Strong People, Focused Strategy Has Cooper Moving, Says Armes - Tire Review Magazine

Strong People, Focused Strategy Has Cooper Moving, Says Armes

One could certainly see Roy Armes as the typical organizational man, given his long 31-year background with Whirlpool, where he held a number of domestic and overseas executive posts. But no doubt he is an operations man, and his turn as chairman, president and CEO of Cooper Tire & Rubber Co. bears this out.

Armes came to Cooper in December 2006 to replace Tom Datillo as president and CEO of the tiremaker, earning the chairmanship a year later. At the time he joined Cooper, the company was disjointed and unfocused. Sales remained relatively strong, but bottom-line results had faltered, and the company’s board was concerned about the long-term health of the venerable American tire company.

Armes sat with Tire Review for an extensive interview, and gave us his views of the recent past and hopeful future for the company he has re-organized and sharpened.

Cooper didn’t appear to be in bad shape when you became president and CEO. Talk about Cooper’s condition at that point.

“The thing that piqued my interest – and I probably underestimated this when I first came here – was that there was a waning confidence among customers, employees and investors. And I could say maybe in the community, as well. But those three were the most important, and they gave me a little bit of concern. They also gave me a bit of direction for where we had to focus to turn the company around. It was not performing to the level that certainly the board was expecting. The motivation of the employees here was surprisingly low. I don’t think it was an employee issue, but it was one of uncertainty of what’s going to happen here. We had all of the experience we needed, we had some very capable people here, and to see that lack of confidence was probably my biggest surprise and what I really underestimated when I came on to the job.”

What sort of changes did you implement?

“For me, the first priority was getting the confidence back in the customers, employees and the investors. I was really on a communications sabbatical during that time, getting out to visit customers, walking and talking with employees, visiting investors and analysts. It was pretty intense for that first six to nine months. I wanted to make sure I really understood what the issues were and got out and really listened to all of the parties. You’ve got to have the confidence of the customers, because without those customers you don’t have a business. You have got to have your employees on board and fired up and wanting to serve the customer, and I saw that desire here. If you get the customer piece right and the employee piece right, then the investors will benefit out of that. That was the first thing.

"The second thing was we needed to get the employees back and motivated and get them focused on a common goal. It was very disjointed in the organization, and there was a lot of confusion and uncertainty about the direction of the company. So one of the things we embarked on in May 2007 was to get a more engaged, cohesive and detailed strategy so that we can get the right focus in the organization. We spent about four to five months putting together a strategy for the company. It was not a rocket science strategy, but it was a strategy rooted in the fundamentals of business – you’ve got to be competitive in this business because it is a global business; you’ve got to grow your top line but do it profitably; and you’ve got to develop the organizational capabilities, systems and infrastructure around delivering those first two objectives. It became very easy at that time to get the company focused on being one team with one common goal.

"The communications and putting that strategy together were probably the two biggest things we did. And we have a business, too, that in 2007 had some pretty high demand, though we had constrained supply at that time. But we had a business that could support us. The business wasn’t dead but we also knew that could also be a blip on the screen and we had to get ourselves ready for down the road. We also had a situation where we had a pretty high debt load and we weren’t generating a lot of cash, and that financially had become an issue. So as part of our strategy, we sold off the Oliver business, we sold the shares we owned in Kumho – we had about 10% of that business and we sold that off in February 2008 – so from when I came on board to middle of 2008 we went from not being sure we were going to be liquid to having a half a billion dollars of cash. That was a huge turn around for us. And those things were building more confidence in the employees, customers and investors. We still had a lot of work to do with the customers and a lot of work to do in our business for the long term, but we were moving forward.”

How have those changes improved Cooper’s infrastructure?

“I would say that a lot of people want to give me credit for all of the things that have happened here, but I will tell you that this entire organization responded to the situation. There was a clear desire for this company to be successful, there was a lot of loyalty inside of the company, a lot of experienced and capable people and all it needed was some focus and direction and the people rose to the occasion. I really believe that was the biggest piece. Because it would not have happened without the employees here stepping it up a notch or two in terms of performance, recognizing the need and where we were as a company. We’ve been very candid with the organization. We said, ‘Here’s what the picture looks like, and here’s what it could be if we do all of these things,’ and in very short order this organization stepped it up. That was the biggest contributor to getting things moving in the right direction here.”

