Cooper Tire & Rubber's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.25.13 | About: Cooper Tire (CTB)

Cooper Tire & Rubber Co. (NYSE:CTB)

Q4 2012 Results Earnings Call

February 25, 2013 11:00 AM ET


Jerry Long - Assistant Treasurer, IR

Roy Armes - Chairman, President and CEO

Brad Hughes - Chief Financial Officer


Pat Nolan - Deutsche Bank

Ravi Shanker - Morgan Stanley

Aditya Oberoi - Goldman Sachs

Bret Jordan - BB&T Capital Markets

John Murphy - Merrill Lynch

Anthony Deem - KeyBank Capital Markets


Good morning. My name is Lacy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cooper Tire Fourth Quarter 2012 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)

Thank you. I would now like to turn the call over to Jerry Long of Investor Relations. Please go ahead, sir.

Jerry Long

Thank you, Lacy. Good morning everyone and thank you for joining our call today. My name is Jerry Long and I serve as the company's Assistant Treasurer responsible for Investor Relations.

To begin with, I would like to remind you that during our conversation today, you may hear forward-looking statements related to the future financial results and business operations of Cooper Tire & Rubber Company. Actual results may differ materially from current management forecasts and projections.

Such differences may be a result of factors over which the company has limited or no control. Information on these risk 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, CEO and President; and Brad Hughes, our Chief Financial Officer.

In association with the press release, which was sent out earlier this morning, we will provide an overview of the company's quarterly operations and results. The press release contains a link to a set of slides that are a summary of information included in the press release and 10-K that will be filed with the SEC. These slides are intended to help investors and analysts quickly obtain information. They will not be used as the focus of today's call.

Following our prepared comments, we will open the call to participants for a question-and-answer session. Questions may also be directed to our email address, which is

Today's call will begin with Roy providing an overview of our results. He will then turn it over to Brad for a detailed review of our quarterly results. Roy will then summarize and provide comments on our outlook.

Now, let me turn the call over to Roy Armes.

Roy Armes

Yeah. Thanks, Jerry, and good morning. I’m pleased to report Cooper finished 2012 with a strong fourth quarter which capped off a great year for the company. While it was a challenging time in our industry and the global -- and in the global economy, I’m proud to say that Cooper Tire rose to the challenge in 2012 and continue to deliver strong results for our stakeholders.

In fact, we generated record net sales and operating profits for the fourth quarter and for the full year 2012, and demonstrated that our company can achieve growth in less than ideal market condition by being focused, agile and pursuing our goals with a sense of urgency.

Our people around the world stepped up and performed despite many obstacles. I want to start out today by thanking our employees for supporting our strategic plan and continuing to effectively execute against that plan throughout 2012.

Our record results continue to display this execution and performance. Consolidated net sales for the quarter were $1.1 billion, a 2% increase over the fourth quarter last year and a company record for any fourth quarter.

This increase was driven by 4% increase in total company unit volumes, compared to the same period last year. And on a full year basis we achieved record net sales of $4.2 billion, an increase of 7% over 2011.

North America unit volumes increased 2% compared with prior year fourth quarter and growth was driven primarily by increased shipment volumes in Mexico. U.S. total light vehicle units were about flat compared to RMA member shipments declining 3% and total industry volumes increasing 2%. The TBR unit volumes increased 12% outpacing the performance of the industry and our RMA member companies.

Unit volumes in our International segment increased 8% from the same period a year ago and within this segment European volumes increased 23% compared to the same period last year let by incremental volumes from our operation in Serbia.

Total Asia unit volumes declined by 2% in the fourth quarter reflecting primarily lower passenger tire exports, including intercompany shipments and despite overall slow growth conditions in China, our domestic PCR volumes outpaced the industry driven by our house brand products. TBR unit shipments including export and intercompany increased 6% in the fourth quarter.

Operating profit for the total company in the fourth quarter was a record $124 million, or 11.7% of net sales, compared with $60 million or 5.7% for the same period last year and for the full year, operating profit was $397 million or 9.5% of net sales.

North America segment operating profit was $103 million or 12.7% in net sales and International segment operating profit was $32 million or 9.4% of net sales.

Earnings were $1.15 per share, compared to $0.51 per share for the same period last year and this includes the one-time non-cash net income increase of $177 million, or $2.82 per share in 2011 that was due to the release of most of the valuation allowance against our U.S. deferred tax asset and related expense effects.

Brad will review all this specific quarterly results on a consolidated basis and by segment. But I want to take a few minutes to talk about some key areas of progress at Cooper.

