Q3 2020 Cooper Tire & Rubber Co Earnings Call
<unk> rubber company's third quarter earnings call and webcast at this time, all participants on the car and the listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your telephone as a reminder, this conference call is being recorded I would now like to turn the conference.
Over to Jacob <unk>. Please go ahead Sir.
Good morning, everyone and thank you for joining the call. Today. This is Jacob drip Cooper's manager of Investor Relations I'm here today, with our Chief Executive Officer, Brad Hughes endured by like our interim Chief Financial Officer.
During our conversation today, you may hear forward looking statements related to future financial results and business operations of Cooper tire and rubber company.
Actual results may differ materially from current management forecasts and projections such differences may be a result factors over which the company has limited or no control.
Information on these risk factors and additional information on forward looking statements are included in the earnings release, we issued earlier this morning and in the company's reports on file with the FCC.
During this call we will provide an overview of the company's third quarter 2020 financial and operating results as well as a business update our earnings release includes a link to a set of slides that summarizes information included in the news release and in the 10-Q that will be filed with the FCC later today.
I didn't know that we will reference certain non-GAAP financial measures on this call. The Wink slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures.
Following our prepared remarks, we'll open the call to participants for a question and answer session now I'll turn the call over to Brad.
Thank you Jacob and good morning, everyone.
I want to start out this morning by thanking Cooper teams around the globe as well as our customers and partners for continuing to perform through the skill once certain times showing great resilience as well as a strong commitment and loyalty to Cooper.
Our third quarter performance demonstrates a level of achievement that could not be possible without many people coming together to meet the needs of the consumers who traveled through life's journey with confidence our Cooper tires.
As noted in our news release earlier. This morning, we had a very strong quarter that included net sales increased 8.6% to $765 million with increases in both the Americas and international segments.
Market share gains in the U.S., driven by Cooper's, 9% unit volume growth, which far outpaced the U.S.T.N.A. and was above the total industry.
Solid needed operating profit of $172 million or 22.4% of net sales and America's operating profit of $176 million or 26.6% of net sales.
Both represent all time records for Cooper in any quarter.
Improved performance in our international segment with unit volume that increased by over 10% and operating profit of $9 million, which compared to an operating loss of $5 million for the same period last year.
Continued significant generation of free cash flow ending the quarter with nearly $500 million of cash and over $1 billion of available liquidity.
Any way you look at it we had an outstanding third quarter and are confident that the strategic initiatives. We have been pursuing are taking hold and driving the increased unit volume with more runway for future growth.
As a reminder, these initiatives include increasing our retail presence by making Cooper products available at a greater number of retail points, where consumers want to shop for tires. This effort is going extremely extremely well.
Not only have we entered into relationships with many new retailers, but Cooper has also been able to expand and continue to grow our business with existing customers.
As stated previously Cooper tires are available in all of the top five <unk> retailers in the U.S. a direct result of our retail expansion efforts. Additionally, we've seen strong growth on E commerce platforms.
We will continue to find ways to provide consumers with easier access to our brands and products, which are increasingly in demand due to our compelling value proposition.
Another key strategic initiative is evaluating and upgrading our global manufacturing footprint with a goal to have the right technology and capabilities with the right production capacity in the right locations with a competitive cost structure.
We bought out our joint venture partner in Mexico, do take full ownership of the plant there to better leverage that low cost facility and in Asia, We launched a joint venture truck and bus radial tire plant in Vietnam.
Just ructions caused by the Corona virus, including two temporary government mandated plant closures at the Mexico facility and travel restrictions in Asia have caused some delays in the ramp up of these facilities, but we are pleased with our recent progress at both.
During the third quarter, the very strong rebound in demand for Cooper tires required us to draw down inventories to below normal seasonal levels.
Because we temporarily closed our plants for several weeks due to corona virus to safeguard the health and safety of our employees, we were not producing tires at a time when we normally would have been building inventory to meet higher seasonal demand.
As a result of these factors and others, we expect our fourth quarter unit volume performance to be constrained by supply that will fall short of the strong demand we continue to see it.
