Cooper Tire & Rubber Co. sold 4.9% fewer tires in the second quarter of 2019 compared to a year ago, and the company says it no longer expects unit volume growth for the full year. Light vehicle tire shipments in the U.S. fell 4%.
The lower volumes cost Cooper $6 million for the quarter.
“While we are not satisfied with the lower unit volume in the second quarter, our strategic initiatives are taking hold, and we are confident that they will contribute more meaningfully to unit volume growth in 2020,” CEO and President Brad Hughes said. (Those strategic initiatives include retail-facing partnerships with both Monro Inc. and Walmart Inc., plus its relationship with American Tire Distributors Inc.)
Details on the second quarter
For the three month period, Cooper reported net sales of $679 million, down 2.8% from $698 million in 2018. Sales in the Americas were down 0.4%, at $582 million compared to $584 million. The much bigger drop was reported in its international business, where sales fell 17.5%, to $139 million compared to $168 million a year ago.
Operating profit in the Americas improved for the period to $47 million compared to $40 million, while the international segment recorded a loss of $1 million, compared to a profit of $6 million in 2018.
“Our second quarter operating profit margin improved sequentially from the first quarter, and the Americas segment delivered improved operating profit despite new and incremental tariffs this year,” Hughes said. “Our International segment was challenged by the ongoing decline within the new vehicle market in China and a weak replacement tire market in Europe.”
New tariffs on tires imported into the U.S. from China cost Cooper $13 million during the quarter — up from $10 million in the first quarter. Hughes said the tire maker still expects the higher tariffs — which apply to both passenger and truck tires, as well as some raw materials and equipment — to cost the company $50 million by year’s end.
After the tariffs were imposed in February, Cooper expected price hikes on TBR tires to follow.
“Our expectation was that there would be price increases on TBR tires in the U.S. market to help offset these costs,” said Chris Eperjesy, chief financial officer at Cooper. “While we and others have implemented price increases, we have yet to see the broad industry pricing that we expected.
“Cooper will remain market facing with our TBR pricing, and while we continue to believe that strong demand for TBR tires relative to supply will eventually result in industry pricing, we do not expect pricing actions will occur as quickly as previously assumed.”
That makes the company’s investment in a manufacturing joint venture project with Sailun Vietnam Co Ltd. all the more critical. The two companies are building a tire factory to produce truck and bus radial (TBR) tires in Vietnam. Production is on schedule to begin in 2020, Hughes said. As of the second quarter of this year, the company has invested $49 million into that joint venture, Eperjesy said.
Outlook
“Increased U.S. tariff costs and delayed timing of anticipated commercial truck tire price increases, as well as weakness in the China new vehicle and Europe replacement tire markets, are expected to impact the remainder of the year,” said Hughes. “The Americas segment, excluding TBR tariffs, is still generally in line with previous expectations. On a consolidated basis, we anticipate growth throughout the year in operating profit margin.”
Still, Cooper adjusted its guidance for the full year:
-The company no longer expects full year unit volume growth compared to 2018;
-The operating profit margin will improve throughout the year, with full year operating profit margin in line with 2018 at 5.9%;
-Capital expenditures will range between $180 million and $200 million. (This doesn’t include capital contributions related to the company’s joint venture with Sailun Vietnam or other potential manufacturing footprint investments;
-An effective tax rate to range between 23% and 26%; and
-Changes related to the restructuring of Cooper’s Melksham, England tire factory will be between $8 million and $11 million.
Note: the expectations include tariffs that are already in place, but don’t reflect additional tariffs that continue to be considered but haven’t yet been imposed.