We recognize that delivering high-quality products at a good value is the key to success for Cooper and during 2012, we’ve seen continued strong consumer demand for our product as tire such as the Cooper Zeon RS3-A and the Discoverer AT3 continue to receive significant third-party recognitions sparking consumer interest and demand.

In fact, per our recent announcement, the RS3-A is the tire selected by Ford as original equipment on its 2013 Ford Focus SE and Titanium models. This is our first ever U.S. passenger OE fitments and we are excited about the benefits this new relationship will bring to our entire company and all of our partners. Our Ford agreement edge the OE work we are doing in North America with our Roadmaster brand tires within the TBR segment and passenger tire fitments in China.

As I said previously, we would consider OE business if it is mutually beneficial from a financial perspective and the business would make us a better company. I believe this relationship with Ford satisfies that criteria.

While we are pleased with the additional channel diversity OE customers bring to Cooper Tire, we are and will remain primarily a [technical difficulty] tire company and that’s our future.

When I spoke with you at the last time this -- at this time last year, we’ve reached a labor agreement with United Steelworkers Local 752 in Texarkana, Arkansas and just reached a tentative agreement with United Steelworkers 207 at our plant here in Findlay, Ohio after a lock-out.

This agreement was subsequently ratified in February 2012. While the lock-out was a challenging situation and resulted in $29 million and higher manufacturing costs during the first quarter 2012, we believe we have move forward and the company is better positioned to compete effectively.

As we reflect on the full year volume performance in 2012, we are pleased with the results. The North American segment volume increased 4% year-over-year led by strong performance in premium passenger segments light truck and TBR.

And in our International segment the team delivered full year growth of 12% compared to 2011. Europe volume increased 1% driven by the ramp up of our Serbia facility, which was purchased in January 2012 and just recently produced its 1 millionth tire.

In Asia, while the fourth quarter exhibited soft -- some softness there, we experienced growth on a full year basis of 8% compared to 2011. Overall, our International team is doing a good job navigating deep challenges in the European economy, as well as slower growth conditions in China.

While volume growth is important for the company, we have clearly stated that our goal is to drive profitable growth, reflecting on a record full year operating profit for the total company of $397 million or 9.5% in net sales, we believe we are achieving our goal. And for several months now, we’ve spoken about two issues that would affect our volumes, one is the deployment of our ERP project and the other is the expiration of the tariffs on Chinese light vehicle tires imported to the United States.

As we enter 2013, we are implementing a major phase of our ERP project in North America. As part of the plant cutover we build additional inventory in the fourth quarter in anticipation of taking down days at our U.S. production facilities during the first quarter in connection with the system cutover.

We also planned a slower ramp up of production and shipments during the launch of this new system, and while the deployment is progressing well, these plant adjustments will affect our first quarter production volumes and manufacturing efficiency, and may affect the timing of certain shipments between the first and second quarter. But, however, we do not expect a material impact on our full year volumes relative to the market.

As we noted during the third quarter earnings call, we expected that a primary effect of the expiration of the special U.S. tariffs on tires manufacturing China would be increase volume volatility. We believe this was a factor in the fourth quarter volumes in the U.S. market.

And in addition, certain U.S. private label customers ended the fourth quarter with an unusually high inventory of tires including we believe a significant number of Chinese tires imported immediately following the tariff expiration. And as a result of this inventory levels, we are seeing reduced orders for primarily private label tires from these customers as they attempt to consume their inventory.

The adjustments are expected to affect sales and production volume during the first quarter and possibly the second quarter. However, the overall profit impact is expected to be minor due to better mix and other profit improvements that we’ve been making. We continue to believe that the company will meet or exceed industry growth rates following these adjustments.

Raw material prices continued to be volatile, the full year average index for 2012 was down 7% compared to 2011 and we believe raw material prices will remain approximately the same during the first quarter of 2013 compared to the fourth quarter 2012. However, on the longer term basis we expect prices to generally increase as the global economy gains momentum.

Volatility and raw material prices is a factor in our pursuit to alternate material sources which require innovative technology and in 2012 Cooper along with partner organizations received a $6.9 million grant from United States Department of Agriculture to evaluate the guayule plant as an alternative source of natural rubber. This work will continue as we are in the first year of a four year grant and we’ll continue to invest in technology and innovation as a cornerstone of our company.

On the subject of investment, Cooper Tire increased capital investment 2012 compared to historical norms to fund critical initiatives such as ERP and our investment in Serbia. And in addition, we have continued to provide returns to our shareholders announcing our 164 consecutive quarterly dividend just a few days ago.