Has that carried forward since that time?

“I think it has gotten stronger. We were a more functionally oriented company, and what I would call a multi-regional company. We made those changes under the premise of being multi-regional, but we were not very well focused, we were departmentalized or silo-managed. What has gotten stronger is that the organization understands that interdependence across all parts of the company is very important to being successful.”

Where is Cooper now in terms of that end goal?

“We set it up as being more of a rolling goal. We didn’t think there was a destination that at the end of two years or three years we were going to be in such and such spot. I will tell you that what we set up as our initial goals in that strategy, we have exceeded and probably are two years ahead of schedule. I think that is a strong tribute to the organization here that stepped up, took on the challenge and delivered some very good results. I would have never guessed that we could have gotten here as fast as we did. I was confident in our direction, but wasn’t really sure we could get here in just a few years. I thought this was a five-year journey and that by the third year we’d be building another five-year plan, and another one. So we continue to roll this thing and reset the targets, which I think is the most encouraging thing. People are feeling much more successful as an organization, and even though we are setting some tough stretch targets, they continue to deliver.”

Cooper has a long tradition as being a ‘dealer-friendly’ tire company, but Cooper’s distribution is broader than just dealers. Where do you see tire dealers fitting into Cooper’s future plans?

“Let’s step back to our strategy, because we looked at where our distribution was and where opportunities were going to be. I’ll focus on the U.S right now, but you could say the same thing globally about what we want to do. If you look at the U.S., clearly our strongest suit is in the independent tire dealer channel and while that channel hasn’t grown, it hasn’t shrunk by any great significant amount, either. So that’s still a very strong part of our business. Another strong core for us is with the wholesale channel, and that we’ve been able to strengthen. Another core area is with regional retailers – those vary in size from 15-20 stores to hundreds of stores – and that has also been a good part of our business. Where we were the weakest was in the national retailer channel. Part of our strategy was to see what we needed to do to strengthen our place in that channel. We had been in that channel before but we also went in there differently in the past. We stepped back and looked at where the opportunities were and that’s why we went with a Sears, a Discount Tire, and a Pep Boys. These are all national retailers that we feel are very important to our business, and that we bring some value and contribution to help them be successful. It was clearly part of our strategy to do that.”

Where do you go from that point, then?

“Well, the other opportunity that we identified was geographically. There are areas within the in the U.S. that we haven’t penetrated. So what we are trying to do is take a targeted approach in those geographic areas to expand. We also have opportunity to expand in Mexico, and opportunity to expand in Canada from a North America standpoint. We continue to stay strong in our traditional channels and take the opportunity to get into some channels where we have not been strong, that are growing. And there are some geographic areas where we see opportunity to grow. We have a unique business model. We’re in the largest market in the world – North America, especially the U.S. – and we’re in the fastest growing market in the world – China. We have strong business in Europe, which has been very stable and profitable. We’ve got opportunities in China where we’re outgrowing the market there. We’ve got need-to-grow capacity there, we’ve got need-to-grow capacity in North America, and that in itself is helping our business grow.”

You mentioned having some geographic holes in the U.S. distribution. Give us some examples.

“If you look at the Western region, for example, we did some research and found that while a lot of consumers out there knew about Cooper tires, they didn’t know where they could get Cooper tires. So we started looking at our penetration there, and our penetration there is half of what it is in the rest of the U.S. Looking at what the consumers wanted, the fact that they knew about Cooper and its reputation but saying they didn’t now where to find them, was a concern. The Western region is a little more dispersed than other regions, so we have to look at what makes the most sense. Can our existing customers help us penetrate more in that area? Or do we have to look at other options?”

Cooper’s international efforts are relatively small compared to many of your competitors. Where is the international market on Cooper’s radar screen, and besides those countries you already mentioned, in what particular countries do you see the most viable opportunities?

“Just a few years ago our international business was barely 15% of our overall revenues. Today it’s in the 30%-35% range. And we see that growing in the next few years to being 50% of our revenues. I look at international as being everything outside of North America – the U.S., Canada and Mexico. And the biggest share of that is in the Asia region, specifically China, where we are doing very well with our joint ventures and we’re doing very well with the products we introduced into that market. And we think we still have plenty of opportunity to grow there. So we’ll have a pretty good mix. I don’t see us venturing very strong into South America in the near term. I see us with opportunities in Eastern Europe and central Europe.”

