Cooper Tire & Rubber Co. Q3 2008 (Quarter End 9/30/08) Earnings Call Transcript

Nov. 7.08 | About: Cooper Tire (CTB)

Cooper Tire & Rubber Co. (NYSE:CTB)

Q3 2008 Earnings Call

November 7, 2008 11:00 am ET

Executives

Curtis Schneekloth - Director of Investor Relations

Roy V. Armes - Chairman of the Board, President, Chief Executive Officer

Philip G. Weaver - Chief Financial Officer, Vice President

Analysts

Anthony Cristello - BB&T Capital Markets

Saul Ludwig - Keybanc Capital Markets

[Curt Lukey]

Operator

My name is [Nashanta] and I will be your conference operator today. At this time I would like to welcome everyone to the Cooper Tire third quarter 2008 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) Mr. Schneekloth, Director of Investor Relations, you may begin.

Curtis Schneekloth

Thank you for joining our call today. My name is Curtis Schneekloth and I serve as the company’s Director of Investor Relations.

To begin with I would like to remind you that during our conversations today you may hear forward-looking statements related to future financial results and business operations for Cooper Tire & Rubber Co. Actual results may differ materially from current management forecasts and projects as a result of factors over which the company has no control. Information on these risks factors and additional information on forward-looking statements are included in the press release and in the company’s reports on file with the Securities and Exchange Commission.

With me today are Roy Armes, Chairman, Chief Executive Officer and President, and Phil Weaver, who serves as Chief Financial Officer. In associated with the press release which was sent out earlier this morning we’ll provide an overview of the company’s third quarter and year-to-date operations and results. Following our prepared comments we will open the call to participants for a question and answer session.

Today’s call will begin with Roy providing an overview of our results. He will then turn it over to Phil for a discussion on some of the details by segment and comments on other matters. Roy will then summarize and provide comments on our outlook.

Now let me turn the call over to Roy Armes.

Roy V. Armes

The third quarter continued to present difficult challenges to the tire industry in general and certainly to Cooper Tire. During this time we continued to work toward our strategic goals while effectively managing our costs and managing our cash flow. The pillars of our plan included establishing a sustainable and cost-competitive supply of tires, profitably growing our business, and enhancing our organizational capabilities.

The challenges we faced included weakening demand in the United States, raw material prices at historically high levels, and shortages in the supply of certain raw materials that forced us to curtail production. All of these have adversely affected our bottom line and offset some of the improvements we were making within our operations.

During the third quarter we had a loss of $0.94 a share or $55 million. While recognizing that there are macroeconomic factors significantly affecting the tire industry and our profit, we clearly understand the challenges we have before us going forward. With these factors in mind, we are proactively managing the business to best protect liquidity in the short term and enhance longer term shareholder value by repositioning the company for future success.

In October we announced a network capacity study of our US facilities that is currently underway and will be finished as quickly as possible but no later than mid-January.

We have also significantly reduced our capital expenditures and will continue to balance the need to conserve resources with the need to invest in opportunities that will make Cooper a stronger company going forward.

Our employees continue to be energized during this period and are doing an excellent job of focusing on the right actions that we need to take to move the company forward.

With that said, let me present an overview of the operations. On a consolidated basis sales for the third quarter increased over the prior year third quarter by 3% and reached a new record of $794 million. Pricing and mix were a positive during the quarter while replacement tire demand primarily in North America has been affected by the consumers’ reaction to continued economic pressures. These pressures, including high gas prices and the credit crisis, have resulted in people driving less miles and delaying the purchase of tires, and in some cases reducing the amount of tires they purchase.

Operating losses for the third quarter were $47 million compared to operating profits of $33 million for the same period last year. For the nine months ended September 30, 2008 we had operating losses of $53 million compared to operating profits of $91 million for the same period last year. The largest driver of this change was the dramatic rise in raw material costs of $137 million.

We cannot offset all of these cost increases with increased prices. We just couldn’t do it fast enough. The North American segment faced continued escalation in raw material costs as oil, rubber and steel prices continued to climb and the recent pullbacks in these costs will not be visible in Cooper’s income statement until 2009.

The US replacement tire market also weakened dramatically. RMA industry shipments in the United States for light vehicles declined by 10% in the quarter on a year-over-year basis. The North American segment was able to partially offset some of these issues with an improved price in mix and a continued expansion in Mexico and Canada.

During the quarter we curtailed production as a result of shortages in certain raw materials from our suppliers were affected by hurricanes. These shortages affected operating profit by about $9 million primarily due to the cost of unabsorbed fixed overhead.

On a positive note our investments in automation, lean sic sigma and other projects began to show on the bottom line as we improved our manufacturing operations in spite of higher utility costs. Gross of the increased utility costs, operation improvements were approximately $10 million during the quarter when compared to last year.