One final area I’d like to highlight is the strength of our balance sheet. We ended the year with $352 million in cash, which provides us important flexibility to meet our obligations and reinvest in our business even through turbulent economic cycles.

We are pleased with the achievements of the entire Cooper Tire family during 2012, we are viewing 2013 with cautious optimism as a year looks to be another period of continuing and new challenges, and we believe we will continue to respond and manage our business accordingly to deliver value to our stakeholders as we have over the last several years.

Now, following Brad’s remarks, I’ll end our session today briefly describing the next evolution of our strategic plan which will guide the company over the next several years.

So, at this time, I’d like to turn it over to Brad, who is going to provide little more detail and color to the fourth quarter.

Brad Hughes

Thanks Roy. One minor clarification, Roy, referenced the 2011 EPS that number excluded the valuation allowance release on that occurred in the fourth quarter of last year.

At -- turning to this year, as reported, our total company results included a fourth quarter record operating profit of $124 million or 11.7% of net sales, compared with $60 million or 5.7% you for the same period last year. North American segment operating profit was $103 million or 12.7% of net sales and the International segment operating profit was $32 million or 9.4% of net sales.

Our higher operating profit was driven by $101 million in lower raw material costs, $9 million in manufacturing efficiencies, $5 million in higher unit volumes and $2 million of lower product liability costs, offset by $25 million of unfavorable price mix, $20 million of higher SG&A costs and $6 million of higher other costs, which includes increased pension expense and higher incentive compensation costs resulting from higher profit. This was primarily in the North American segment.

Reviewing our segment performance in North America, the segment sales were $811 million or 5% increase compared with the fourth quarter of 2011. The topline improvement for the quarter was driven by an increase in unit shipments and by higher pricing mix. Unit shipments for the North American segment increased 2% compared with the fourth quarter of 2011.

Total light vehicle tire shipments for the U.S. were about flat during the fourth quarter and once again outperformed shipments as reported by the Rubber Manufacturers Association members or RMA members, who reported a quarterly decline of 3%. Industry shipments increased by 2% as compared to the same period in 2011.

Cooper’s fourth quarter passenger segment declined 4%, while the light truck segment experienced 17% growth versus 2011. Our UHP product line unit shipments grew 36% during the quarter compared with the prior year as we continue to improve premium mix with our -- within our distribution channels.

Commercial truck tire sales of the Roadmaster brand continue to gain strengths as shipments were up 12% for the quarter compared with fourth quarter 2011. In comparison, total industry shipments within this category as reported by the RMA were down 3%.

For the full year 2012 Cooper’s light vehicle shipments have increased 3%, compared to a decrease of 2% for the industry and a decrease of 5% for RMA members.

As a note regarding shipment volumes, beginning in the first quarter of 2013, we will be making a minor change the way we report unit shipments in connection with our ERP system conversion.

In the first quarter we will begin to report shipments based on the sales date rather than the shipment date as we have historically done. While this is usually the same date that can differ for small number of direct shipment to U.S. customers from our foreign entity, these adjustments are considered minor timing differences and we will begin reporting future periods using this new process.

The segments operating profit was $103 million for the fourth quarter or 12.7% of net sales, this represents an increase of $68 million over the fourth quarter of 2011. Allow me to summarize the key drivers in the form of an operating profit walk forward.

$51 million from low material costs, $19 million in favorable pricing mix, $10 million from lower manufacturing costs, $3 million from higher volumes and $2 million low products liability costs, partially offset by $11 million due to higher selling, general and administrative costs and $6 million of higher other costs.

Our raw material index was $225 which was 11% lower compared with the prior year fourth quarter as natural and synthetic rubber prices decreased. The index declined nearly 2% sequentially from the third quarter. This was lower than the guidance we provided in the third quarter earnings call which indicated the index would be nearly flat sequentially.

As Roy mentioned earlier, we are expecting the raw material index to remain approximately same sequentially during the first quarter of 2013 compared with the fourth quarter of 2012.

Raw material prices remain inherently volatile within our industry and Cooper’s purchasing strategy continues to place a priority and securing an adequate supply of raw materials, and purchasing at close to or better than industry competitors.

As a reminder, in the United States we use the last in first out or LIFO accounting method charging the most recent costs against sales which in turn impacts profit more quickly than other inventory accounting method.

Favorable pricing and mix contributed $19 million of increase profits during the fourth quarter. Market pricing was largely unchanged from the third quarter of 2012 due to relatively stable raw material input costs yet remained higher than the fourth quarter of 2011 as select pricing promotions were reduced or eliminated.