Do you see Cooper as a $4-$5 billion company then?

“I can see us being a $5 billion company over the next three to five years. We think that is very doable. We also think that in this industry there is going to be some nominal growth over the next few years. I don’t think this industry will see double-digit growth; that might be the case in some countries or smaller regions, but on an overall basis we think the industry will grow in the 3%-4% range. North American growth could be in the 1%-3% range, getting back to normal. We just came off of a period where for three of the past four years, this industry has been down. That never happened before. So we’re optimistic about the next five years, about some steady growth as an industry, and we think we’re positioned well right now to be able to take advantage of that. Looking at what we have done this year and last year, we see that as an indication that $5 billion in the next three to five years is not out of the question.”

Are the aspirations for growth in Eastern Europe based on factory capabilities and product you already have there? What is the rationale?

“We first penetrated that market through opportunistic sales. As we start to see growth there, we will need capacity to support those regions. The same holds true for China and Asia in general, because we have a very strong export business, as well as a domestic business there. As a result of that, we have to look at how we can get additional capacity there to expand because we’re not going to be able to keep up with that market with what we are doing right now. We have a very strong team there right now; they have done very well to grow that business, and we think we have plenty of opportunity there.”

Are you talking about adding capacity in Eastern Europe or are you comfortable that you have enough capacity otherwise to handle that market?

“I don’t think we have enough capacity globally to satisfy the needs of even the normal market growth that’s out there. So we definitely have to be looking for some additional capacity. That can come in a lot of different forms. You can look at joint ventures, or you can look at building new plants, or you can look at off-take deals or alliances that could work out, as well. There are a lot of options that we are looking at to get our capacity where we feel it needs to be to support our business. That is a fundamental focus of ours right now. We still have opportunities to expand capacity in China and in Mexico; it’s a matter of the timing of those to make sure we don’t overload.

"We even have some capacity here in the U.S. Since we shut down Albany (Georgia plant), we have taken a lot of that that business to our three plants in the U.S. and they are expanding even as we speak. Not so much from brick and mortar, though the Tupelo plant (Mississippi) has added brick and mortar, but we have added molds and new machines to improve efficiency and add capacity. So over the next year or so, we’re going to continue to raise capacity within the current footprint that we have, but I don’t think that’s going to be enough for what we’re looking to do. That’s why we’re looking for other expansion opportunities.”

How has the added tariff on China-made consumer tires helped or hurt Cooper?

“It helped us in terms of our ability to raise prices, if I can be so bold, because we had to raise prices to offset the tariffs on the products we were importing from China. We have one joint venture in China that was 100% exporting to the U.S., so it hurt us from that standpoint because we had an investment that we were not able to utilize effectively.

"Having said that, let me share with you the facts as we see them because I don’t want to get into that political football that’s going back and forth right now. The facts for us are that we have 1,000 less jobs. We shut down Albany but we have added some 200 jobs at our other facilities in the U.S., but net-net, we’re down about 1,000 jobs. Secondly, because of demand we’re going to import as much, if not more, from our China facility this year than we did last year. That’s all driven by the demand. Originally, we said that when the tariff came on we were going to cut our production in China by half to avoid those costs; we needed a certain number of tires out of there. But as the demand grew and supply grew tighter, we found that we needed more tires out of there. So we’re basically going to import more tires out of that operation this year than last year.

"The third point is that the demand increase for us actually started in June-July last year, well before the tariff kicked in. As we got closer to when the tariff started, there were a lot of customers who were concerned and that may have driven an artificial increase in demand, but we started seeing increased demand in June-July. Once the tariff came on, we raised prices to offset some of the costs. Even then, our demand continued to rise and we decided that we needed to up the capacity from our China facility and we decided to increase capacity here in the U.S., as well as in Mexico, to satisfy those needs.

"Those are the facts as we see them today. Now people are going to interpret that a lot of different ways, but the way we see it, this demand started well before the tariff started; we have a 1,00 less jobs; we’re going to get more product out of China and our other plants – we did raise prices to help our profitability, particularly for the low end products, and our demand continues to grow. Absent the tariffs, we made the right decisions for the business to give us a much stronger foundation to grow on. When the tariffs came in we had to adjust. There’s going to be more government regulations we’ll have to adjust to, but never have I seen regulations put in place where it’s cheaper to do business.”