We also began ramping up capacity at the facility in Mexico that we invested in earlier. At the end of the year they should be manufacturing at a run rate of about 2.2 million tires per year. We’ll continue to increase those production levels in 2009 and of course those tires are sold both in Mexico and shipped to the US market as well.

We saw continued growth in our international segment sales primarily as a result of increased price and mix along with increased production at Cooper Kenda Tire. This facility hit a production milestone of 10,000 tires per day during the quarter and is continuing its successful ramp up. This was achieved ahead of the original schedule. In total the segment increased revenues year-to-date by 21% over the prior year. Operating profit margins for the quarter were even with the prior year while facing some of the same factors as in North America.

Our balance sheet and liquidity levels continue to be positive, and at the end of the third quarter we had cash and cash equivalents of $264 million and we’ve not had to draw on our $325 million in available credit lines which remains as a source of liquidity for us.

Now I’d like to turn it over to Phil and he’s going to provide you with more detail on the individual segments and financial matters.

Philip G. Weaver

First, our North American tire operations reported sales in the segment of $586 million during the quarter. This was an increase of 2% compared to the third quarter of 2007. The increase was driven by improved pricing and mix offset by lower unit volumes. As mentioned by Roy, decreased volumes in the United States were partially offset by increased volumes in Mexico and in Canada.

Operating losses for our North American tire operations were $51 million in the quarter and $65 million to date. The year-to-date includes $22 million of costs related to production curtailments and compares to an operating profit of $74 million in the first nine months of 2007.

The increase in sales during the quarter was the result of improved pricing and mix of $68 million offset by lower unit volumes of $58 million. The improved mix was primarily the result of increased sales volumes of the Cooper brand which continues to gain market share. The segment also increased its sales of winter tires and shipments to Canada and Mexico.

The product segments with the largest declines were broadline and light truck.

In the United States our sales of light truck vehicle tires decreased 14% in the third quarter of ’08 compared to the third quarter of ’07. This exceeded the roughly 10% decrease in total light vehicle shipments experienced by all members of the Rubber Manufacturers Association and also exceeded the 6% decline in total light vehicle shipments for the total industry for the quarter. The industry decrease in light vehicle tire units was due to macroeconomic conditions in the US. These include higher fuel prices and recession concerns and have caused reductions in replacement tire purchases.

A portion of the difference between the industry and the company’s performance was a decision made by the company to eliminate one brand and to exit unprofitable lines of business. Sales to both private brand distributors and to wholesale channel customers decreased as competition intensified in these price sensitive channels.

Price and mix improvements contributed positively during the quarter adding $41 million to our operating profit compared to the same period of 2007. This was not enough to offset the $104 million of unfavorable raw material impact during the quarter. The underlying raw material index was up approximately 42% on a year-over-year basis and was up more than 20% from the second quarter to the third. These increases occurred in natural rubber, oil derived materials and steel.

Factors in global commodity markets drove record high raw material prices specifically in natural and synthetic rubber as well as other petroleum-based materials. These high costs coupled with our use of the last-in first-out cost flow assumptions for inventory accounting in North America have contributed to decreased reported earnings. The LIFO accounting method charges the most recent cost against sales and in a period of rising material costs results in lower profit compared to most other inventory accounting methods.

We implemented a price increase in February of up to 5%. On July 1 we had another price increase of up to 8%. On October 1 we implemented a third price increase for this year of up to 10% in an effort to recoup these costs.

Mix improvement during the quarter also added a slight benefit. In the third quarter of 2007 we benefited by about $14 million from the declining LIFO inventory layers which of course means that the lower prior year costs were charged against current selling prices. There were no similar benefits in 2008.

We continue to improve our underlying plant operations through the successful implementation of automation, lean and sic sigma projects, and complexity reduction. The manufacturing improvement in the quarter net of increased utility costs was $6 million on a year-over-year basis. Product liability costs during the quarter were reduced by $8 million compared to the third quarter of 2007 while year-to-date our product liability costs are $9 million higher than last year.

Before turning to the international operations, let me express these changes during the quarter for North America in the form of an operating results walk-forward. This compares the third quarter of 2008 to the third quarter of 2007.

A total decrease in North American operating profit was $78 million. The key drivers were a $41 million improvement in price and mix, $8 million in lower products liability costs, $6 million in favorable manufacturing performance, $7 million in lower other costs, offset by $13 million from lower volumes, $104 million in higher raw material costs, $9 million in costs related to production curtailments, and as I mentioned in the comp we did not have the $14 million of LIFO benefits that we reflected in 2007.

