Cooper focused on moving past failed Apollo merger
FINDLAY, Ohio (July 1, 2014) — Cooper Tire & Rubber Co. didn't miss a beat on its growth path after its proposed merger agreement with India's Apollo Tyres Ltd. was terminated six months ago.
Cooper simply moved on and continued to do what it does best: build its business, develop innovative products, and manufacture and sell high quality tires, according to Roy Armes, chairman, CEO and president.
Cooper's goal is a sustained operating profit/sales ratio of 8 to 10 percent, eventually exceeding 10 percent, and $5 billion to $6 billion in annual net sales. Mr. Armes said.
Cooper fell just short of that last year despite the turmoil, reporting $240.7 million in operating income on sales of $3.44 billion — a 7-percent ratio.
Part of 2013 was filled with obstacles that took some determination and smarts to overcome, but the firm emerged in very good shape, Mr. Armes said in a recent interview, citing a solid foundation it has established on which it will grow.
Over the past several years, he said, the company has expanded its global manufacturing footprint and enhanced its technical capabilities, launching recognized products in the process.
“And we have improved the efficiency and cost effectiveness of our manufacturing operations while maintaining a focus on quality and safety,” he said.
That has “positioned us for the next phase of growth, which will be driven by continued initiatives to maintain our global cost competitiveness while continuing to expand our footprint and to drive demand for our products around the world.”
Cooper expanded its reach with acquisitions in Mexico, China and Serbia in the past decade to give it a stronger position worldwide. Cooper gained cost-effective sourcing of products, with more than 40 percent of its manufacturing capacity now in traditionally low-cost countries, company officials said during the firm's first-quarter conference call in mid-May.
The Guadalajara, Mexico, factory provides customers in the region with a local source of supply, according to Mr. Armes, “while partnering with key distributors that will help, we believe, propel the Cooper house-branded value proposition.”
He said it gives the company an advantage as import duties from countries such as Brazil, Argentina, Bolivia and Ecuador do not apply to products from Mexico.
“To date, we have built a strong position in Mexico and are beginning to expand into Central America,” he said. “These new markets are attractive to us, and we believe we can reach more than 4 million units in Latin America by 2020.”
Cooper's position in China has been strengthened — for the time being at least — now that its problems with Chinese joint venture Cooper Chengshan (Shandong) Tire Co. Ltd. have been put to rest. Cooper and partner Chengshan Group Co. Ltd. are moving forward on a path to determine future ownership of the JV.
That outcome will impact specific plans related to achieving the company's future financial targets, officials at the firm said during the May conference call.
Cooper is committed to China, both from a growth standpoint within the country and as a source of truck and bus tires produced for global distribution.
In June, Cooper Tire Asia relocated its technical operation to Kunshan, China, from Shanghai to place it closer to its Kunshan tire plant. The $23 million, 54,000-sq.-ft. facility was constructed specifically for the tire maker's research and development activities and staff of about 65 material scientists and tire engineers.
It's a key investment that supports the company's growth in China and Asia, Allen Tsaur, vice president and general manager of Cooper Asia, said when the center was dedicated on June 12. He said the firm's prime focus areas in Asia are passenger and truck tire growth along with expansion of the company's efforts in the original equipment market.
Cooper also revived recently a $35 million plan for a global technical center at its headquarters in Findlay.
Cooper is also upgrading machinery at its Tupelo, Miss., factory — thanks in part to $39 million in financial support it is receiving from the state of Mississippi and the city of Tupelo — to make the 30-year-old car and light truck tire factory more competitive. That is essential for long-term success, Mr. Armes said.
He declined further information on the upgrade for competitive reasons, but multiple reports from local press in Mississippi have put the figure at as much as $140 million.
Cooper was in a strong position financially entering talks with Apollo, Mr. Armes maintained. “We finished 2012 with record sales and earnings and our team demonstrated that we delivered on all of our goals set back in 2008.”
Its recent success — including the firm's first quarter 2014 results ($80.9 million in operating income on $796.5 million in sales) — was not a matter of turning things around but instead building on the solid foundation Cooper had in place, he said.
“We did nothing new following the terminated merger; rather, we have stayed the course on our new strategic priorities,” Mr. Armes said, and that has continued to drive the kind of results the company is looking to achieve.
Cooper has strengthened its foundation over the last several years by improving efficiencies, enhancing its technical capabilities to develop new products and transforming the tire maker's manufacturing cost base, he said.
Its cost reduction program, called Project Normandy, has been successful in the U.S.— driving down manufacturing costs 16 percent from 2008-12 — and is being extended globally.
The project focuses on four primary cost drivers: deploying automation; standardizing processes to reduce scrap at all sites; decreasing material usage without compromising quality and performance; and efficiencies in distribution.
Product consolidation is another key area the company is focusing on to trim complexity and manufacturing costs, according to Mr. Armes. “We have gained a better understanding of the effects that complexity has on our operations with respect to efficiencies and scrap, and as a result, we set a goal to reduce the number of product platform families by 60 percent by 2020.”
There are some key advantages to platform consolidation, he said: reduced complexity and manufacturing costs; increased sourcing flexibility; improved new product development; and faster product launches, all the while allowing for product differentiation within regions around the globe.
Transformation of the firm's production cost base has given it a balanced and competitive manufacturing footprint. Through execution of its strategic plan, Mr. Armes said, Cooper has the potential to expand its global capacity by 17 million to 18 million units at one third the cost of an equivalent greenfield plant expansion.
As for the fallout from the scuppered Apollo deal, Cooper said in its first quarter 10Q filing with the Securities and Exchange Commission that is still waiting for the Court of Chancery of the State of Delaware to set a hearing date on Apollo's motion seeking a declaration on the status of termination and reverse termination fees.
The court determined on Jan. 27 it would proceed with a decision on the Apollo entities' motion for declaratory judgment, Cooper said, but has yet to set a date.
“The company regularly reviews the probable outcome of such legal proceedings,” Cooper said, “the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for such legal proceedings at the time a loss is probable and the amount of the loss can be estimated.”
Cooper also noted that putative class-action lawsuits filed against it by “alleged stockholders” in state courts n Delaware and Ohio claiming Cooper directors breached their fiduciary duties to the company's stockholders by agreeing to enter into the proposed transaction with Apollo have been dismissed.
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