Manufacturing costs decreased by $10 million within the fourth quarter as compared to prior year. During the same period last year the company incurred $11 million of costs related to the labor issues at the Findlay, Ohio facility.

Net efficiencies at all North American plants for the balance of the quarter were $1 million unfavorable after excluding the one-time associate -- cost associated with the locked-out.

Product liability expenses were $22 million, a decrease of $2 million from the same period of 2011. The level of full year product liability expense was slightly lower than the company’s earlier guidance for full expense in 2012. The outlook for product liability expense in 2013 is for expenses to trend moderately higher in 2012 but remain consistent with historical trends.

Selling, general and administrative costs increased $11 million in the fourth quarter. This includes an increase in incentive-based compensation year-over-year due to higher profit levels. Increased advertising and other strategic brand investments in the North American markets also contributed to the increase. Other operating costs increased $6 million compared to the fourth quarter in 2011, primarily due to increases in pension costs and incentive compensation.

Now, turning to our international tire operations, net sales in the international segment were $342 million down 9% from the fourth quarter of 2011. Unit volumes for the segment were 8% higher versus the same quarter of 2011. However, revenues declined as lower selling prices in both the Asian and European market lowered top-line sales.

Continued weakness of the overall European economy was compounded by a significant decline in winter sales in the Western European market such as Germany, Austria and Switzerland. Cooper European operations offset this market weakness with strong sales volumes in its U.K. and warmer weather markets.

Despite challenging economic conditions, we achieved market share gains for total year of 2012 compared to 2011, primarily through growth in Eastern Europe and Russia, along with sales of a new product line produced at Cooper’s new Serbia operations. As Roy mentioned earlier, unit volumes in our Asian operations were down 2% in the fourth quarter, due primarily to lower passenger tire exports including intercompany shipments.

Despite slower market conditions in China, Cooper’s house brand passenger volumes outperformed a domestic market and TBR volumes increased 6% across all channels. On a full-year basis, shipment volumes in our Asia operations increased 8% with the growth driven by both TBR and PCR segments.

Efforts to expand distribution and supply of light vehicle tires in China continue and are reflected in favorable growth in the Cooper brands over the prior year fourth quarter. In particular, sales of Cooper branded tires in the higher positioned product segments experienced the most growth. Thus the mix of unit sales in the quarter was more favorable towards the higher margin Cooper branded tires and high performance tires.

We feel these results confirm our direction in future opportunities in China. The performance of our international segment is reflection of Cooper’s commitment to grow our presence in the global tire market. And we are pleased with our progress in driving profitable topline growth.

Operating profit in the fourth quarter of 2012 was $32 million, or 9.4% of net sales, which is an improvement of $3 million over the same period of 2011. Let me provide a review of the underlying factors impacting international segment operating profit in the form of a walk forward.

$67 million from lower raw material cost and $2 million from higher sales volumes were partially offset by $63 million from lower pricing mixing, $2 million in higher SG&A due to higher advertising and sales support expenses in China, 1 million in higher manufacturing costs and $1 million of other miscellaneous expenses.

The full-year operating profit in the international segment was $144 million or 9.1% of net sales for the full year. This compares to $103 million or 6.6% of net sales in 2011. We are pleased with the progress of our international segment, especially considering the challenge of integrating our new operation in Serbia, along with the challenging macro economic conditions in both China and Western European market.

We believe we are well positioned for the future with our new operation in Serbia, along with our CKT plant in China, which can now sell into domestic China market starting this year. In addition to the individual segment results at the corporate level, unallocated charges were $13 million during the fourth quarter, up from $5 million in the same quarter of 2011. This increase was primarily the result of higher incentive-related costs driven by higher profit and accruals for stock-based liabilities which has increased with our share price.

I’d now like to cover a few other items starting with income tax accounting. Income tax expense recorded in the fourth quarter from continuing operations was $34 million, computed using the actual tax rates for various jurisdictions in which the company does business.

The company’s tax situation in 2012 was greatly normalized compared to prior years following the valuation allowance for lease in the U.S. at the end of 2011. As a result, a significant portion of the company’s tax expense was related to our profitable operations in the U.S.

Our taxes and related accounting were also impacted by the mix of earnings, tax credits and generally lower tax rates in non-U.S. jurisdictions. As we continue to generate taxable income, we will benefit from allowable tax credits and other tax strategies to minimize tax expense and taxes payable.

