"We incurred higher manufacturing costs in North America as we managed our inventory levels by reducing production," says Cooper Tire CEO and President Brad Hughes.
"We incurred higher manufacturing costs in North America as we managed our inventory levels by reducing production," says Cooper Tire CEO and President Brad Hughes.

Rising raw material costs significantly affected Cooper Tire & Rubber Co.'s financial results for the worse in the first quarter of 2017.

Cooper posted net income of $30.5 million on net sales of $643 million for its first quarter ended March 31, 2017. That compares to income of $59 million on sales of $649.7 million for the same period last year.

Operating income for the quarter was down 46.5%, from $91.1 million to $48.6 million. The company's net income-to-sales ratio was 4.7%.

"As anticipated, the first quarter was impacted by a dramatic increase in raw material costs," says Brad Hughes, CEO and president. "For Cooper, which is on the LIFO accounting method in the U.S., increased raw material costs reduced profits by $50 million, which was partially offset by price and mix improvements of $8 million.

"In addition, U.S. 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 U.S. TBR volume was up 32%, Latin America region unit volume was up nearly 16% and International segment volume was up 31%," says Hughes. "Combined, global unit volume increased nearly 3% year over year, and we generated a 16.6% return on invested capital for the trailing four quarters."

Americas Tire Operations

Cooper's Americas Tire Operations also suffered by comparison. It recorded net sales of $531 million vs. $579 million for 1Q 2016, a decrease of 8.3%. In addition, operating profit was down 40.4%, from $106 million to $63 million.

The company says the decline in net sales was due to the following:

* lower unit volume,

* $4 million of negative foreign currency impact, and

* $1 million due to unfavorable price and mix.

Segment unit volume decreased 7.4% from a year ago, with a double-digit increase in unit volume in Latin America that was more than offset by decreased unit volume in North America.

Cooper’s total light vehicle tire shipments in the U.S. decreased 11.3% due to the competitive pricing and promotions environment in which companies adjusted their prices to address rising raw material costs, as well as weaker industry sell-out volumes.

The Rubber Manufacturers Association (RMA) reported that its member shipments of light vehicles in the U.S. were up 1.4%. Total industry shipments -- including an estimate for non-RMA members -- increased 1.1% for the period.

Cooper’s TBR tire shipments for the U.S. were up 32.4% during the first quarter, "significantly outperforming both the industry and the RMA," according to the company.

To manage inventory based on lower unit volume in the U.S., the company curtailed production levels, which more than offset improved manufacturing cost efficiencies achieved during the period and resulted in $12 million of unfavorable manufacturing costs in the first quarter.

Full-year projections

"We believe Cooper is well positioned as we head into the remainder of 2017,” says Hughes. "Going into the second quarter, our inventory levels are in good shape and raw material costs have begun to level off. We expect pricing to continue to adjust to the new raw material cost environment and promotional activity to continue. Our U.S. 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.

"For the second half of the year, we anticipate that the industry environment will stabilize and that our U.S. unit volume will be in line with the industry, helping Cooper achieve the high end of our 8 to 10% 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 U.S.

"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," he added.

Related Topics: Brad Hughes, Cooper financials, raw material costs, RMA

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