Cooper records 22% increase in sales, $21 million loss in 2Q
Cooper Tire & Rubber Co. reported a net loss of $21 million on consolidated net sales of $625 million for the three-month period ended June 30, 2006. That compares to a net loss of $6.9 million on sales of $511 million for the same period one year ago.
The 22.3% increase in sales was driven largely by the following:
* the acquisition of Cooper Chengshan (Shandong) Passenger Tire Co. Ltd. and Cooper Chengshan (Shandong) Tire Co. Ltd. The latter was finalized on Feb. 4, 2006.
* improved product pricing and mix.
Cooper Chengshan delivered solid results, according to the company, and added $110 million in sales during the quarter. Improved pricing and mix in North America and Europe added $36 million.
These increases were partially offset by the impact of continuing weak replacement tire markets and lower unit sales in North America and Europe.
Cooper says the "extraordinarily weak" replacement tire demand in the North American market and the resultant high inventories prompted it to reduce production during the quarter, resulting in $8 million in unabsorbed overhead expense. In addition, the company announced the planned closure of its manufacturing facility in Athens, Ga., which produced tire retread products and a relatively small number of racing tires. The company recorded $8 million of restructuring costs in the second quarter in connection with the planned closure.
For the six-month period ended June 30, 2006, Cooper posted a net loss of $26 million on sales of $1.2 billion. Sales were up 19% compared to the first half of 2005. The company's first-half operating loss was $30 million.
North American Tire operations
Cooper's North American Tire operations continued to gain share during the quarter in a very difficult market, according to the company. While the Rubber Manufacturers Association reported preliminary light vehicle replacement tire shipments were down 7% in the second quarter, Cooper's total light vehicle tire shipments were down approximately 5%.
Cooper says it gained market share in virtually all product categories including broad-line, high performance, ultra-high performance, SUV and light truck tires. "Importantly, strong market share gains were in the Cooper brand product lines, contributing to an improved product mix."
Year-over-year increases in premium product sales such as SUV and performance tires also contributed to the positive mix change. Unit sales of SUV tires increased by 2%, and unit sales of high performance and ultra-high performance tires increased by more than 14% during the quarter.
In total, Cooper's North American Tire operations reported sales of $463 million in 2Q 2006, up 1% compared to sales in the second quarter of 2005. The company says this increase is attributable to improved pricing and mix, offset by lower unit sales.
Operating results for the North American Tire operations declined year over year as a result of several key operating factors. In addition to the $8 million in restructuring charges for the Athens plant closure and the $8 million in unabsorbed overhead from temporary plant shutdowns to reduce inventory, lower unit sales reduced operating profit by $7 million. Higher commodity prices further reduced operating profit by $27 million. These were partially offset by $21 million in improved pricing.
North American Tire operations generated operating losses of $30 million in the second quarter and $36 million in the first six months of 2006.
International Tire operations
The company's International Tire operations reported sales of $186 million in the quarter, an increase of 124% compared to the second quarter of 2005. The acquisition of Cooper Chengshan contributed $110 million in sales during the period as sales remained strong within China and in certain export markets.
Sales for Cooper Europe were down about 9% following the record sales in the first quarter and as a result of unfavorable changes in foreign currency exchange rates. Total unit sales for the International Tire operation more than doubled compared to the second quarter of 2005.
Operating profit for the International segment was $8 million, compared to $3 million in the second quarter of 2005. Cooper Chengshan added more than $9 million in operating profit. Improved pricing and mix added $5 million. These were partially offset by higher raw material costs, expenses related to the startup of Asian operations, lower overall unit volume in Europe, and higher utility and other plant costs.
For the first six months of the year, Cooper's International Tire operations recorded sales of $311 million and operating profit of $11 million. That compares to $162 in sales and $3 million in operating profit in the same period a year ago.
Cooper's management team, minus former Chairman, CEO and President Tom Dattilo, will discuss the financial and operating results for the quarter in a conference call today at 11 a.m. Eastern time. Dattilo resigned at the company's recent board of directors meeting. Byron Pond, a board member since 1998, is the interim CEO.
Interested parties may access the audio portion of the conference call on the investor relations page of the company's Web site at www.coopertire.com.
"The replacement tire market conditions in North America remained challenging in the second quarter," says Pond. "Replacement tire demand was soft, manufacturers' inventories were increasing, and raw material prices continued to escalate relentlessly. In this tough environment, we focused on customer service and sales of our premium products and were able to gain market share and improve our overall product and customer mix.
"The North American Tire Division curtailed production to adjust inventory levels rather than use price discounts in an attempt to temporarily stimulate demand. Our shutdowns did have the intended result of bringing our inventory more in line with our plans and anticipated demand.
"We are very pleased with the results of Cooper Chengshan as sales remain strong and margins are solid," he says. "We are working to further improve the efficiency and increase the capacity of Cooper Chengshan in order to take advantage of the tremendous opportunities in China. We are currently in the process of test marketing Cooper brand premium tires in China, and we are excited about our future in China and the surrounding region."
Based on historical cyclical patterns and annual seasonal patterns for the replacement tire industry in North America, Cooper expects replacement tire demand to improve somewhat in the second half of the year. However, the company also anticipates continued increases in the prices of its key raw materials as the year progresses.
In an effort to offset these increasing material costs, the company implemented a price increase of up to 7% on all product lines in its North American Tire operations effective July 1, 2006.
Cooper also anticipates improvement in European markets and continued strong growth in China over the next six months. Initiatives to increase total production in China will continue at Cooper Chengshan, through outsource supply arrangements, and through the construction of the Cooper-Kenda Rubber Industrial Co. Ltd. joint venture plant. (The Cooper-Kenda plant will be ready to begin production during the fourth quarter of 2006.)
"While we are not satisfied with the results of (the second quarter), we are confident that our fundamental strategy is correct," says Pond. "We are putting more effort into cost reduction and other margin improvement initiatives and are confident they will improve performance.
"Our gains in market share, the growth of our high-performance and premium products, and improving brand recognition will also help us put profit back on track. All of this, combined with further progress we are making in more efficient manufacturing and low-cost sourcing will position us well for the future."
During an investor conference call to discuss the financial results, Pond says the company is "getting down to the dust level" to improve North American plant performance. "There's a lot to gain in focusing on North American operations," he said.
Moving forward, the company plans to set aggressive internal targets and meet them, get better pricing and product mix, improve cycle times for its products and improve its cash position.
Cooper announced a quarterly dividend of 10.5 cents per share on common stock, payable Sept. 29, 2006, to stockholders of record at the close of business Sept. 1, 2006. This will mark the 138th consecutive quarterly dividend paid by the company.