FINDLAY, Ohio—Now that Cooper Tire & Rubber Co. has sold its 65 percent ownership in Cooper Chengshan Tire Co. Ltd., the firm said finding alternative sources of truck and bus radial tires is one of its top priorities.
Cooper sold its share to its former joint venture partner, Chengshan Group Co. Ltd., for about $262 million. Cooper listed the value of CCT—determined by an independent firm—at about $437.7 million in its third quarter 10-Q filing.
The CCT joint venture was Cooper's only source of TBR tires, and while off-take agreements with Chengshan are in place until mid-2018, the firm is exploring its options aggressively to fill the capacity, Cooper officials said during a Dec. 4 conference call.
Roy Armes—chairman, CEO and president of Cooper—said options could come in a variety of forms, including an agreement with another supplier, a joint venture, an acquisition, adding capacity to its other facilities, buying a facility and running it, or building a new plant.
“We've been working on this now for several months actually, while we were in parallel with negotiating the agreement in the ownership structure change with CCT. So we've already got a head start on this thing. Ideally in 2015 we ought to have some idea of what direction that we're going, and we can communicate that strategic direction when we get there,” Armes said.
“That's what I would like to do. Obviously there are a lot of factors and considerations in that,” he said. “But we have a high sense of urgency in moving forward with an alternative plan.”
Armes said one of his expectations is for Cooper to lay out a definitive direction for sourcing alternative TBR production sometime in 2015.
“We don't want this thing hanging around forever,” Armes said. “At the same time, we do want to move along at a pace where we can fully understand our risk and evaluate the right approach given what we've gone through.”
Part of that plan might include establishing a plant outside of China in light of the recent decision by the U.S. Department of Commerce to levy countervailing duties on tires imported from China. Cooper was assessed a 12.5 percent duty on its passenger and light truck tires produced at its wholly owned Cooper Kunshan Tire Co. Ltd. facility in Kunshan, China.
While the countervailing duties currently do not affect TBR tires imported from China, Armes said Cooper would consider the potential for future duties being imposed when moving forward with its decision to source new TBR capacity.
“We're not taking any options off the table at this point in time because I think that is a consideration we have to think about,” he said of the recently imposed duties. “If something happens down the road, are we going to be protected in one way or another?”
Armes also shot down any possible rumor that the sale of CCT would re-open merger talks with Apollo Tyres Ltd.
“I don't think we can comment on any kind of speculation, or rumors or anything else that might be out there,” Armes said. “We're focusing on what we have to do in our strategy to grow our business in China. We've always said before if there is something that makes sense from a shareholder standpoint or creates shareholder value it's something that the board has a responsibility to look at. Right now (Apollo) has not been any part of our focus.”
Cooper to evaluate resources
Brad Hughes—president of Cooper's International Operations—said the firm is continuing to evaluate the best uses of its resources, including proceeds from the CCT sale. The executive said those uses could include additional investments in the company's business, acquisitions, returning additional cash to shareholders, other balance sheet activities or a combination of those actions.
Hughes said CCT's results no longer will be reported with Cooper's consolidated results as of the end of November. Through nine months of 2014, he said CCT accounted for $479 million of Cooper's sales, with a net income of $32 million.
“These proceeds in combination with previously received dividends have provided an outstanding return on our original investment in the joint venture,” Hughes said. “While this divestiture was in response to unforeseen circumstances of last year and an increased awareness of the risks associated with this joint venture, we are now in a position to prudently evaluate new opportunities.”
Through an off-take agreement in place until mid-2018, Hughes reiterated Cooper will continue to earn profits on CCT-produced units it sells through other Cooper business units, citing Roadmaster tires sold through Cooper U.S. as an example.
However, Cooper would lose the profits that CCT earns on selling tires to Cooper business units and on any tire CCT sells directly to the customer.
Hughes said the agreement provides commercially attractive terms to both parties and is structured with a penalty to ensure performance from CCT.
“The contract works very similarly to the contract we had in place when the joint venture was in place,” he said. “It did accommodate for certain cost changes even in the existing contract, but in essence it's very close with the exception of the new penalties included in the off-take agreement for non-performance in a number of categories for CCT. But the commercial elements of the contract are very similar to what we had in the JV.”
Firm names new CFO
Armes introduced Ginger M. Jones as Cooper's new vice president and chief financial officer, effective Dec. 3.
She succeeds Hughes, who was appointed president of the firm's International Operations in July.
Jones joins Cooper after holding the same position for seven years at Plexus Corp., a $2.3 billion electronics manufacturing services company with more than 24 facilities around the world, according to Cooper. Plexus serves the medical device, industrial, aerospace and defense sectors.
She was promoted to senior vice president, CFO, in 2011.-
Prior to Plexus, Jones spent five years with Banta Corp. as vice president and corporate controller. Jones served as director of finance for the Drive Logic Division of CCC Information Services Group Inc. and was chief financial officer for Choice Parts L.L.C., a joint venture between ADP and Reynolds and Reynolds Co.