Now turning to our international operations. Sales increased to $285 million, up 21% over last year for the third quarter. This was a new record and results in increased volumes and price for the segment. Sales in Asia were up 35% during the quarter driven by the continued ramp up of our Cooper Kenda tire facility in China. In Europe they experienced flat unit sales even as they continued to focus on profitable business margin improvement other than volume growth for growth sake.

Operating profit in the international segment was $7 million and equaled last year’s operating profit of the same amount for the quarter. Year-to-date the segment had operating profit of $20 million compared to $25 million in the same period during 2007. This segment has been impacted by many of the same factors as North America including raw material increases and weaker demand, particularly in Western Europe.

During the third quarter of 2008 we shipped about 850,000 tires from the Cooper Kenda tire facility which is ramping up as Roy mentioned. Increased production levels at that facility have helped to support North American sales. In 2008 we expect to receive approximately 2.5 million tires from this facility.

Our other Chinese joint venture, Cooper Chengshan, continues to develop products that will improve our position and market share in China. They also have implemented several projects improving throughput through the plant. These efforts will play an important part in Cooper’s future and CCT is focused on executing these improvements. They’ve been successful in implementing price increases that offset the higher raw material costs in China.

Operating profit in the quarter for the international segment was also affected by the Olympics held in Beijing whereby utility availability across China was curtailed somewhat dramatically for short periods. These restrictions affected the segment sales as the reduced economic activity lowered tire prices in several key customer channels and also forced higher utility costs and curtailed manufacturing at the segment’s Chinese tire plants.

Our facility in Europe is dealing with higher utility costs but has been successful in implementing projects to offset a portion of these higher costs.

As previously mentioned, operating profit for the segment was unchanged at $7 million during the quarter. Let me provide you with the key underlying factors that netted out in the form of an operating profit walk-forward from the third quarter of this year compared to last year. There was a $30 million improvement in price and mix, about a $3 million impact on higher volumes, offset by about $33 million from higher raw material costs. The drivers for most of these changes were discussed earlier in the call.

Now I’d like to cover a few other items starting with income tax accounting. The income tax benefit recorded in the third quarter for continuing operations was $2.3 million. The resulting effective tax rate for the quarter and nine months ended September 30, ’08 for continuing operations was -1.5% and -8% respectively exclusive of discreet items.

For comparable periods in 2007 the effective tax rate for continuing operations exclusive of discreet items was 6.9% and 18.4% respectively. The change in the tax rate exclusive of discreet items relates primarily to the impact of an accounting rule which limits the recording of a tax benefit on a loss. The company is still required to accrue taxes on income in non-US jurisdictions.

We recognize that the tax situation of Cooper is a complicated one and considering our position it would be worthwhile to remember that these accounting effects do not impact our cash flow and that this accounting rule does not restrict our ability to use tax benefit of losses to offset future earnings.

Now to cash flows. Net cash used by continuing operations as far as operating activities was $155 million in the first nine months of 2008. This compares to net cash provided by continuing operations of $280 million during the first nine months of 2007. The change in cash flow was driven primarily by changes in profitability, inventory levels and accounts receivable balances.

Inventory is accounted for on the balance sheet net of the LIFO reserve for North American operations. The LIFO reserve was $138 million at September 30, 2007, $140 million at December 31, 2007 and $238 million at September 30, 2008.

When the reserve is added to the inventory balances reported under LIFO, you will note a use of cash of nearly $300 million during the first nine months. This increase was driven by increased quantities of finished goods which we said we needed to do to restore our balances from December balances to more normal levels of about $75 million, increased cost of materials in finished goods of about $135 million, and increased costs and quantities of raw materials of about $90 million.

The higher raw material balances were due in part to efforts to avoid shortages in commodities experiencing tight supplies during the quarter. As raw material prices fall and/or say at the lower levels, we expect to benefit from this in both profitability and cash flow. These benefits could be significant in 2009.

The change in the LIFO reserve during the third quarter of 2008 which reflects the movement of cost levels just for the North American inventories was $55 million and you’ll note that year-to-date it was about $98 million.

Accounts receivable also increased and was $54 million larger use of cash during the nine months in 2008 than in 2007. We’ve not experienced significant collection issues so far.

Balance sheet highlights include cash of $264 million at the end of September which is down from $352 million a year ago. Our stake in Kumho Tire of Korea of $104 million was collected during the quarter reducing other current assets by the same amount. Although we have remaining $40 million of authority for share repurchases and $104 million on debt authorizations, we’ve temporarily suspended these repurchases to protect our liquidity during this banking crisis. The next scheduled maturity of long-term debt in the parent company is $97 million due in December 2009.

Now a few words about our credit facilities. We have two primary credit facilities that are potential sources of liquidity. The first is a $200 million asset-backed revolving credit facility which expires in November 2012. It’s used to support letters of credit and short-term borrowings. We also have an accounts receivable securitization program for up to an additional $125 million that expires in 2010. Both facilities remain undrawn and we currently have about $30 million of letters of credit backed by these facilities.