In short we have created a demand engine that will continue to strengthen as we move forward, but in the nearer term product availability to meet this increased demand will be constrained.
Of course, we will continue to leverage and take full advantage of our global production footprint and capabilities as we move ahead.
I will share more information on our outlook at the end of our call.
I will now turn the call over to Jerry for a detailed review of the quarter Jerry.
Thank you Brad let's take a look at our third quarter results on a consolidated basis sales were $765 million up from $704 million in 2019.
This 8.6% increase was driven by $55 million, a favorable price and mix $4 million of higher unit volume and $2 million of favorable foreign currency impact.
Operating profit was $172 million or 22.4% of sales compared with operating profit of $53 million or 7.5% of sales in 2019.
Third quarter operating profit compared with 2019 was impacted by the following factors, which are summarized on page six of the supplemental slide deck.
$48 million, a favorable raw material costs.
$35 million, a favorable price and mix.
$2 million of lower manufacturing costs and $1 million of higher unit volume.
These were partially offset by $5 million of higher asking expenses and $2 million of higher other costs.
The third quarter of 2020 included a $49 million benefit in operating profits from lower product liability costs related to an adjustment of the company's product liability reserves.
A similar review in the third quarter of 2019 resulted in a benefit of $4 million.
This together with the normal activity in product liability expenses and each quarter, including current case activity in legal fees resulted in a $40 million.
$40 million of lower net product liability expense for the third quarter of 2020.
Moving forward, we expect an ongoing reduction in our annual product liability expense of around $5 million per year compared to our historical annual run rate. Excluding these adjustments.
Diluted earnings per share were $2.42 compared to a diluted earnings per share of 58 cents in the third quarter of 2019.
Now moving onto our segment performance, starting with Americas tire operations.
Sales for the third quarter was $660 million up 9.6% from $602 million in 2019, as a result of $59 million of favorable price and mix and $1 million up higher unit volumes, which were partially offset by $2 million of unfavorable foreign currency impact.
Unit volume was up slightly compared to the same period a year ago.
Our U.S. light vehicle unit volume increased by 9%, while the U.S.T.M.A. decreased by 1.2% and the total industry increased by 8.1% for the period.
Total industry volumes were positively impacted by non U.S.T. numbers.
In Latin America unit volume declined due to challenging market conditions and lower production levels as we ramp up our plant Mexico offsetting U.S. unit volume performance third.
Third quarter operating profit in the Americas increased to $176 million or 26.6% of net sales compared with $68 million or 11.3% of sales in 2019.
Operating profit included $39 million, a favorable raw material costs and $34 million, a favorable price and mix.
Quarter also included $40 million of lower net product liability expense.
These were partially offset by $3 million in higher EPS gene expenses $1 million of unfavorable manufacturing and $1 million of higher other costs.
Even after excluding the 49 million dollar benefit from the product liability adjustment. This was an all time record operating profit for the Americas segment in any quarter.
Now turning to our international tire operations net sales for the quarter were $142 million up 7.5% from the third quarter of 2019.
He could have a global pandemic, we remain cautious about our ability to forecast raw material costs precisely in this period of market volatility.
Now to some corporate items other pension and postretirement benefit expenses decreased three $9 million versus the prior year.
This was primarily due to the companies improved funding position at December 31st 2019, as a result of favorable returns on plan assets.
The effective tax rate for the third quarter was 24.6% compared with 21.0% for the same period prior year.
The tax rate for the third quarter of 2020 was primarily driven by the mix of earnings among our different tax jurisdictions.
Jax raped for the third quarter of 2019 included $2 million, a discrete items that favorably impacted the tax rate.
We still expect a full year 2020 effective tax rate of approximately 25%.
Effective tax rate is based on forecasted annual earnings and tax rates for the various jurisdictions in which the company operates.
More detail on our taxes will be available in a form 10-Q that will be filed with the SEC later today.
Turning to cash flows and some balance sheet highlights.
