Here are three takeaways from Cooper Tire & Rubber Co.’s quarterly earnings report Tuesday and company officials’ public comments:
Cooper is optimistic a two-year slump in the tire industry is ending and 2019 results will get stronger farther into the year.
A trend of higher raw materials costs and lower tire demand, which has been a drag on Cooper and other tiremakers, appears to be ending, said Brad Hughes, chief executive officer for Cooper Tire.
Costs for raw materials, like rubber, steel and oil-derived materials, are expected to be higher this quarter than they were a year earlier, but lower than in the previous quarter, said Hughes. Raw materials prices also declined in the latter half of 2018.
“We are optimistic about 2019 as our business model is strong and our strategic initiatives are well underway,” Hughes said. “We expect the full year 2019 to include modest global unit volume growth compared to 2018, improving operating profit margin throughout the year, with full-year operating profit margin exceeding 2018.”
“Overall, we believe that with industry conditions improving, Cooper is well-positioned for the future,” he said.
Cooper bases its confidence for 2019 on the U.S. market.
“Our confidence in our volume growth is being built off what our expectation (is) in the U.S market, where we do think that we do have a number of initiatives that are going to start to contribute this year,” Hughes said.
Cooper’s tire sales in the United States improved throughout the past year, the company reported. Sales volume in the third and fourth quarters last year in the U.S. surpassed the numbers posted in the third and fourth quarters of 2017, respectively, he said.
By contrast, sales volumes in China declined in the latter part of 2018 because of weaker economic conditions, Hughes said. But it appears the Chinese government is considering actions to stimulate its automotive and parts industry.
Cooper’s results were better than a casual glance would indicate:
As a result of Cooper Tire announcing in December that it was forming a joint venture with Sailun Vietnam Co. to build a truck and bus radial tire factory in Vietnam, Cooper sustained a $34 million charge in the fourth quarter.
The so-called goodwill impairment charge results from the fact that production capacity to be created by the new plant will decrease expected production requirment for Cooper’s Qingdao Ge Rui Da Rubber Co. (GRT) joint venture in China.
Construction of the $220 million to $240 million manufacturing plant in Vietnam is expected to begin soon with tire production starting in the first half of 2020. It will be located near Ho Chi Minh City, at the site of Sailun Vietnam’s existing operations. Cooper will own 35 percent of the new venture.
Despite the goodwill impairment charge, the joint venture in Vietnam is an important step.
“While there is an impairment charge, we are excited about this addition to our manufacturing footprint which diversifies our sourcing to protect against risk, including tariffs,” said Chris Eperjesy, chief financial officer.