The amount that can be borrowed is subject to the availability of working capital that can be pledged. These two credit facilities do not contain significant covenants. Obviously they were put in place a couple of years ago when the market was significantly different. As mentioned earlier we have not drawn on either of these facilities.

Turning to pension funding. Our typical contributions to US pension plans exceed the minimum ERISA funding requirements in order to take advantage of tax benefits and maintain prudent funding levels. Contributions to domestic and foreign plans in 2008 will be in the range of $40 million. The value of investments in the company’s pension trust has decreased during this recent market turmoil. If investment values remain at these levels or even decline further, the company anticipates pension expense will increase materially in the future.

Cap ex during the third quarter of 2008 was $35 million compared to $26 million in the third quarter of 2007. We estimate that capital expenditures for all of 2008 will be in the range of $140 million to $160 million. This is below the previous estimate we provided as we take a more conservative and cautious approach to the use of capital while the economic outlook remains uncertain. We currently plan to continue with this approach towards capital expenditures into 2009. Therefore the levels will keep our capital expenditure at or below depreciation.

On June 18, 2008 the company announced an agreement to invest in a tire facility in Guadalajara, Mexico. The company’s ownership in this facility is approximately 38% with an investment of $31 million. The facility is the second largest tire plant in Mexico and is currently producing about 2.2 million tires.

During the third quarter the company made an initial payment of $26 million for this investment with the remainder to be paid upon completion of a final opening balance sheet audit. The investment will not be consolidated with the company’s financial statement due to our minority ownership position and therefore it appears as a component of other assets in our consolidated balance sheet.

Our two Chinese manufacturing investments are consolidated but are not 100% owned. Therefore capital expenditures at Cooper Chengshan and the Cooper Kenda joint venture are funded from three sources: Cash from operations, increased debt and contributions from the owners. My point here is that this has an impact on the amount of funding that Cooper’s required to provide as these are not wholly-owned operations.

On a related note and in connection with our acquisition of Cooper Chengshan, beginning in January 2009 and continuing through December of 2011 our partner has the right to put to us the remaining 49% ownership in that venture at a minimum price of about $63 million.

I’ve covered the highlights and now I’d like to turn the call back over to our CEO.

Roy V. Armes

Before taking your questions, let me give you some thoughts about 2008. The third quarter contained significant headwinds for Cooper and the challenges we faced included heightened raw material costs and weakened demand in major markets. Although spot raw material prices have recently pulled back, the lower costs will not be reflected in the product costs on our income statement until 2009. Even at those levels there’ll be at prices that would be considered historically high.

Tire industry demand is suffering as consumers feel pressure on many different fronts and the product segments that Cooper has traditionally had a large presence in are the areas most significantly affected. There’s also more intense competition in the form of increased lower priced imports. All of these factors have worked to camouflage the improvements we’re making in the operations overall.

We remain focused on taking waste out while developing products that the consumer demands and improving our mix at the same time. These actions are in line with the strategic goals that we established earlier this year and the capacity study we announced on October 21 is another step along that path.

We recognize that achieving those goals will be more difficult in this environment but we are committed and have confidence that the plans we’ve put in place and executing are the right initiatives to improve profitability short and long term. To that end we continue to act with focus on the items that will reposition our business model and move us to a place where we can capitalize on future opportunities.

We are fortunate to be in a position of flexibility with the deployment of our capital should economic circumstances require additional adjustments. As was mentioned earlier we still have cash and untapped credit lines and will of course tightly monitor our spending and capital expenditures during this period as we’ve suspended the repurchase of shares and debt, limited our expenses where possible, and are investing only in the items that are critical to Cooper’s success.

Our international segment continues to hold great promise for the future as it is delivering progress consistent with our plans. Examples of this include production milestones that were reached recently at our Cooper Kenda tire facility, the continued expansions at Cooper Chengshan Tire and the European operation profitability levels in difficult circumstances. Our outlook for the segment for the remainder of 2008 is cautious as the result of global demand weakening at a quite rapid pace.

North America continues implementing sic sigma lean and automation projects, and the progress that we’ve made with these initiatives will be an important building block of our future success. We’re not positioning the business so that we move forward with a continuous improvement culture.

Our recent investment in Mexico will also support our strategy of obtaining a supply of lower-cost high-quality tires and we’ve developed specific plans to address our growth issue. Some of these plans include launching new products and sizes and analyzing our participation across all channels to identify how we can expand the Cooper brand in channels where it’s currently not represented very well.

For 2008 we expect industry volumes in North America to be down compared to 2007. Earlier this year we had believed that it would be flat.