The effective tax rate for the year prior to the elimination of minority interest was a tax expense of 31.5%. At this time, we believe that the company’s forecasted effective tax rate on a normalized basis for 2013 will be in the 29% to 34% range. In projecting this annual effective tax rate, it is important to realize that it is based upon forecasted earnings mix by tax jurisdiction which may change. For more detail on our taxes, please go to our Form 10-K that will be filed with the SEC.

Consolidated or total company’s selling, general and administrative costs were $68 million or 6.4% of net sales, up from $47 million or 4.5% of net sales in the same quarter of 2011. As I have explained, this change is the result of higher incentive-based compensation costs reflecting higher profits, increases in accruals for stock-based compensation reflecting share price and increased selling and advertising costs as we make strategic investments in distribution capabilities and building the Cooper brands globally.

As we have discussed in earlier calls, we will continue to make investments in the Cooper brand and distribution networks on a global basis and believe SG&A as percent of net sales will remain in the 5% to 7% range in the near term. Cash flows and balance sheet highlights include cash and cash equivalents of $352 million at December 31, 2012 which were $118 million higher than December 31, 2011.

Cash provided by operating activities was $162 million during the fourth quarter. Cash and cash equivalents increased by $80 million during the fourth quarter, following the regular seasonal pattern for working capital. The company typically builds inventory during the first half of the year but release during the peak third quarter selling season.

Accounts receivable of $463 million decreased from the December 31, 2011 balance of $499 million. Our fourth quarter sales in 2012 increased over the prior year, collections were higher at the end of the year, improving the company’s DSO.

Net property, plant and equipment was slightly over $1 billion at December 31, 2012 compared with $929 million at 2011 year end. This includes the assets purchase in Serbia.

The notes payable balance of $33 million relate to our operations in Mexico and the People’s Republic of China. These are typically refinanced as they reach maturity with an ongoing goal of converting a portion to long term instruments.

A few words about our credit facilities, we have two primary parent company credit facilities to provide sources of liquidity. The first is a $200 million asset-back revolving credit facility which expires in July 2016. We also have an accounts receivable securitization program that expires in June 2015 with a limit of $175 million.

Both facilities were undrawn at December 31st with approximately $82 million of the lines used to back letters of credit. The amount that can be borrowed is subject to the availability of certain assets that can be pledged. These two credit facilities do not contain any significant financial covenants until availability is reduced to specified levels.

Additionally, we have unsecured annually renewable credit lines in Asia of which approximately $347 million remains available. These credit lines do not contain material financial covenants. All related borrowings are due within one year and are included in notes payable on the balance sheet.

Capital expenditures in the fourth quarter of 2012 were $64 million and totaled $187 million for the full year, which was at the lower end of the range provided throughout the year. We believe capital expenditures for 2013 will range from $195 million to $215 million. While this is higher than depreciation and amortization, we believe it is an appropriate amount considering our strategic goals to further enhance the capability of our global assets and resources.

I'll now turn it back over to Roy.

Roy Armes

Thanks Brad. As we complete our prepared remarks, I just wanted to close the loop on [technical difficulty] the beginning of the call. I talked about the record performance [technical difficulty] in 2012. And I’m pleased to say that we’ve achieved nearly all of our goals from our original strategic plan. And it’s gratifying to reflect on the past knowing that our team developed the right plan, got aligned to their plan and executed it well, driving results that not only met but often exceeded our goals.

Now, as we head into 2013, we have refreshed our strategic plan for the next several years carrying us through 2017. And we’ll outline that strategy later in the year, which will include in investor event, Cooper will host in New York.

I can tell you today that strategic priorities of this evolved plan do not change from our existing plan. We will still be focused on continuing to strengthen the value proposition that distinguishes Cooper in the market place today. And we’ll remain committed to, one, developing a competitive cost structure and improving profitability, two, driving tough line profitable growth, and three, continue to build the organizational capabilities we need to deliver the strategic plan.

Now, as we look forward to talking with you further about this later in the year, and this is -- that will follow our first quarter results. So with that, that’s really all the prepared comments. What we’d like to do operator is to start to take questions now. So if we could have the first question.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Rod Lache.

Pat Nolan - Deutsche Bank

Good morning everyone. It’s actually Pat Nolan on for Rod.

Roy Armes

Okay. Hi Pat.

Pat Nolan - Deutsche Bank

Roy, I want to follow-up on your comments about the private label customers and where their inventory stood at year end. Based on some of the industry data that’s come at least for January, it looks like the input numbers were pretty high in January. So I wanted to kind of follow-up on your thoughts about the inventory with the customers and kind of feel you out as far as what you think it’s going to happen with your actual shares as far as shipments to the customers at least near term?

