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Cooper Tire & Rubber Company (NYSE:CTB)

Q3 2009 Earnings Call

November 2, 2009; 11:00 am ET

Executives

Roy Armes - Chairman, Chief Executive Officer & President

Phil Weaver - Chief Financial Officer

Curtis Schneekloth - Director of Investor Relation

Analysts

Himanshu Patel - JP Morgan

Rod Lache - Deutsche Bank

Tony Cristello - BB&T Capital Markets

Saul Ludwig - KeyBanc

Kirk Ludtke - CRT Capital Group

Operator

Good morning, my name is Melissa and I will be your conference operator today. At this time, I’d like to welcome everyone to the Cooper Tire third quarter 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, you may begin your conference.

Curtis Schneekloth

Good morning everyone and thank you for joining our call today. My name is Curtis Schneekloth and I serve as the company’s Director of Investor Relations. To start with, I’d like to remind you that during the conversation you may hear forward-looking statements related to future financial results and business operations for Cooper Tire & Rubber Company. Actual results can differ materially from current management forecast and projections.

This is a result of factors over, which the can has 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 and filed 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.

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. Following our prepared comments we will open the call to participants for a question-and-answer session.

Now let me turn the call over to Roy Armes.

Roy Armes

Thanks, Curtis and good morning to everyone. The third quarter was truly exciting for Cooper as we benefited from changes that we’ve been successfully implementing in an environment where there’s been a positive relationship between a price and raw materials.

We continue to make progress as outlined in our strategic plan by establishing a sustainable and cost competitive supply of tires, profitably growing our top line and enhancing our organizational capabilities. We’re also successful in managing our cash, ending the third quarter with $410 million up $162 million from December 31, 2008 and this period we also reduced our debt by $77 million.

While exciting, this progress is a part of our journey and not the goal. We realize we must continue to successfully execute changes to position the company for success, while remaining realistic about the difficulties that can be posed by the global economic environment and factors outside of our control, but during the third quarter, we had net income of $0.77 per share or $47 million.

This includes restructuring charges, primarily related to the closure of the Albany, Georgia, facility of $13 million and this is a significant improvement over the prior year third quarter loss of $55 million or $0.94 per share. The demand for tires appears to have begun stabilizing, but is not rebounded dramatically and indicators of this include stabilization in miles driven the U.S., our largest market and market recovery in China.

Our strategic plan continues to guide us forward and although we had to adapt our expectations to ever changing market conditions, we’re committed to delivering results with the actions that we’ve put in place. Production at our facility in Albany, Georgia ceased in September, well ahead of the original projections. In currently, we’re relocating equipment for installation in other plants and we continue to estimate the restructuring charges in total will be around $120 million to $145 million of which 60% to 70% would be non-cash.

To date, we have incurred $113 million of restructuring cost, the majority of which were non-cash. The annual savings of the closure will be in the range of $75 million to $80 million, primarily due to the better fixed cost structure and the operating leverage at our other remaining facilities, in essence, better optimizing the three remaining facilities versus sub optimizing the four U.S. plants.

With that said, let me present an overview of the operation. On a consolidated basis, sales for the third quarter increased over the prior year third quarter by 1% to $803 million. Volume increases were offset by negative pricing and mix during the quarter and raw material costs were favorable during the third quarter, but have begun to increase.

We also continue to realize the benefits of reducing costs in our manufacturing operation. There were a few positive indicators during the quarter related to the top line and they were both industry and company specific. These included improved miles driven data, strong shipments in China and reduced inventory levels throughout the industry.

We’re able to begin closing the gap that existed with industry performance in the United States and as we discussed in prior calls, this is the result of multiple efforts that have been underway and are beginning to deliver results. These reflect a positive sign of what we can do by adjusting our go-to-market efforts.

Operating profit for the third quarter was $71 million, compared to operating losses of $47 million for the same period last year. The largest drivers of this change were the impact of lower raw material costs and favorable results from our operations. These were offset by negative price, and mix impacts, and higher selling, general and administrative costs. Increased restructuring costs during the quarter also impacted the results.

We benefited globally from raw material cost improvements of about $184 million and North American operations accounted for about $135 million of that total. Our underlying operations in North America continued to improve performance, as investments in automation, Lean Six Sigma and other projects mature.