China has recently experienced double-digit growth in replacement tires but the market there is beginning to soften, and Western Europe is also experiencing volume declines.

Raw material costs escalated in the third quarter and were 20% higher than the second quarter which means that they’re 40% higher on a year-over-year basis. Fourth quarter raw material costs will be at a level at least as high as the third quarter and the recent pullbacks in raw materials are likely to be visible in the numbers during 2009 beginning in the first quarter.

The first quarter of 2009 is still likely to be higher on a year-over-year basis and during the fourth quarter of 2008 we’re targeting reduced levels of raw material inventories. During the year these had increased as we managed through supply challenges and we expect that raw material inventory management will result in releasing some cash in the first part of ’09.

As previously stated, we remain committed to the next level goals we established in our strategic plan. The pillars of this plan include establishing a sustainable cost-competitive supply of tires, profitably growing our business and enhancing our organizational capabilities. Some of the improvement in our future may come from improved macroeconomic factors but we’ll also drive our own improvements. Some of these changes will be incremental and some will take the form of step change improvements.

Our employees support the culture of continuous improvement we’re implementing and have confidence in our direction and believe strongly in the company’s future.

Recently I’ve been on business with customers who continue to support Cooper and are excited about the direction we’re taking, and as management we’re willing to take and make the difficult decisions that are necessary and will continue to drive Cooper to the levels of profitability we believe we’re capable of achieving.

Thanks a lot for attending the conference call here. That concludes our prepared remarks and what we’d like to do now is open it up for a Q&A session.

Curtis Schneekloth

I have one point of clarification before we take the questions and that is when we discussed the activity in China where utility availability was curtailed, we mentioned that there were lower tire prices. That should have been lower tire purchases in China during that period.

Now we’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Anthony Cristello - BB&T Capital Markets.

Anthony Cristello - BB&T Capital Markets

Phil, you gave us some numbers on unit shipments but if you look at the industry shipment of down 10%, what was the Cooper comparison to that down 10% for the industry?

Philip G. Weaver

During the quarter?

Anthony Cristello - BB&T Capital Markets

Yes.

Philip G. Weaver

During the quarter in North America we were down about 14% in total light vehicles.

Anthony Cristello - BB&T Capital Markets

I’m assuming that Mexico and Canada performed better than that number?

Philip G. Weaver

Yes. They were up. I don’t have the exact market share numbers but the volume shipments were definitely up.

Anthony Cristello - BB&T Capital Markets

Can you discuss your customers right now, how they’re managing inventory into the peak season? Then also has the tight credit market impacted some of your independent customers? And from the standpoint of perhaps working capital constraints, does that also place further pressure on inventory demands going forward?

Roy V. Armes

I’ll start out with that and then Phil can follow up on some of the other specifics. What we’re seeing with our customers today in the channels itself, the inventories are in some cases running higher than they normally have. In other cases it’s being very well managed. We feel pretty good about our inventory management here. We had planned to put additional finished goods inventory in our operations here and we’ve accomplished that but we’ve been managing that pretty tightly over the last few months. It’s a mixed bag but for the most part it’s still on the high side.

Your other question about the credit crunch and the impact it’s maybe having on some of our independent retailers, clearly they are all beginning or have been managing their cash very closely. We’ve not seen a huge drop-off of our retailers. It is more difficult to get money for sure but I think what I’ve seen is our customers have been very good to manage for cash.

Anthony Cristello - BB&T Capital Markets

On that same note with your customers, when you talk about oil prices and natural rubber prices and some of the commodities in general coming down, does it then become a bit more difficult for you to go out and basically put in effect more price increases? And have noticed any greater level of pushback on your recent price increase than what you’ve seen in the past two you put into place earlier this year?

Roy V. Armes

We haven’t seen any additional pressure there. I think the issue here is our customers see the raw material prices coming down; they obviously are pushing to adjust prices; and we’ve explained to them about how this works, that commodity pricing is still going to be higher in the first half of next year of year-over-year comparison from what we’re forecasting. But they’re all pushing for lower prices but it hasn’t been specific to just the recent one that we’ve come out with.

Anthony Cristello - BB&T Capital Markets

At Cooper Chengshan when you look at their ability to put that remaining percent back to you, are you indifferent to wanting to take that back or not wanting to take that back? Maybe you can’t comment. Also has their interest kept you from putting into place or managing that business any differently?

Philip G. Weaver

It has not caused us to manage it any differently because whether we remain as partners or whether we go our separate ways, we still want to lower the costs in that facility. We have expanded it a number of times; we’ve invested pretty considerably in the throughput; and I would say that we’ll continue to do that.