Roy Armes

Yeah. Well, as I said last year, there was a lot of build-up of inventory prior to the expiration of the tariffs. We sensed that there was some of that going on and it in fact happened. And I think what started here in the fourth quarter and into the first quarter here as our customers now are pushing that inventory through the supply chain.

So the inventories were slightly higher last year than we typically have seen. Now, going forward, we said before this volume volatility with this expiration of the tariff is going to continue. But I think we’ve got ourselves pretty well positioned and this will normalize into the fourth -- sorry, into the second quarter. And we’ll see more of a normal rate and performance where we are at industry or higher in the latter half of the year.

But I think right now, there is some inventory that needs to be blown through the system for us to be able to take advantage of more volume. And now I want to also indicate that as I said in the last call that we are not out looking to grow market share. We’re out looking to grow our profitability. And I think that’s what we’ve been proving and we’ll continue to prove going forward. That’s our primary goal.

Pat Nolan - Deutsche Bank

And if I could just follow-up on that, what are you seeing as far as the pricing environment in North America? Have the adjustments that you were expecting post the tariff already taken place and you are thinking industry pricing is kind of reset now or do you think there will be another step down in Q1?

Roy Armes

Yeah. It’s a good question, Pat. I think what we’re seeing, here in the fourth quarter last year and even now, we continue to see more activity on the promotion side of the equation, not necessarily pricing. I think it’s yet to be seen what’s going to happen with pricing. But I would say it’s still fairly disciplined into the industry and I think we’re just going to have to watch it going forward. But we still see lots of promotions on specific tire segments or sizes, not across the board so much but very targeted.

Pat Nolan - Deutsche Bank

Okay. I'll get back in the queue. Thank you.


Your next question comes from Ravi Shanker

Ravi Shanker - Morgan Stanley

Thanks. Good morning, everyone.

Roy Armes

Good morning, Ravi.

Ravi Shanker - Morgan Stanley

Roy, can you comment a little bit more on the Asia softness that you saw? I mean, do you really see the Chinese tire market kind of coming back and maybe a pickup in replacement there or do you think the softness continues for maybe another year or two?

Roy Armes

Yeah. That’s a good question, Ravi. I think what we’re seeing, we really believe this. We’re much more optimistic about this coming back. We saw the softness. We’re seeing some signs of recovery. And I’ve talked with other industries as well. And they are seeing the same thing we are and it’s a little bit of a slower recovery.

We think by the second quarter, we ought to have start seeing a little bit more stronger recovery there. And we should be able to see a better recovery in the second half of this year. So we are kind of bullish from that standpoint.

Ravi Shanker - Morgan Stanley

Got it. And just to follow up on that and not to steal your thunder from the Analyst Day later this year. But if I can get a sneak peek, one of the key growth initiatives you had highlighted a couple of years ago was eventually growing that Asia business and getting the international portion to being as big as your U.S. portion of the business today. Does that still hold -- are you getting more bullish there or are you getting more bearish just given what’s going on in Asia the last say few quarters at least?

Roy Armes

No. Ravi, what -- actually what we’re going to be doing is, some of this investment that you’re going to see in this next year is investing in the distribution channels in China specifically. So we’re getting bullish there.

I think what’s happening a little bit as we start to look at international business being 50% and the North American business being 50% of our total is North America is performing very well. And it is putting lot more pressure on the Chinese or the Asian portion. But we’re not doing less bullish than what we have been. And we’re going to be investing this year to expand the distribution in China, specifically.

Ravi Shanker - Morgan Stanley

Got it. It's a high-quality problem to have. Last question for Brad, your 1Q is going to be a fairly volatile quarter given that you have the easy comps from the -- or the tailwind, if you will, from the Findlay issue last year. But at the same time you have these puts and takes with the inventory adjustments and such. Can you just give us a few buckets we need to keep in mind when we are kind of doing our bridge from 1Q ‘12 to 1Q ‘13?

Brad Hughes

Yeah. I think when you picked up on one of the main adjustments that you’re going to need to make which is around the incremental cost that we experienced with the labor situation at Findlay a year ago. And that’s an appropriate adjustment to make. We are indicating that we think that raw materials will be relatively flat as you look from one quarter to the next.

And then one area that Roy mentioned in his comments is with regard to the implementation of our ERP system and the higher levels of inventories carried into this year and how that could affect the volumes. I think those are the principal areas that you need to take a look at.