Capital expenditures in the third quarter were $24 million compared to $50 million in the same period a year ago.
We still expect full year 2020 capital expenditures to be around the high end of a range between 140 and $160 million.
Return on invested capital was 10.2% for the trailing four quarters.
At the end of the third quarter Cooper had $496 million, an unrestricted cash and cash equivalents compared with $137 million at the end.
End of the third quarter of 2019.
You will recall that the company drew down $270 million on a revolving credit facility during the first quarter.
During the third quarter the company repaid 240 million on its revolving credit facilities and has no remaining balance outstanding.
The significant improvement in cash was primarily driven by strong operating results as well as our actions to reduce working capital capital expenditures and discretionary spending.
With that I'll now turn the call back over to Brad for our updated outlook.
Thanks Jerry.
As we noted in our press release temporary plant shutdowns related to Corona virus combined with strong demand for our products has driven our inventory levels below normal.
We are working hard to increase production to help me demand as we move into the fourth quarter still.
Still we expect that the strength of our third quarter performance will affect our ability to meet global demand for our tires in the fourth quarter due to limited inventory.
This will result in modestly lower global unit volume for the second half of 2020 compared with 2019, yes, we expect to achieve an operating profit margin within our stated midterm target of 10% to 14% for the second half of 2020, even excluding the 49 million dollar benefit for.
The adjustment to our product liability reserve model and the third quarter.
We continue to believe that the Cooper brand in our value proposition resonate strongly with consumers, especially in these uncertain times, our strategic initiatives are unlocking the relevance of our brand with customers and consumers, creating additional growth opportunities we.
We are on the right strategic path and our team will continue to drive our initiatives to achieve our long term goals.
With that let's move to your questions. Operator will you take the first question place.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too at this time, we'll pause momentarily to assemble our roster.
And our first question will come from James Picker L O with Keybanc capital markets. Please go ahead.
Hi, good morning, guys completely discrimination on a.
On a fantastic quarter here.
Can.
Can you talk with the the quarters price mix almost an eight point benefit to consolidated revenue all driven by the Americas, how much of this attributes to positive mix as opposed to price and my follow on on the industry pricing front are you seeing other suppliers.
Put through increases.
In the fourth quarter, we still one formal announcement from from a tier two just wondering if pier ones have made.
A definitive moved on pricing as far as you could say.
Well with regard to our price and mix James and thank you for acknowledging the quarter. We're really pleased with the results and pleased that we think the momentum just going to it's going to continue on this week.
Build up our production capability to meet the demand that we're seeing so odd but with regard to price a mix I mean, we're seeing the advantage or the benefits of the pricing actions that that we along with the industry took in the spring on and there has been a little bit of activity subsequent to that but I would suggest that.
From what we've seen the majority of the pricing activity in the industries related back to that spring activity and that's true for US we did on top of that on have some benefit on the mix side of the equation on as we've been suggesting we anticipated what's going to happen and so ours is.
A reasonable balance between both the price and the mix.
Got it.
Okay, and then do you expect to underperform U S. T M. A in the fourth quarter due to your inventory shortage I mean, obviously, it's a good problem to have you outperformed you assume everybody what nine points. This quarter just wondering what your thoughts are there and I mean, you should get some some manufacturing benefit.
And the fourth quarter, assuming that you're going to have all of your lines you know.
Many of your lines running at full capacity great to build back these inventory levels, yeah. So I without knowing exactly what the U S. T. Amaze Gonna do we are going to odd we have very low levels of inventory right. Now we are ramping up production and we're taking full advantage of our global footprint to make sure. We can meet as much of that is <unk>.
<unk>, but based on what we see right now we think demands going to exceed the supply that we have in with the level of inventory that we came into the fourth quarter with an we're likely on <unk>.
Going to be behind the U S. T may just because we can't provide enough product to meet the demand that's out there so.
So it's clearly not a demand situation right now it's a.
It's a production and inventory availability issue.
It is a good thing and the better news is that we're continuing to build up and ramp up our production capabilities, particularly at our Mexico facility on but it's global in terms of the response that were coming to this with.