These manufacturing efficiency improvements were approximately $13 million during the quarter, when compared to the third quarter of 2008. This change is net of continued cost in our Albany facility during the quarter of approximately $12 million that are not included in the curtailment or restructuring cost.

During the first part of the quarter, we did adjust production to align with projected demand. These curtailments cost approximately $4 million during the quarter, a decrease of $3 million from the same quarter last year and our utilization rate should continue to improve as we balance production with demand for our products.

Our international segment provided a very strong result with $30 million in operating profit, an increase of $23 million over the third quarter of 2008. The Chinese market was particularly strong as the government stimulus took effect and the relationship between price, mix and raw material cost was positive on a year-over-year basis.

The international segment also drove manufacturing improvements through the implementation of Six Sigma and Lean projects and during the quarter we announced that we’ll be realigning manufacturing at our Melksham, England facility. This will help us align production with market requirements going forward.

I was pleased by the performance of Cooper’s employees during the quarter and excited about the results delivered. The operating margins were nearly 9%. Delivering sustainable margins will be our challenge going forward.

Phil is now going to provide with you a little more detail on the individual segments and the financial matters, so Phil.

Phil Weaver

Thanks, Roy and good morning everyone. First covering our North American operations, segment sales were $574 million, a decrease of 2% compared to the third quarter of 2008. Increases in volumes were offset by negative price and mix for the quarter. We saw positive signs during the quarter that the overall market maybe stabilizing. These included improved miles driven data, lower inventory levels throughout the supply chain, and increased light vehicle tire shipments.

Operating profit for North American tire operations was $48 million in the quarter, compared to an operating loss of $51 million in the same quarter of last year. The 2009 results include restructuring charges for the closure of our Albany facility of $13 million. Excluding these charges, the segment would have had operating profit of $61 million during the quarter.

In the United States replacement market, our unit shipments of total light vehicle tires increased 2% in the third quarter, compared to the third quarter of 2008. This was in between the 1% increase in light vehicle tire shipments reported by the Rubber Manufacturers Association or RMA and the estimated 3% increase in total light vehicle tire shipments for the total industry for the quarter.

The total industry decline includes an estimate of the total industry amount, rather includes estimates of imports by non-RMA member companies. This improvement in our performance relative to the industry agrees with the projections that we had provided on earlier calls this year. The relationship between price mix and raw materials was extremely positive during the quarter and on a net basis, supported about $110 million of improvement to operating profit. We expect this will be the peak of that positive trend in this cycle.

During the fourth quarter, there will be increased pressure as raw material costs have begun increasing and we’ve not issued related price increases. The underlying raw material index was down approximately 37% on a year-over-year basis.

As a reminder, the LIFO accounting method, which we used in the United States charges the most recent costs against sales, in effect more quickly affecting profits compared to other inventory accounting methods. This drove a positive $135 million impact on a year-over-year basis from raw materials. We continue to improve our underlying plant operations through the successful implementation of automation, Lean and Six Sigma and complexity reduction efforts.

The net manufacturing improvement in the quarter was $13 million on a year-over-year basis. This $13 million includes the costs of about $12 million during the period at our Albany facility. These costs were not included in restructuring or curtailment costs. To be clear, stated in another way, the manufacturing improvements were approximately $25 million without these additional Albany costs.

As previously mentioned, we curtailed our production less in the third quarter of 2009, compared to the third quarter of 2008, and this had a positive impact of $4 million. Product liability and SG&A costs were higher by approximately $9 million compared to a year ago. This was primarily the result of unusually low costs in third quarter of 2008.

We also recorded higher incentive related and other charges during the quarter of about $5 million. Before turning to the international operations, let me express the changes during the quarter for North America in the form of an operating result walk-forward. This compares the third quarter of ‘09 with the third quarter of 2008.

The total increase in North American operating profit was $99 million. The key drivers of this were $135 million improvement in raw materials, $13 million in net favorable manufacturing performance, $4 million in lower curtailment costs, offset by $25 million in weaker price mix combined, $9 million in higher products liability and SG&A costs, $6 million in higher incentive related costs and $13 million in higher restructuring costs.