Ravi Shanker - Morgan Stanley

Thank you.

Roy Armes

Thanks Ravi.


Your next question comes from Aditya Oberoi.

Aditya Oberoi - Goldman Sachs

Great. Thanks a lot. My first question was a follow-up to Pat's question about pricing in North America. The price mix of $19 million positive was pretty impressive given the kind of commentary we were hearing going into the quarter. Can you break it up between how much was pricing and how much was mix for that $19 million?

Brad Hughes

Adi, we typically don’t provide a lot of details there. But if you look at what we reported for the fourth quarter, there were contributions from both. And I think it’s reasonable to say to leave it at that. That there were contributions from both price and mix. It wasn’t entirely one or the other. And so we had the benefit from both.

Aditya Oberoi - Goldman Sachs

Got it. And my second question was on your CapEx. Now, it's been a couple of years that the CapEx has been trending at I would say an above average run rate. Can you talk a little bit about how much of the $195 million to $215 million guidance is just a growth CapEx or CapEx related to ERP that might fall off from ‘13 to ‘14?

Brad Hughes

We’re getting close to the end of our significant ERP investments. So as we transition from ‘13 to ‘14, you should see some change for that. Also, we will be towards the latter stages of the investments that we’re going to be making in Serbia. However, we are continuing to invest in other parts of the operation for growth and profit margin improvement.

And so as we look at it, ‘13, we’ve given you the guidance for and when it’s appropriate we’ll give you an update as we look towards ‘14. But two elements that will start to diminish a little bit around ERP and the initial round of investments that we have planned for Serbia.

Roy Armes

Yeah. It’s not only Serbia. We’re planning expansions in our China operation, CCT specifically, also in Mexico as well as Serbia. So you will see those investments to start to take hold here in 2013.

Aditya Oberoi - Goldman Sachs

Got it. And my last question is on balance sheet. You guys are pretty close to getting to net leverage neutral levels. As we have seen with some other suppliers who have been willing to take some opportunistic benefit from the credit market, any view there to tap the credit markets and return more cash to shareholders maybe via buybacks or something?

Brad Hughes

We’re comfortable with where our balance sheet is right now. We continue to look at the market to determine whether or not there is an opportunity that we should be taking for to invest back in the business, so to direct back to shareholders.

At this point, I think that we are more likely to stay the course with the strategy that we’ve employed for the last several years which is to work out of our operating cash flow to fund growth and margin improvement opportunities into business.

Aditya Oberoi - Goldman Sachs

Okay. Great. Thanks a lot, guys. Congrats on a good quarter.

Roy Armes



Your next question comes from the Bret Jordan.

Bret Jordan - BB&T Capital Markets

Hi. Good morning.

Roy Armes

Hey Bret.

Brad Hughes

Good morning, Bret.

Bret Jordan - BB&T Capital Markets

A quick question on the OE side of the business since it’s sort of new to the news. But where do you see that being -- you talk about really being longer-term focused in replacement. Where do you see that sort of as a comfortable peak level as a percentage of sales and where do you see the impact of being on operating margins as you sort of scale up to enter the OE side?

Roy Armes

I would say Bret, we get this question obviously quite a bit. And we look at it about every year. And I’ve always said that if it’s financially, mutually beneficial and the relationship in the business can make us a better company, we would really consider this. Because we’ve always felt we could get, it could help our brand awareness and brand equity. And it could push our technology to, sort of, new levels. And we have for the past few years had OE business we were doing in China with some of our major companies there as well as this past year -- past year and half we have TBR OE business that we’ve had with Wabash.

So we’ve been in the OE business just not so much, not in the U.S. specifically for passenger tires or light trucks. Where this fits in our portfolio, this is financially, mutually beneficial. I think the relationship with Ford has been very, very good. They’ve been very supportive. They have pushed us in the lot of areas whether it’s technology but particular in area of technology which has really been helpful.

So we’re gaining what we saw we would get out of this at this important in time. So without divulging too much, I think you’ll see that business grow to some degree over the next few years. But it’s not going to be a major part of our business.

Bret Jordan - BB&T Capital Markets

Okay. Great. Thank you.

Jerry Long

Operator, we have time for one more question.


Thank you. Your next question comes from John Murphy.

John Murphy - Merrill Lynch

Good morning, guys. I had a couple but I will keep it short here. Just as we think through the ERP sort of volatility and disruption in the first quarter and going into the second quarter, will we get a benefit from this in the second quarter or is that going to be sort of the benefits going to be realized more late in 2013 and into 2014?