From a production standpoint, and so I think that we may not begin to build inventories into fourth quarter, but I think we're gonna be in a in a position did to start on.
Moving in that direction as we get to the early part of next year. So for now we're going to be constrained a little bit but overall the great news is the demand and and the expectation we have four.
To continue.
Got it I'll I'll take the rest of my questions offline. Congrats again, thanks James.
Our next question will come from Rod glass with Wolf Research. Please go ahead.
Good morning, everybody.
Was hoping just maybe you can give us some color from your.
Your discussions with the channel on on what what it actually it's happening with respect to sell out so and it's pretty clear that just because of supply constraints and covid shut down that there was a lot of an inventory depletion over the course of the past couple of months, but uhm, obviously miles driven has been low and and.
Uhm are you are you able to get a sense of what really is happening in in the end markets at this point.
Well I think overall ride that time.
Remains relatively strong I mean, given the circumstances with covid and and the like that on that I think that it's probably stronger than than we as an industry anticipated I think thats started in the second quarter and I think thats continued into the third quarter.
On.
From what we can see it in industry level. The channels are still pretty tight on inventory and that suggests that there is reasonable sell out activity, even as we as manufacturers are beginning to to catch up a little bit on with the demand side now beyond that.
Given our outperformance of the U S T M, a and actually the industry on where in a little bit sharper situation right now, but we feel reasonably good about what we see with regard to to industry sell out.
Interesting and I was also hoping just.
<unk>.
Kind of analyze the drivers of of your outperformance there are probably a number of different things you you've had he's been talking for awhile about new distribution channels.
Do you have a sense of how much that contributed and there was also at least for part of the quarter I think that there were some unusual circumstances with some of the large.
Mass merchants being shut down and independents, taking a lotta market share. So is that something that did you you feel is maybe aberrational and and that would reversers. There is it is it something that's more sustainable for Ya.
No. We clearly think this is sustainable when we look at that the volume and and where it's coming from it's really across the board Rod. So we've as you know our teams have been working really hard to expand our retail distribution points and that's that's with our traditional customers and through our traditional distributor channels out too.
To our partners in some of our program retail programs on but it's also with the the larger national retailers, where would they be mass or tire retailers on so on.
With the work that our teams have been doing on we're really starting to see all those things begin to contribute to to better demanded and frankly, we're hearing again from from different types of customers and and through different channels that where our product is positioned with the value prop.
Physician that in particular are Cooper brand offers that we are really well positioned for where consumers want want to buy tires from from a price and performance perspective right now so.
We feel really good about what we're seeing and we think it's sustainable.
Terrific Thanks for that.
That's right.
Our next question will come from Brett Jordan with Jeffries. Please go ahead.
Hey, good morning, guys 40, Brett.
As you look at the the inventory availability and it's a relative tightness. How do you think about maybe price increases in the balance of the year's the bias across the board.
Well I will continue to monitor what is happening in the industry and make sure that that we're we're meeting competitive.
For our customers and with consumers, but certainly will be monitoring to see if I. If there is activity and if it if it's up we certainly will be prepared to take advantage of that on and and and we'll watch I mean, there's a lot. There's some some recent on volatility around raw material prices and and.
We'll have to see how that influences pricing activity.
We are always at the ready, but our primary an objective is to ensure that with the value proposition that we offer which I was just alluding to how well that's playing in the marketplace right now we're going to want to make sure that we're staying where we need to be competitive we for our customers and and with consumers and and.
Feel like we're in a good position to do that.
Okay, and then I guess, a follow up and you'll think about the U S unit growth and you did comment about the the expansion of your distribution channels sort of a follow up on the last question could you got a bucket the unit growth from new customers versus legacy customers year over year.
Yeah.
And it didn't mention it other than to indicate that it was it's across the board. So we really are seeing an grow from all of those whether it be the big national retailers, including the mass merchants E. Commerce is is contributing more every quarter and we're seeing increases in our in our tradition.
<unk> distributor channels so.
