Cooper Tire & Rubber Co. reported net income of $8 million on net sales of $601 million for the first quarter ended March 31, 2018. That compares to income of $30.5 million on sales of $643 million for the year-ago period.
Operating income for the quarter was down 54.4%, from $58 million to $26 million. (The company restated its operating profit from 2017 to reclassify $9 million of other pension and postretirement benefit costs out of operating profit.)
The company’s net income-to-sales ratio was 1.3%. For comparison, the company's income-to-sales ratio for the year-ago quarter was 4.7%.
The company’s first quarter U.S. volume performance generally aligned with U.S. Tire Manufacturers Association (USTMA) trends, according to Cooper President and CEO Brad Hughes.
Hughes says the trends ““were weaker than expected due to slow consumer sell-out within the industry that continued from 2017. The decrease in our first quarter operating profit, adjusted for one-time items, was more than explained by weaker volume and higher manufacturing costs as we made production adjustments to keep our inventories in line with current market conditions.”
Hughes says he expects the company’s performance to be “choppy in the coming months as As the tire business navigates through current weak U.S. demand and raw material prices inch up.
“However, we believe that underlying macroeconomic factors support improvement in tire industry demand within the second half of this year. We expect that this, together with our initiatives to increase unit volumes and reduce costs, will drive improvements in our operating profit in the second half of the year. Our initiatives will be detailed at our investor event on May 11. Cooper has a strong brand with great consumer loyalty and we are poised to succeed when conditions improve and our efforts take hold.”
There was good news in the company’s truck and bus radial tire (TBR) business, which was up 25% in the first quarter. Hughes says the company’s TBR business was “well above” industry trends.
“In March, we announced a Cooper branded TBR product line to complement our successful Roadmaster brand, and it has been very well received. In addition, we are encouraged by the profitability within our International segment, which continues to grow and demonstrate the value of our flexible global footprint. In the long-term, we believe Cooper will continue to be a strong global tire competitor that delivers value to our shareholders."
Operating profit for the first quarter 2018 included $12 million of higher manufacturing costs and $11 million of lower unit volume. This was partially offset by $6 million of lower raw material costs, net of price and mix. Higher manufacturing costs reflect decisions to align production to demand and control inventory levels.
Key reasons income fell
The company says multiple unique items impacted the comparison of first quarter 2018 to first quarter 2017. These are:
- The non-recurrence of the Q1 2017 tariff reversal created an unfavorable variance of $22 million in the first quarter of this year. This was partially offset by $7 million of costs related to tornado damage at a North American distribution center in 2017 and $3 million of net insurance recoveries in the first quarter of 2018 related to that event.
- There were $3 million of higher other costs in the quarter. Other costs included expenses related to workforce actions in the U.S. and Mexico as well as start-up costs related to two new U.S. distribution warehouses that will be operational this year.
- Cooper's first quarter raw material index decreased 5.8% from the first quarter of 2017. The raw material index increased 2.3 percent sequentially from 153.1 in the fourth quarter of 2017 to 156.6 in the first quarter of 2018.
Americas Tire Operations
Sales declined in Cooper’s Americas Tire Operations in 2018’s first quarter. The business recorded net sales of $485 million versus $531 million in the first quarter of 2016, a decrease of 8.7%. In addition, operating income was down 55.9%, from $71 million to $31 million.
The company broke out the decline in net sales as follows:
- $30 million of lower unit volume;
- $19 million of unfavorable price and mix; and
- $3 million of favorable foreign currency impact.
Segment unit volume decreased 5.6% from the prior year, with unit volume decreases in North America and Latin America.
Cooper’s first quarter total light vehicle tire shipments in the U.S. decreased 6.4%. The USTMA reported that its member shipments of light vehicle tires in the U.S. were down 5.3%. Total industry shipments (including an estimate for non-USTMA members) decreased 1.9% for the period. The U.S. market performance reflected weaker than expected sell-out volume and corresponding pricing and promotional activity.
The company explained the decline in operating income as follows:
- $10 million of lower unit volume;
- $12 million of unfavorable manufacturing costs, related to lower unit volumes; and
- $14 million of unfavorable price and mix, which was offset by favorable raw material costs of $14 million.
Outlook for the second quarter
"Operating profit margin performance in the second quarter is expected to be similar to the first quarter, as we continue to navigate through a turbulent market environment. However, we expect industry demand to improve in the back half of the year,” says Hughes.
“We expect that this, along with our actions to drive volume and reduce costs, will result in operating profit margin approaching our stated 9 percent to 11 percent range for the second half of 2018,” Hughes said. “In addition, with growth in the International segment, led by Asia, we expect Cooper to generate full-year unit volume growth on a consolidated basis compared to 2017.”