Now, turning to our international operations, this segment had net sales of $297 million, up 4% from the third quarter of 2008. This was driven by increased volumes, offset by negative currency and price mix impacts. Unit sales in Asia were up 28% for the quarter, an exciting development driven primarily by the strength of the Chinese market.

Europe’s unit sales were down about 14% as the markets they serve saw a continued weakness. On a total basis, the segment’s unit sales were up about 15%. Operating profit in the international segment was $30 million, an impressive increase of $23 million from last year’s operating profit of $7 million during the quarter. The biggest driver of this was the improved price to raw material relationships, which provided a positive boost of $11 million.

Manufacturing improvements totaled $6 million. Currency also provided a boost of $7 million. Volume increases contributed $6 million to operating profit. Offsetting these were negative price and mix effects of $39 million.

Selling, general, administrative and other costs increased $6 million over 2008’s quarter. The Cooper brand has continued to perform extremely well in China. Our radial medium truck operations have also been achieving successful growth and have outperformed the market while driving margin improvements. The joint ventures in Asia will continue to drive out costs while continuously improving quality. These changes will be critical to our ability to grow in the future.

Our employees in Europe continue to do an excellent job in a tough environment. It will be necessary for us to further reduce production at the Michelin plant to remain cost competitive, but we continue to believe, there is a very viable long term position for us in the European market.

Let me provide you with the key underlying factors in the form of an operating result walk-forward for the international operations from last year’s third quarter to this year. There were $49 million of improvements relating to decreased raw material costs, $6 million from increased volumes, another $6 million from improved manufacturing, $7 million favorable currency effects, offset by about $39 million from lower price and mix and $6 million about the costs. The drivers 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 expense recorded in the third quarter from continuing operations was about $3 million and was computed using forecasted jurisdictional annual effective rates. More detail on our tax situation will be available in our Form 10-Q to be filed with the SEC. Our tax situation continues to be complicated due to tax holidays in certain jurisdictions and the valuation allowance we carry against certain deferred tax assets.

This allowance was about $230 million at the end of September 2009. Due to this allowance and the application of tax accounting rules, we have very unusual effective tax rates. We have about $13 million of tax refunds recorded as receivable at September 30, 2009. During the third quarter we collected about $26 million. These relate primarily to the carry back of certain specified liability losses.

Now, a few words on cash flow. Net cash provided by continuing operations in operating activities was $304 million during the first nine months of 2009. This compares with net cash used by continuing operations of $155 million during the first nine months of 2008 for an improvement of $459 million. The change in cash flow was driven primarily by changes in profitability and inventory balances.

We have grossed up the impact of LIFO in the cash flow statement to highlight the cash impact of the changing inventory. Cash provided by continuing operations for the quarter was $139 million. Inventory was a source of cash in the third quarter of 2009 as raw material costs decreased and quantities of inventory were reduced to meet seasonal demand. We will begin rebuilding these balances through the end of the year.

A couple of balance sheet highlights. Cash and cash equivalents were $410 million at September 30, 2009. Net property and equipment is down about 12% from a year ago third quarter as capital spending was constrained to amounts less than depreciation and due the $76 million fourth quarter 2008 write-down of assets related to the closure of our Albany facility.

Goodwill related to our Asian operations was written off also during the fourth quarter of 2008. Almost all of the short term notes payable relate to partially-owned ventures in China, whose operations are included in our consolidated balance sheet. These are typically refinanced as they come due, with the goal of converting a portion to long term instruments.

Refinancing of these balances continues on plan. The current portion of long term debt includes $97 million of parent company debt, due in December of this year and about $10 million of term loans maturing in partially-owned subsidiaries in China. For additional information, please refer to the disclosures of credit facilities available to these operations in our Quarterly Report on Form 10-Q, which should be filed later today. Shareholders’ equity reflects the new requirement to include non-controlling shareholders interest rather than reported in a mezzanine position between liabilities and equity.

Now, liquidity a few words about our credit facilities. We have two primary parent company credit lines to provide sources of liquidity. The first is a $200 million asset-backed revolving credit facility, which expires in November 2012. We also have an accounts receivable securitization program for up to an additional $125 million that expires in September 2010.