The balance is is important because I possess.
Positions us to.
To continue with this demand engine that we've created and to sustain it.
Okay, great. Thank you.
Thanks.
Our next question will come from Ryan Brinkman with J P. Morgan. Please go ahead I think for taking my question you know you've discussed that your own inventories are lower this will constrain you know temporarily constrained your your shipments what do you think though that the inventory picture it looks like for the industry as a whole.
What what do you think the balance of supply and demand for tires generally means for pricing for the industry or for Cooper and four Q and beyond and then also what is your ability to replenish inventories look like you know beyond for acute should we think about there being a tailwind and <unk> does it last for dissipate can kind of the first half of next year to catch back.
You know in terms of your ability to you know ship more tires in would be ordinarily indicated by the retail demand in that period.
So does it to the first question on you know based on the information that we say I would suggest that as an industry.
Centaury levels are are are tight I think they continue to be tight there may be certain certain pockets, where that's not true, but I think an overall assessment I is that that they remain tight and we all are are trying to to ramp up to meet the demand that is a current which is great.
On and again, we're a little bit ahead of that in terms of the demand side of that equation.
When I went to to school they used to say that if you've got more demand than supply that that that is not a bad position for pricing. So I will continue to monitor.
I think the industry will continue to monitor what's happening with raw materials and and on as an industry again on I've been in this now for a decade and it's remarkable to me how disciplined the approaches to cost that affect all of us when that happens there seems to be on a response.
The pricing side, and and with low inventories right now would probably suggest that that the industries and.
A position to do that if it's warranted on with regard to our production and supply I think we're going to begin to round the corner in the fourth quarter, we've been ramping up we've gotten over the two mandated shutdowns in Mexico and in a ramping up that facility and and making it truly a cooper production fish.
Alrighty now that we own 100% of that we've been ramping up in in the U S facilities, adding bowls on as quickly as we can to help meet demand and frankly, we're leveraging our global footprint, we announced that we're expanding our Serbia facility. So we're looking at positioning products in a way.
Through our network globally to insure that we're gonna be able to ramp up as quickly as possible. So I I think that we will begin to turn that corner an inventory going into the beginning of next year and then it'll be dependent on on the demand side of the equation and how fast that continues to move forward relative to that production, but I think we'll.
I'll be turning the corner in the fourth quarter, and and we'll start to be positioned better with inventory at the beginning of next year, but it may take a little while.
Okay, great. Thanks, and I was gonna sort of next to ask you to kind of unpack the price mixed raw materials spread you've already made a number of comments on on pricing, but just maybe as results to to mix in raw materials. I mean, his biggest spread it to get to go back to third quarter of 2012 to find as as big of a positive contribution.
Ah relatively romance I imagine continue tailwind, but grows increasingly less positive but remains positive at least for a couple quarters. How should we think about that and then with regards to mix what what what do you think there was over the next few quarters.
Yeah, So I I on the the the.
The raw materials side of the equation that you started with our guidance is that our expectation for the fourth quarter is up sequentially, but that would still be down year over year on based on what we can see right now and so that is a bit of a tailwind there and and you know our teams do.
Do on our focus is always on making sure around availability, we don't see any issues there around availability of of raw materials and then they want to make sure that that we're buying at or below the prices that we think our competitors are buying yet and so you know they are continuing to do things to try and protect our position.
And I think they've done a good job on with regard to odd Nicks, we still we still have an opportunity that they move quarter to quarter, but but.
But we still think there are opportunities for us over the.
The next several quarters to continue to advanced mix. It may not be every quarter, but in you know when you look at it over Ah continue I'm in it and a longer period of time, we think that there's more runway on nick's as well.
Okay, Great. Thanks, and then just lastly for me relative to any potential change or not change in the administrations in the U S. With the presidential election here you know it could be a number of changes tax regulatory so I was just about to ask on tariff, though can you remind us at the latest that you've seen on tear off included with regard to possible terrorists from southeast Asia and then.