Roy V. Armes

I would probably add to that that we’ve got a very good relationship with our joint venture partner there and are very well aligned on the things that we need to do. Now we are in terms of managing the business challenging a lot more about any kind of investments that we would be making there going forward until we see something change in this economy.

Operator

Our next question comes from Saul Ludwig - Keybanc Capital Markets.

Saul Ludwig - Keybanc Capital Markets

Just to clarify on the volume. When you first went through it, you said your US volume was down 14% and then in response to Tony’s question you said North America was down 14%. Earlier you mentioned that your price mix helped you; the volume negatively impacted you by $58 million. Now $58 million on last year’s revenue would have been down about 10%. So I’m curious, was the down 14% just the US and inclusive of the gains that you had in Mexico and Canada or was your North American volume something less bad that 14% when including Canada and Mexico?

Philip G. Weaver

You’re right to clarify that. It was 14% in the US. Therefore it was less as a segment.

Saul Ludwig - Keybanc Capital Markets

And that number would be 10%?

Philip G. Weaver

It was around 7% for the segment.

Saul Ludwig - Keybanc Capital Markets

Even though the $58 million would have implied 10%?

Philip G. Weaver

Even though that’s what your model may have implied.

Saul Ludwig - Keybanc Capital Markets

No, no. You told us that you had $58 million and last year your sales were $580 million roughly so that’s how I’m coming up with the 10%. Not my model at all.

Philip G. Weaver

Correct.

Saul Ludwig - Keybanc Capital Markets

Phil, you mentioned about the pension cost. Refresh us. How much of your pension expense was down this year compared to last year? And again if the markets stayed flat where they are now till the end of the year, what would the pension expense be or what magnitude of an increase would you incur?

Philip G. Weaver

If the market is down, we did a study at the end of September. I don’t think I have the October numbers committed to memory but they were down somewhere in the range of 13% to 14%. On one side of this of course would be the actuarial loss that would be generated from that which you can do the math. We had about $1.1 billion of assets globally but the unknown is the change in the discount rate which we can’t really set until we get closer to year end, which would be an offset. So I can’t really predict yet what that would be.

Saul Ludwig - Keybanc Capital Markets

Based on the study that you did at the end of September and based on whatever guess you made about the discount rate recognizing that both the value of your portfolio and the discount rate could change between then, how did it look as of the end of September in terms of what your increase in pension expense would be next year?

Philip G. Weaver

We ran a number of different discounts and I just can’t recall numbers for each of them. It would be up fairly dramatically and I guess we’ll just tell you that on our next quarter call we can give you that better because who knows what the rates are going to be at year end.

Saul Ludwig - Keybanc Capital Markets

What about this year versus last year?

Philip G. Weaver

We used the 6% discount rate I think for the most part last year so I’m guessing it will be up at least 100 basis points.

Saul Ludwig - Keybanc Capital Markets

I meant your pension expense ’08 versus ’07.

Philip G. Weaver

For year-to-date or for the quarter?

Saul Ludwig - Keybanc Capital Markets

Year-to-date.

Philip G. Weaver

Year-to-date it was about $13 million and last year to date was about $17 million.

Saul Ludwig - Keybanc Capital Markets

These high inventories that you have, I have two questions that are sort of tied together. To what extent are you going to cut production in the fourth quarter to reduce those finished goods inventories and how much is that going to affect you in unobserved overhead? These inventories were created when raw material costs were very, very high. To the extent that you liquidate inventories you’ll be having the reverse of LIFO benefits. You’ll be having high costs. How much will the liquidation of high cost inventories affect you may be in the fourth quarter?

Philip G. Weaver

Let me cover the cost piece if I could and let others thing about the production side for the moment. There’s not liquidation in the sense of quantities so the cost change, and I’m just talking about North America because you’re mentioning LIFO, that’s the only place we’re on LIFO. The cost change will result in the FIFO cost being lower and the LIFO reserve being lower but if we have the same quantities, you would get the same LIFO costs.

Saul Ludwig - Keybanc Capital Markets

I’m assuming you’re going to be lowering your units though.

Philip G. Weaver

I don’t think there’ll be a dramatic decrease in our units between now and the end of the year. I’ll let others cover that, but there won’t be any huge impact I would say relative to a liquidation of quantities.

Roy V. Armes

There wouldn’t be if you had the same units; that’s correct. What we’re going to try to do is to balance our production. We think we’re at a pretty inventory level on the finished goods side. We are high on the raw material side where we’re really going to be addressing this more, and we’re going to be adjusting our production to get more in line with demand, which would mean right now we’re running at reduced schedules right now across our facilities that range anywhere from 90% to 100% of the capacity. We’re going to continue to monitor that and adjust production where we think it makes the most sense.

Saul Ludwig - Keybanc Capital Markets

Do you think we’ll have a big charge for unabsorbed overhead or big costs for unabsorbed overhead in the fourth quarter?

