By LOU WILIN
Cooper Tire & Rubber Co. posted first-quarter profits of $45.4 million, a 19 percent decline compared to its record-setting results a year earlier, the company said Friday.
Earnings amounted to 71 cents per share, down from 87 cents per share in the January-March quarter a year ago.
Sales declined 7.6 percent to $796.5 million.
Investors were impressed. Cooper’s stock price rose nearly 7 percent Friday, closing at $27.48.
“Cooper is off to a strong start in 2014 … Our first-quarter operating profit is the second-best for a first quarter in our company’s history, topped only by last year’s first quarter, when we set an all-time profit record,” said Chief Executive Officer Roy Armes.
Cooper Tire’s profitability was inflated in some recent quarters by reduced raw material costs for rubber, steel and oil-derived materials, said Kirk Ludtke, managing director of CRT Capital Group, Stamford, Connecticut.
Cooper has had to share some of the savings by cutting prices to remain competitive, Ludtke said. Cheap Chinese tire imports since a tariff expired in 2012 have made the lower end of the tire market more competitive. Cooper sold more tires last quarter, but it also sold some at reduced prices to be competitive.
But more raw material cost reductions last quarter softened the blow.
“They got a big tail wind from raw material costs,” Ludtke said.
More good news: It appears the price-cutting in the war for market share is settling down, said Brad Hughes, Cooper Tire’s chief financial officer.
“The impacts from the Chinese tariffs going away and some of the Chinese manufacturers trying to regain their position in the U.S. market … that initial re-entry into the market is stabilizing, both from a volume and a price perspective,” Hughes said.
“While we had been watching pricing catching up with the reduction in raw material costs that continued through ’13 and into the first quarter of ’14, that as well seems to be stabilizing,” Hughes said. “So what you are seeing in our numbers is kind of the last bit of that catch-up right now. As we look forward, it does appear to be relatively stable.”
In fact, 12.2 cents on every dollar in sales in North America became profit last quarter for Cooper. A year earlier, 11.9 cents on every dollar in sales in North America became profit.
Overall profit in North America declined 4 percent from a year earlier to $68.6 million.
North America sales decreased 6.5 percent to $563.5 million, though 5 percent more tires were sold.
In the United States, Cooper Tire sold 6.8 percent more car, light truck and sport utility vehicle tires than a year earlier. That outpaced the 4.6 percent growth of the entire industry.
Cooper’s International Tire Operations profit fell 23 percent to $23 million. Sales declined 9 percent to $310 million with price cuts and 2 percent fewer tires sold, with declines in both Asia and Europe.
The reductions in Asian tire shipments were “lingering effects of the earlier labor disruptions at our Cooper Chengshan (Shandong) Tire Co. joint venture in Rongcheng, China,” Cooper stated.
Production and financial reporting resumed last quarter at the factory, which thwarted Cooper’s attempted sale to Apollo Tyres of India last year. But the plant’s vehement opposition to the sale, which was favored by the Cooper board and shareholders, left wounds. Cooper Tire in January announced a plan in which it and its Chinese partner will end or mend its fractured partnership.
On Friday, Cooper Tire leaders said efforts to resolve the Chinese plant’s future are progressing. Cooper and Chengshan Group have agreed that one of the companies will buy the other’s interest in the factory, or will keep the current structure in which Cooper owns 65 percent.
One way or another, Cooper will keep earning profits in the world’s fastest-growing tire market, Armes said.
“Regardless of the ownership outcome, China is and will continue to be an important part of Cooper’s long-term growth strategy,” Armes said.
If Cooper sells its interest, it will gain a war chest of at least $283 million to invest elsewhere, said Keith Moore, managing director and event-driven strategist for MKM Partners, Stamford, Connecticut.
An independent valuation firm may decide Cooper’s interest is worth even more, and Cooper would receive more.
Cooper would have “added flexibility to enter into acquisitions, new offtake relationships, or possible greenfield development of additional production capacity anywhere around the world to support the expansion of our business,” Armes said.
The Chinese plant will have to keep making Cooper-brand products for at least three years, too, Cooper said.
If Cooper buys Chengshan’s minority interest, worth at least $152 million, “We will have the certainty of a wholly-owned asset with an experienced team in place that will continue our China growth strategy,” Armes said.
Either way, Cooper will keep employing sales, marketing and technology forces in China, and retain its other Chinese factory, Cooper Kunshan Tire Co. outside Shanghai, he said. Cooper is the sole owner of that one.
Cooper Tire’s partnership with Chengshan Group went awry last year when Cooper Chengshan Tire Co. and its unionized workers sabotaged the sale to Apollo. The Chinese plant stopped producing Cooper-brand tires and withheld the plant’s financial information from Cooper Tire leaders.
Without the financial information, Cooper Tire could not release information about its performance in the third quarter of 2013. That prevented lenders from releasing financing that Apollo needed to buy Cooper.
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