FINDLAY, Ohio—Cooper Tire & Rubber Co. Chairman, President and CEO Thomas Dattilo resigned unexpectedly Aug. 3 as the Findlay-based tire maker posted deeper losses in part from “extraordinarily” weak replacement demand in North America.
Cooper's net loss fell to $20.7 million from a loss of $6.88 million in the prior period, and the loss from continuing operations also deepened to $22.9 million from a loss of $6.42 million last year. It marks the firm's sixth consecutive quarterly loss.
Sales during the period rose 22.3 percent to $624.8 million—due in large part to first-time inclusion of revenue from its China operations. In its North American segment, Cooper posted an operating loss of $29.9 million vs. operating earnings last year of $1.33 million. Sales rose 1 percent to $463.4 million as unit shipments slipped 5 percent.
“In terms of operating conditions and operating profit, it was an extremely tough quarter,” said CFO Phil Weaver during a conference call with analysts. “Raw material prices continued higher while industry demand remained weak in North America and Europe.”
For the first half of the year, sales rose 19.2 percent to $1.22 billion as the net loss deepened to $25.9 million from a loss of $1.67 million last year. North America's sales in the period rose 4.1 percent though the segment fell to a loss of $35.8 million from a profit of $7.78 million last year.
The same morning as the results announcement, Cooper said Mr. Dattilo had resigned to “pursue another opportunity.” The tire maker said in a filing with the Securities and Exchange Commission (SEC) that it categorized his departure “as if he were terminated involuntarily without cause,” a designation that kicks in his severance and benefits. A separate designation is “resignation for good cause.”
Byron Pond, who has served on the board of directors since 1998, will be interim CEO until a permanent replacement is found. Mr. Pond said Cooper's search will concentrate on someone who has a strong background in automotive or durable goods industries, experience in global corporations and expertise in manufacturing, distribution and sales.
Asked whether there was a difference of opinion between the board and Mr. Dattilo, Mr. Pond responded: “There was not. The board is a firm believer in the strategies and the fundamental course the company has set. And we think that being able to have a better cross-position as a result of this investment in China is absolutely the right thing to do, and that is the cornerstone of our strategy. And there is no disagreement.”
But Tony Cristello, an analyst with BB&T Capital Markets in Richmond, Va., said the board still could have had its reasons for wanting a new leader.
“The company appears to be getting close to where some very tough decisions are going to have to be made,” Mr. Cristello told Tire Business. “My guess is by the end of this year you would then be out of your cash-flow generating periods, you'll be entering your seasonally weaker quarters and, if your cash balance has continued to be driven a little bit downward, then you have to think about what's best for this company over the next 12 months.
“And if they weren't comfortable with Tom, maybe they wanted their new CEO in place to be part of some of those decisions.”
Larry Lesieur, operations manager for tire wholesaler Maynard & Lesieur Inc. in Nashua, N.H., said he was surprised by Mr. Dattilo's departure, but that it makes sense in light of the company's recent troubles.
“The bottom line is the stockholders are king, and when the stock is trading at $8.50 at its all-time low…somebody's going to take the fall, and it's usually the CEO,” he said.
Besides the earnings shortfall, Cooper also recently had been removed from the S&P 500 index and had its credit ratings downgraded still more into “junk” territory. The stock fell from the Aug. 2 close of $10 to $8.23 on Aug. 9. The 52-week high is $17.56.
Steve Craven, owner of Craven Tire & Auto in Fairfax, Va., said he had anticipated Mr. Dattilo would leave before the year was done.
“He's certainly a visionary in the industry,” Mr. Craven said. “He's a student of the industry and I have all the respect in the world for him. I just think the current management team tried to make (Cooper) into something they're not,” he added, referring to the tire maker's attempts to market the Cooper brand as a premium product.
Regardless of the circumstances of Mr. Dattilo's resignation, however, executives, analysts and dealers all acknowledged that the firm's problems will require much more work to overcome.
“The departure of the company's CEO may lead to a positive management change, but the problems here run deeper than just management, and it may not be easy to attract star talent to a $564 million market-cap tire company based in Findlay, Ohio,” said Jonathan Steinmetz with Morgan Stanley in an analyst report. “The company's problems include high cost structure, low brand value, rising raw material costs, weak end markets, production problems, lack of captive distribution, increasing production complexity and personnel turnover.
“The company still does not appear to have a fully developed plan to offset these challenges,” he added.
Mr. Pond, 69, said the board and management are “totally aligned” on the company's need to focus on what has made Cooper successful in the past—having a high quality product, built with low cost and supported with good service. He said the company's priorities will be to set “aggressive” internal targets and meet them; improve margin through cost controls, pricing and mix; improve cycle times to serve customers better with less inventory; and improve the firm's cash position.
“We truly believe that if we deliver on these, we will end up enhancing shareholder value,” he said.
Dealers and others contacted by Tire Business said a main problem is that the company had built its business as a value-tire producer. Now that it's harder to produce tires in that segment profitably in North America, how does the company stick to what it knows best but still make money?
“I don't have an answer for that, and I don't know how much they do,” Mr. Lesieur said, adding he's unsure what the company's vision is for the next five to 10 years.
Barry Steinberg, president of Direct Tire & Auto Service in Watertown, Mass., said Cooper's efforts to move beyond broadline might have shifted its focus too far from its roots. “I think a lot of things suffered at the expense of the extensive, expensive focus on (ultra-high performance),” he said.
Cooper's CFO said the tire maker did see some second-quarter gains with its products. While Cooper's light vehicle tire units were down 2 percent so far this year, industry shipments were down about 6 percent, Mr. Weaver said.
The firm's shipments in sport-utility vehicle tires rose 7 percent; high-performance and ultra-high-performance tires were up 16 percent; light truck tires were down 3 percent as the industry fell 7 percent; and broadline was down 12 percent while the industry dropped 14 percent.
“So we continue to gain share,” Mr. Weaver concluded.
Cooper produced about a million fewer tires in the second quarter than usual as it instituted production slowdowns to reduce inventory. The curtailment negatively impacted operations results by $8 million, Mr. Weaver said.
“While it's costly to take out production days, we strongly believe that it makes more sense to do that than to try to boost demand temporarily with pricing discounts,” he said.
The tire maker is expecting more tires to come from its operations in China in the near future. The joint venture plant with Kenda Rubber Industrial Co. Ltd. should start production by year-end or early next year with 2007 output of about 1 million to 2 million tires. Cooper also is looking at increasing capacity at its Cooper Chengshan plants in China.