Philip G. Weaver

In terms of the cost to us during the fourth quarter, they could mirror the third quarter.

Saul Ludwig - Keybanc Capital Markets

I was very encouraged Roy to hear about the improved manufacturing efficiencies and the gains that you’re making there, and I think you mentioned that was $6 million or $8 million. Can you just elaborate on that a little bit and what we’re going to see going forward? That was very, very encouraging.

Roy V. Armes

Let me first say that we had about $6 million net improvement and that included about $4 million worth of increased utility costs, so on a year-over-year basis at say comparable utility costs it would have been an improvement of somewhere about $10 million. We’re very pleased with that.

We’re continuing with the efforts of reducing our complexity. We’ve got a lot of work going on with our black belts in improving operation efficiency or process efficiency. We have the automation projects that are coming on line in three of the plants as I mentioned before. We’ll have the fourth one finished by the end of the year and going into ’09. We’ll be cranking that one up or getting that one ramped up and running. So we’re feeling pretty good about that. But we’re also not planning to stop there. We’ve got other things in mind and other actions that we’re going to be implementing during 2009. We expect that momentum to continue.

Unfortunately in this situation when you get hit with some of these inefficiencies like not having enough material to keep the plants running, having the demand being soft like it is, it does camouflage some of those improvements.

Operator

Our next question comes from [Curt Lukey].

[Curt Lukey]

I just wanted to follow up on one question regarding capacity utilization. Did you provide a number earlier in the call on where your plants are running currently, your domestic facilities in terms of utilization rates?

Philip G. Weaver

Roy mentioned in response to a question that we’re running around 90% right now; 90% to 100%.

Roy V. Armes

That’s our mold levels which we’ve adjusted to try to get more in line with our demand and also managing our inventories at the same time.

[Curt Lukey]

Have you already taken the capacity reduction action that you talked about earlier? I thought that I saw a press release that you were going to reduce capacity in the US. Have you already done that?

Roy V. Armes

No. What we said there was we were going to take 90 days to evaluate what the best options were for us up to and including a restructuring of the capacity that we have which could mean a plant closure. We’re not going to be to a point where we can say specifically what that is until mid-January or sooner hopefully. There’s nothing that’s included in our numbers or our comments related to that.

[Curt Lukey]

But you’re already at 90% to 100% capacity utilization? Why would you be needing to take out another plant if you’re already -?

Philip G. Weaver

Those are at current mold levels and they can be adjusted up or down to total mold levels.

[Curt Lukey]

So you’ve got four tire making facilities domestically and you were thinking about taking one of them down?

Roy V. Armes

That’s one of the options.

[Curt Lukey]

Would it be as much as a 25% capacity reduction? I’m just trying to get a sense for how significant the operational restructuring might be, and if you took out one of four plants that would suggest you were planning on taking out 25% of your domestic capacity. I’m wondering if I’m looking at it the wrong way?

Philip G. Weaver

I would say that’s probably not the right perspective because if you remember we had reduced our Texarkana plant capacity by making it our flex plant two years ago. As a result we took about 5 million units out that could be produced in that facility.

Roy V. Armes

Even as you look at the possibility of taking one plant off line, with the footprint that we have we can take on more capacity at the remaining facilities.

[Curt Lukey]

How does this dovetail with your union agreements? I remember a few years ago you got pretty pretentious with the steel workers and I’m just wondering how that all might work this time around?

Roy V. Armes

We’re right now in the middle of negotiations at our Finley facility and I would tell you that I believe that the union, union committee and the people have really acted very responsibly through this whole process. It’s a tough situation not just for them but a tough decision for us to make as well ultimately. I’ve been very pleased about the cooperation and the working together that’s happened over the last month or so, not just the last month certainly because of the announcement we made but I think the relationship has been pretty good.

[Curt Lukey]

So you’re going to make an announcement within 90 days? You’re still on that track?

Roy V. Armes

Yes. We said no later than the middle of January.

[Curt Lukey]

With respect to the put, how would you handicap it in terms of the likelihood being put?

Philip G. Weaver

I don’t think we want to throw a number out there. That’s really up to or partners to decide.

[Curt Lukey]

Would they be willing to take something other than cash?

Philip G. Weaver

We’ve not even had that discussion yet.

Roy V. Armes

I think the one thing we’d probably add to this is that we’ve got a very good relationship with our partners. I think they’re pleased and we’re pleased with the progress that’s being made in Asia, and we’re continuing to drive that improvement. I think that has a bearing on what we do going forward.

[Curt Lukey]

On the liquidity front is there a way to estimate what the contraction in net working capital would be based on today’s material prices?