In terms of the tariff, how much of that 35% did Cooper end up eating?

“The way we handled that with the price increase, and I don’t have the exact numbers, but it was a minimal amount. We couldn’t raise prices by 35% just on those particular tires, so it turned out to be around 10%-12% across the broader part of the line. The other fact is the tariff did have an impact on the Chinese imported product – it’s down 30%-40% – but overall imports into the U.S. are up 15%-20%. They’re just coming from different countries – Japan, South Korea, Indonesia, Thailand, Vietnam, Taiwan. In a lot of cases, it was the same companies, they just moved production back to Japan or South Korea, and so on. There is currency, there are freight rates, and there are a lot of things that impact this. The tariff certainly impacted imports directly from China, but imports to the U.S. are still up 15%-20%.”

Cooper has kind of stuck its toe in the eco-tire water with the Cooper GFE, which was released in July 2009. Where do you see the green tire segment going and what is Cooper working on for that segment?

“One of the things I think we’re very good at is fast product development cycle time. In less than a year, we were able to come out with the GFE. We did not expect this much out of the fuel efficient tire area because I still think it’s new to consumers, so we had limited breadth of product that we came to market with. As it turned out, more and more consumers have become interested in fuel-efficient tires. And the recent consumer magazine reports rated the GFE very high in terms of fuel efficiency and performance. We see down the road there’s going to be demand for those products, we’re just not sure how much demand is going to be out there. But we are looking at expanding our product portfolio to make more available to consumers. The jury is still out as to how fast this is going to take off, but we need to compete in that segment. We know we can build energy efficient tires, tires with 20%-30% lower rolling resistance than the tires they replace. So we think we can compete there, but we haven’t gone and thrown our whole line out and said we’re going to replace them all with fuel-efficient tires. We’re waiting to see how market demand goes before jumping in with a broader line-up.”

Cooper is still producing and selling medium truck radials, but very, very quietly. Do you see that as an untapped growth segment for Cooper? If so, what is Cooper planning to build that business?

“Ssshhh! We still want to keep that quiet! It’s not a big part of our business, first of all. It’s a small percentage, but we did think it was a good opportunity for us because our Chinese joint venture specializes in medium truck/bus tires. We thought by them being experts in this for many, many years, we could leverage that into the U.S. market. So we came out with the Roadmaster tire. We sent some people to China to work with the joint venture and help with the processes and make sure our quality was right and build a really good truck tire. I was out with some customers recently, and two of them were commercial tire customers, and we got very good reviews from them both on our radial medium truck tires. I was pleased to hear that, because we haven’t gone out there and been real flashy, but were listening to our customers to find out what they really needed and how we could satisfy those needs and help them target certain customers who could sell the product for us. It’s still a small part of our business and we want to grow that part of the business. You’ll see over the next few years that we will be expanding that product line-up. We’re not looking for 50% growth year over year, but I think we’ll show some pretty solid growth in that market.”

To varying degrees, Cooper has had working relationships with other tire companies. Do you see a point at which Cooper merges with, is bought or buys another tire company?

“I don’t know if I see that directly. But I would say this: If there was something out there that made sense, particularly for the shareholders, that is something that we would have to seriously take a look at. That is not our strategy. Our company is not up for sale. We think we can be successful in the business we’re in now. Could there ever be that possibility? Who knows? There are lots of things that have happened in the world. But it needs to make sense for our business and our shareholders for it to make any sense at all. It’s like anything else: you can never say never because the dynamics of this industry, the dynamics of the economy, the dynamics of the global economy.”

Where do you see Cooper in the global tire market and what does the company need to do to reach that point?

“I see Cooper as being a $5 billion to $5 billion-plus business and I would say that as a minimum. Secondly, we will have 50% of our revenues and profits coming from international. I see where we are continuing to strengthen our relationships with our customers and using that same model globally. One of the strengths of Cooper is that strong relationship with our customers – and the customer loyalty that we have is very strong. As long as we keep providing value to our customers, I think you can see that model continuing to work. I think you’ll see Cooper with a footprint that is highly competitive to be able to satisfy some of those customer demands. You’ll see a much more integrated Cooper, and what I mean is integrating our systems globally so that we can source and leverage our manufacturing footprint more effectively than we are today. More importantly, I think you’re going to see a high performing organization that is delivering to the customers’ expectations and, as a result, we are a very profitable company.”

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