As you know if there were a change you know is it just a case that right now the case you know rest with this international trade court the composition, the numbers of which I've already been decided and so there's really no impact there or does the administration have some sort of influence on you know how that court or others could rule.
Yeah, there's a lot there and I I I'm not going to suggest that I'm smart enough to to get it all the pieces there I would say in the near term what we know is that there's.
A very near term ruling to be coming out on the the countervailing duty as it applies to Vietnam, which is one of the four Asian countries that is in question here that could be as early as tomorrow.
And then by around the end of the year early next year.
We're expecting the first round of preliminary.
Duty rulings to be coming on the can't take dumping portion of that that will include Vietnam.
Plus the other three countries of Thailand, Taiwan and Korea on.
Historically on changes in administration have not had a significant impact on the members of that decision making body, but.
Who knows but I may I would say historically that has not been something that changes or changes right away certainly.
Okay very helpful. Thank you alright.
Again, if you have a question. Please press star than one our next question will come from John Hilley with Northcoast Research. Please go ahead.
Thank you congrats on a great quarter guys.
<unk> wanted to ask about just kind of the margin outlook for queue for my math could be wrong, that's often the case, but if I back out the product liability adjustment kind of implies a high teen operating profit level in Q3, and you guys are saying in your 10 to 14 range for the second half.
To me that it implies like mid single digits, the low double digits, but.
Is there any reason you'd fall outside of that 10 to 14 four Q for do you think.
Well again the guidance that we've given we we thought it was more appropriate given given how much on sell out we had from inventory during the third quarter, which generally from a seasonality perspective would've been spread over the third and the fourth quarter on but because we weren't able to replenish that with the.
The shutdowns that were appropriate given the health and safety considerations for our people.
During the.
Second and third quarters, and the ramp up that subsequently occurred.
We just did to put in perspective, the strength of the business right now we thought it was more appropriate to look at it on a second half basis, and I'm Gonna I'm gonna stick to that in this instance, John and to indicate that we're gonna be in that 10% to 14% range on because we think that's the best indicator of how the business is trending now as.
We are able to begin or reach those on ramp up positions, where we're meeting the demand side of the equation enabled to build back on some additional inventory.
Again, we will be able to look at a clearer picture as we get into next year, but I really think on just to understand because.
We feel very good about how the business is performing right now and when you look at it in in the the time space of the second half that's really indicative of.
Of where we're at right now with with a demand engine that's still going.
Great and I just wanted to ask kind of how you interpreted some of the industry statistics and the and Q3 with you guys TMA being down, but the imports being meaningfully.
Do you think that was pulled forward of imports maybe trying to get ahead of the tariffs or was that more reflective of hate.
The legacy domestic manufacturers.
We're struggling with a.
Largely a production standpoint, how how do you interpret that that big pickup and imports that we saw in the quarter yeah.
Again, one person's view, but I, we I would suggest that we look at that as a combination of both I do think that on.
Number one tire demand were returned more quickly than than we were able as an industry, particularly in in North America to ramp our production up to meet it and so people would be looking for alternatives to meet consumer demand. So that would be an impact on but I think clearly.
There were some important activity taking place to try and get ahead of the tariffs on that that many are anticipating are going to occur I mean, when you look at those for Asian countries.
Think we've said it this way before but that represents about 28% of the total units that are sold in the United States and so it's a big piece of the market and so I would expect that you know wholesalers and distributors are gonna try and get a little bit ahead of that to the extent that they can.
You know I think the good news for US is even in that environment on where there might be some stock build that we were still ahead of the industry.
And see real you know.
Sustainable growth with our demand.
Great. Thank you guys. Thank you.
Thanks, John.
This concludes our question and answer session I would like to turn the conference back over to Brad to use for any closing remarks. Please go ahead Sir.
Yes, Thank you and and I just want to reiterate the thank you to the Cooper team and their families around the globe, along with our customers and our suppliers for coming together to contribute to a great result.
And for their ongoing efforts to support our drive towards delivering this winning strategy. That's taking hold right now so thanks to all of you for participating today and please stay safe and stay healthy. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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