Philip G. Weaver

I would say one sort of proxy for that if you will is to look at the change in the LIFO reserve in North America during 2008 because if you say we get back to the prices that we had at the end of ’07. In North America LIFO reserve went up by about $97 million or $98 million. So that would be the order of magnitude just for North America and then you would also have the impact elsewhere. It could be that plus maybe 30% or so.

Curtis Schneekloth

Additionally we have very high raw material inventory levels which we will work off which could be in the tens of millions of dollars also.

[Curt Lukey]

So if material prices got back to where they were at year end 2007, you would have something like $100 million in North America?

Philip G. Weaver

Based on price alone, yes.

[Curt Lukey]

And then volumes I guess are a little lower too. But that’s the way to look at it. So that’s a pretty big number.

Philip G. Weaver

It is a big number and that’s an important part of this call. Not only how LIFO in a period of rapidly rising input costs affects our reported profits but also you have to think about it on the cash flow side, on the up part and the down part of the cycle.

[Curt Lukey]

With respect to the credit facilities, you mentioned that they were both undrawn but also that their borrowing base facilities. How much could you actually have drawn at quarter end based on the borrowing base?

Philip G. Weaver

I don’t have that in front of me but it’s substantially all of the headline amount. And obviously they’re designed to track with the increases in working capital. That’s how they’re designed.

[Curt Lukey]

With respect to the fourth quarter, you’ve given us some guidance as to how things are going. Curtis I think you mentioned that there’ll be unabsorbed capacity costs similar to the third quarter?

Curtis Schneekloth

Yes. I think that’s an appropriate view on it.

[Curt Lukey]

How are volumes so far? Have they rebounded at all?

Curtis Schneekloth

Volumes have not rebounded in October.

Roy V. Armes

If you look at the industry numbers that we’ve just recently gotten, passenger tires for the month is down over 20%, light trucks are down something in the neighborhood of 20+%, so these volumes are taking a big hit to say the least in the industry. Sorry. The month is between 15% and 20% down on the passenger tires.

Curtis Schneekloth

The other part of the scenario that people need to think about is that our raw material pricing will actually likely peak in the fourth quarter of 2008 and if you’re familiar with the raw material index that we’ve used in the past, that number would be somewhere around 240.

[Curt Lukey]

240 in the fourth quarter?

Curtis Schneekloth

Yes.

[Curt Lukey]

What was it in the third quarter?

Curtis Schneekloth

232.

[Curt Lukey]

What was it in the fourth quarter of ’07?

Curtis Schneekloth

166.

Roy V. Armes

It sounds like there’s not any more questions left out there. Before we close, just let me summarize a few points that we’ve discussed here today.

This third quarter was certainly difficult for the industry and for us and it was affected by several things we’ve mentioned: Raw material costs, softening demand, banking crises, low consumer confidence.

But we feel that in spite of all this we’ve been able to grow revenues to record levels; to improve price and mix through expansion of our Cooper brand in North America and expansion of our business in Canada and Mexico; we’ve been able to improve our operations so there’s some underlying operation improvements; we’ve been able to continue to invest in our strategic initiatives whether it’s Mexico or black belts; process efficiency; automation; and still been able to maintain a strong balance sheet and liquidity.

Our expectations going forward with having said all of that is very slow demand in ’08 that’s going to carry right into ’09, and our sense the industry’s going to be down for the fourth quarter and in ’09. Given those scenarios we recognize our challenges and we’re planning accordingly going forward with actions such as more aggressively managing our inventories particularly on the raw material side where we want to free up and generate cash from what we’ve got tied up in that inventory, having tighter controls of our cap ex spend as well as continuing to tighten our controls on costs, monitoring and adjusting our production levels to better balance with the demand and the inventories in the supply in general.

We’ve developed some very good products throughout 2008. Our new products have accounted for about 20% to 30% of our revenues this year. We’re going to continue to develop products to put in the market even during this environment that we’re in. Our low-cost country sourcing is being ramped up as we speak which is also driving some of the competitiveness that we plan to rely on as a company going forward.

We’ve got a continuous improvement mindset really being set up inside our organization and also completing the automation and continuing our process improvements. So if you think about all these actions, we feel along with the excellent alignment that we’ve got here internally and the commitment we have from our people, that it’s going to put us in an excellent position as a company coming out of this challenging economic environment. And I think that’s something that we do truly feel good about.

With all of that said, we’re confident about what we can accomplish as a company. I think we’re continuing to improve in spite of the economic environment that we’re in. We’re continuing to put things in place, initiatives that are going to help us to develop a stronger company and a stronger foundation going forward.

With that said I’d like to once again thank everybody for their attendance and participation in this conference call, and we’ll see you next quarter.

Operator

This concludes today’s conference call. You may now disconnect.

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