Brad Hughes

Yeah. What we had -- John, it’s Brad, We have a significant deployment occurring in North America that starting right now will continue through couple of quarters although that the most significant effect with regard to production in cutovers was around year end. But the real benefits from this are likely to start occurring next year and as opposed to during this year.

John Murphy - Merrill Lynch

So, as we think about it this year, we should think about it, sort of, as timing as far as volume and production and not necessarily any incremental cost or should we just -- I mean or should we think about incremental costs as well?

Brad Hughes

Well, we’ll start to depreciate and amortize some of the investments that we’ve made but that’s not going to be significantly different from what you are starting to see right now. It will increase as we move through the year.

On -- and then the and there will be cutting over different plants and that will cause us to lead to move inventories and as a result we’ll take a plant down for a couple three days in order to accomplish that. But the real benefits will then begin to come online next year.

Roy Armes

Yeah. And keep in mind here too, Bret, this is being implemented in North America basically throughout the whole year and taking out chunks of this, so that we can manage it efficiently and effectively.

John Murphy - Merrill Lynch

Okay. And then just lastly on the raw mat index, could you just remind us what it was in the first quarter, second quarter and third quarter of 2012 just so when we are doing our walks year-over-year we have that?

Jerry Long

Hey. John, this is Jerry.

John Murphy - Merrill Lynch


Jerry Long

I’ll follow-up with you and get you that information after the call.

John Murphy - Merrill Lynch

Sounds great. Thank you very much.

Roy Armes

Okay. Thanks, Bret.

Jerry Long

Operator, we’ll take on more.

Roy Armes

Thanks, John.


Thank you. Your final question comes from Brett Hoselton.

Anthony Deem - KeyBank Capital Markets

Hi. Good morning, gentlemen. Anthony Deem in for Brett today.

Roy Armes

Okay. Hi, Anthony.

Brad Hughes

Hi, Anthony.

Anthony Deem - KeyBank Capital Markets

Hi. So, first on your raw materials, and looking at Asian butadiene pricing recently, it’s gone up as high as 40% we have seen since December. And so, I'm thinking that your internal raw material outlook for the international segment could potentially be different from the flattish outlook you provided. So how should we be thinking about International margins early in 2013 in light of what appears to be increasing raw material costs in the region?

Roy Armes

Well, the guidance that we providing Anthony as, I think we probably discussed in the past is the global guidance. Now you’re right, there can be some timing differences with regard to when we see movements in specific commodities and I will leave to you and business intelligence network to keep you apprise of that.

But we have not seen anything that would suggest that we would change the first quarter guidance that we provided globally even considering some of the differences that you may see from one region to another. So we go out to the first quarter, I think we’re still relatively comfortable with the flattish guidance that we provided to you.

Anthony Deem - KeyBank Capital Markets

Okay. Thank you. And then a couple more, I appreciate the commentary around the Asian volumes. But can you give us a sense of the truck and bus, as well as the passenger industry outlook? You mentioned a recovery, I guess, are you looking for 1% to 3% growth, 3% to 5%, 5% to 10%, how can you characterize that sort of recovery within those time periods you specified and how do you -- how should we think about Cooper's volume in light of that recovery?

Roy Armes

I think if we split up the PCR in this particular case and TBR. TBR has been one that’s been under a lot of pressure during this economy in Asia. The PCR business has continued to grow at some pretty strong rates. I don't hold me to my memory here but it more in the high single-digit growth and we’re going to perform at or above that and we did in 2012 and we believe we can do that going forward here.

The truck and bus tire, we think is the one that will come back a little bit more this year. That industry has been down relativity speaking and we anticipate a recovery there but I don’t recall the actual number there. Jerry, can help you with that, if you would give him a call.

Anthony Deem - KeyBank Capital Markets

Great. Thank you very much.

Roy Armes

All right. Okay. I just want to again thank everybody for being on call today, I appreciate your time and interest in questions. And we are very pleased with the year we had as a company. I think our employees are really to give -- be given all the credit. They’ve done the right things to make sure that we change this business model or transform this business model over the last several years to one that can withstand a lot of different economic conditions here and I think we’re continuing to prove that quarter-to-quarter. So, with that, again thanks again for the call, it’s appreciated and look forward to talking with you on the next quarterly call.


Thank you for participating in today’s conference call. You may now disconnect.

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Cooper Tire (CTB): Q4 EPS of $1.15 beats by $0.29. Revenue of $1.1B (+2% Y/Y) beats by $0.07B. (PR)