Now that the sale of Cooper Tire & Rubber Co.’s share of Cooper Chengshan (Shandong) Tire Co. Ltd. is a given, Cooper is turning its attention to securing alternative sources of radial truck and bus tyres to complement the expected off-take production from Chengshan Group Co. Ltd., Cooper Tire Chairman, CEO and President Roy Armes told analysts last week.
Among the options Cooper could consider, Mr. Armes said, include: agreeing with another Chinese supplier; making an acquisition; buying a facility and running it under Cooper’s control; or adding capacity to its wholly owned Cooper Kunshan Tire Co. Ltd. operation in Kunshan, China.
“We have the financial wherewithal to take any of those paths, or a combination of those paths,” Mr. Armes said. “We’re focused on increasing our business in China because it’s a market that’s growing strongly in both OE and replacement tyres and it’s the largest TBR market in the world.
Mr. Armes noted that Cooper Chengshan is Cooper’s only source of truck and bus tyres, making finding an alternative source for TBR tyres a high priority so it has options when its supply agreement with CCT runs out, ostensibly in 2018.
He said Cooper had planned to explore alternative sources with or without its CCT joint venture.
“The most important thing to remember is that our Asian strategy remains intact,” he said, “and we intend to have a significant presence in China.”
The CEO said Cooper is going to be more cautious with these alternatives to ensure it selects the correct one for the long term.
“Obviously there are challenges any time you go out and try to replace a business,” Mr. Armes said. “We’ve been very, very pleased with some of the discussions and dialogue we’re having with some potential partners.
“There is enough potential capacity out there globally that I think there are going to be some options for us to continue to grow in China, and we’re in that process as we speak.”
Mr. Armes confirmed during the Nov. 7 third quarter conference call that the proposed sale of its 65-percent interest in Cooper Chengshan to Chengshan Group will proceed in accordance with the process it set forth earlier this year after reviewing the documentation and working with Chengshan in confirming the necessary steps to move forward.
Cooper Tire said it had received notice and related documentation on Chengshan’s intention to purchase the CCT joint venture in an Oct. 8 release.
“China will continue to be an important part of our growth strategy, whether or not we own the joint venture,” Armes said. “Should our joint venture partner complete the transaction and buy our share of CCT, we have offtake rights through mid-2018.”
Cooper’s third quarter 10-Q filing with the Securities and Exchange Commission listed the valuation of the CCT, determined by an independent firm, at about $437.7 million. While Cooper did not specify Chengshan’s exact offer, a 65-percent stake would amount to about $284.5 million.
Brad Hughes — senior vice president, CFO and treasurer, and president of Cooper’s international operations — said that if Cooper sells its interest in CCT, the firm would continue to earn the profits on CCT-produced units that it sells through other Cooper business units, citing Roadmaster tyres sold through Cooper U.S. as an example.
However, Cooper would lose the profits that CCT earns on selling tyres to other Cooper business units and on any tyre sold directly to the customer by CCT, Mr. Hughes said.
Cooper has not shared specific financial information with regards to the CCT transaction for competitive and legal reasons, Mr. Hughes said, but the firm plans to disclose such specifics at the appropriate time.
Cooper did not provide a projection as to when the CCT transaction would be complete. Mr. Hughes said the next step in the process is receiving government and regulatory approval.
The firm has not determined what it will do with the proceeds from the CCT transaction.
“We’re going to continue to look at what the best thing to do with that cash will be for our shareholders,” Mr. Hughes said. “But certainly part of that will be a consideration for what we need to do in China for our TBR business for investments. If those don’t materialize, we’ll begin to look at other investments in the near-term.”
Solid third quarter
Cooper Tire’s net income increased to $48 million for the third quarter, up from a slight loss last year. Net sales also increased 11 percent to $920 million compared to the same period in 2013.
For the nine-month period, Cooper Tire’s net income increased to $131 million from $91 million in 2013. Sales also increased to $2.61 billion from $2.58 billion.
Cooper Tire reported $336 million in cash and cash equivalents compared with $310 million at Sept. 30, 2013, and $327 million at June 30, 2014.
“Our third quarter performance continued the solid trends we saw during the first half,” Armes said in a statement. “Even after adjusting for the unusual issues last year, we had strong unit volume growth, particularly in the Americas segment.”
The firm’s third quarter in 2013 was impacted by a number of unusual circumstances, Cooper Tire said. Labor actions at CCT resulted in lower production and shipments; higher costs; and lower volume associated with shipping inefficiencies related to ERP system implementations; and costs related to the then-pending merger with Apollo Tyres Ltd., which subsequently was terminated.
Cooper Tire said many of the year-over-year comparisons are not representative of the business under normal conditions.
Cooper Tire said it experienced higher unit volume of $133 million, partially offset by unfavorable price and mix of $49 million. Third quarter 2013 also included $122 million in reduced unit volume associated with supply issues at CCT.
Net sales for Cooper’s Americas Tire Operations segment increased 10 percent to $694 million from $633 million in 2013. Unit shipments increased 11 percent compared to 2013, which saw $29 million in lower unit volume associated with the CCT labor issues. Cooper said the increase was driven by sales of new, higher margin passenger and light truck products introduced in the past year.
Net sales for the nine-month period increased 2 percent to $1.9 billion in the Americas.
The firm’s International Tire Operations’ net sales increased 19 percent on the quarter to $313 million from $264 million in 2013. The increase represents $116 million from the absence of volume related to CCT labor issues, Cooper said.
For the nine-month period, international net sales decreased 1 percent to $950 million.