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Cooper's 2Q Results Reflect Market Turbulence

Posted on August 4, 2017
"Importantly, we ended the quarter on a strong note, growing U.S. volume over the prior year and outperforming the industry in June," says Hughes.
"Importantly, we ended the quarter on a strong note, growing U.S. volume over the prior year and outperforming the industry in June," says Hughes.

Brad Hughes, CEO and president of Cooper Tire & Rubber Co., says "raw material cost variability, weak trends in retail sell-out of tires to consumers, elevated inventory in the channels and a fluid pricing and promotional landscape" were challenges that affected the company's second-quarter 2017 fiscal year results.

Cooper Tire posted net income of $45 million on net sales of $721 million for the second quarter ended June 30, 2017. That compares to income of $71.3 million on sales of $740 million for the same period in 2016.

The company’s 2Q ’17 income-to-sales ratio was 6.2%.

Operating profit was comparatively down 32%, from $110 million to $75 million. Cooper says the decrease reflects “a volatile raw material cost, product pricing, and promotional market environment.” Operating profit margin dropped from 14.8% of net sales to 10.4%.

“Cooper reaffirms our guidance for full-year 2017 operating profit margin to be at the high end of our previously projected 8% to 10% range,” says Hughes. “This is based on a better than expected second quarter operating profit margin of 10.4%, and a second half that we believe will also come in at the high end of that range.”

He says improved volumes in the U.S. from the first quarter to the second quarter. “Importantly, we ended the quarter on a strong note, growing U.S. volume over the prior year and outperforming the industry in June. Cooper also achieved strong year-over-year second-quarter unit volume increases in Latin America and Asia, as well as in truck and bus radial tires.”

Consolidated unit volume decreased 0.5% compared with a year ago, with strong growth in the International segment (up 11.1%) that was offset by lower volume in North America (down 4.4%). The decrease in North America did not overcome a modest unit increase in Latin America.

The company repurchased nearly $21 million of its common stock during the second quarter of fiscal 2017 at an average price of $36.55 per share. Average shares outstanding have decreased 4.3% from the second quarter of 2016.

Americas Tire Operations, 2Q 2017 vs. 2Q 2016

Net sales: down 6%, from $655 million to $615 million.

Operating profit: down 28.3%, from $116 million to $83 million.

Operating margin: down 4.2 percentage points, from 17.7% to 13.5%.

Second-quarter net sales in the Americas segment declined 6% as a result of $44 million of lower unit volume and $1 million of negative foreign currency impact, partially offset by $5 million of favorable price and mix, primarily due to net price increases related to higher raw material costs.

Segment unit volume decreased 4.4% from the prior year, with a modest unit volume increase in Latin America that was more than offset by decreased unit volume in North America.

Cooper’s second quarter total light vehicle tire shipments in the U.S. decreased 10% in a competitive pricing and promotional environment, as the industry experienced weak sell-out volumes.

The U.S. Tire Manufacturers Association (USTMA), formerly the Rubber Manufacturers Association, reported that its member shipments of light vehicle tires in the U.S. were down 2.2% in the quarter. Total industry shipments (including an estimate for non-USTMA members) decreased 1.4% for the period.

Cooper’s TBR tire shipments for the U.S. were up 27.4% during the second quarter, significantly outperforming both the industry and USTMA member results.

Full-year outlook

“Current industry conditions are likely to persist into the third quarter, and Cooper will continue to manage our inventory levels in line with demand,” says Hughes.

“Raw material costs are trending down at present, but may remain volatile, and we expect that uncertain consumer demand may contribute to continued high levels of promotional activity. In this environment, we will remain market facing in our pricing and promotions and expect to deliver year-over-year unit volume increases in both the Americas and International segments in the second half of 2017.”

Management expectations for the full year 2017 are as follows:

* Raw material costs are forecast to be down sequentially in the third quarter of 2017, and then to stabilize throughout the balance of the year.

* For the full year 2017, unit volume growth is expected in the International segment and in Latin America. Unit volume in the U.S. is expected to be in line with the industry for the second half of 2017.

* The International segment is expected to continue to improve profitability relative to 2016, inclusive of the recently acquired majority interest in Qingdao Ge Rui Da Rubber Co. (GRT).

* The effective tax rate for full year 2017 is expected to be in a range between 30% and 33%.

* Capital expenditures are expected to range between $200 and $220 million for the year.

For more information on Cooper Tire's financial results, check out these links:

"Raw Material Costs Hit Cooper Tire Hard in the 1Q."

"Cooper Tire Increases its Profitability in 2Q 2016."

Related Topics: Brad Hughes, Cooper financials, Qingdao Ge Rui Da Rubber Co., raw material costs, tire shipments, USTMA

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