Both facilities remain on drawn and approximately $36 million of the lines are used to back letters of credit. The amount that can be borrowed is subject to availability of working capital 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 that total $200 million, of which about $98 million remain available. These credit lines do not contain financial covenants. All related borrowings are due within one year and are included in notes payable.

We continue to very tightly monitor our cash position and liquidity available. We have several calls on our liquidity in the near term and the bigger ones include the following. $97 million of parent company debt due in December, which I mentioned, about $35 million of taxes payable related to discontinued operations, nearly $18 million for the put option, which will be exercised by our partners at Cooper Chengshan Tire, which may occur in 2010 and somewhere in the range of $70 million to $100 million of inventory build we expect next year related to normal seasonality and rebuilding of inventory levels to maintain high order fulfillment rates.

Capital expenditures, in the third quarter of 2009, it was reduced to $22 million to conservative cash. We have vigorously reviewed capital expenditures and spent only amounts that are absolutely critical to the business, or have extremely quick paybacks. We will probably keep capital expenditure amounts at or below depreciation levels for some period. We currently believe that capital expenditures for 2009 will range from $90 million to $100 million.

That covers our highlights and now I’d like to turn it back over to our Chairman. Roy.

Roy Armes

Thanks, Phil. In September, the United States government imposed a tariff on tires imported from China. The tariff was imposed effective September the 26 and creates an additional 35% duty on tires imported during the first 12 months, 30% during the second 12 months and 25% during the last 12 months.

We implemented a price increase of up to 12% to help cover these increased costs and are making tactical sourcing move to try and mitigate the duty cost. Throughout the process we’ve been balancing the needs of our customers with the new reality of what it costs to import tires from China. A part of our response will be to accelerate the ramp up of the Occidente facility in Mexico and our Cooper Kenda Tire joint venture is the facility that would be most impacted by this change. That facility as you may recall was intended to export its entire production with a majority going to the United States.

We are actively working to find other markets to ship our production to from the CKT facility and in 2010 we had intended to ship approximately 4.5 million units from China to United States, that number now will be closer to two to three million. We will instead be shipping some of the products to Europe and rebalancing a portion of our sourcing to accommodate these changes.

When and where possible, we’ll also look to participate in the high growth Chinese market. The price increase was designed to cover the additional cost from the tariffs and in the short term, we could see some positives from the enactment of this legislation, but it’s extremely difficult to accurately predict the full impact of this change around the globe in the medium term. We will continue to deal with whatever changes occur in this and other external factors, so that we can meet our customers’ needs and deliver improved bottom line results.

Before taking your questions, let me give you some other thoughts about the third quarter and our outlook for the remainder of 2009. We’ll continue to focus on improving our global cost structure, profitably increasing the top line and enhancing organizational capabilities as the key elements of our strategic plan.

Our efforts to build a sustainable cost competitive base have been successful thus far and we’ve been challenged by many external factors over the last couple of years including the changes in raw material costs, the global economic meltdown and changes in government regulations, all the while we’ve been making the changes that will make us more competitive going forward.

These changes are taking hold and the benefits are driving to the bottom line. This will continue to be our priority for us as we move forward and the benefits of the changes we make have not fully appeared yet and we are excited about the opportunities that still exist. The efforts we’ve made to change the way we go to market are helping us to close the gap with industry shipments in the United States and during the third quarter, we were successful in closing much of the difference as the products we have launched have gained traction.

The other significant influence in this is our relationship with our private label customers. Through working closely with these customers to more fully understand that market’s needs, we have begun to halt the decline in this area. If you combine the excellent work our international segment has done in growing profitably in regions outside the U.S. with the opportunities we believe exist for growth in the United States, then you have an encouraging scenario.

While we can’t promise that there will be a growth going forward, we believe the changes we are making will put us in an excellent position to compete. We’re dedicated to developing a high performing culture that is focused on continuous improvement and we continue training our employees in the methodology on Six Sigma and Lean. This is pushing us to improve operating efficiency and make the changes sustainable.

Despite all of these positive changes, our results can still be influenced by external factors such as changes in raw material prices or a further downturn in the global economy. Our balance sheet remains a very positive story as we successfully shepherd our resources and manage our liquidity. This was visibly demonstrated by the increased cash balance that was achieved while paying down debt. Our priorities will continue to be maintaining adequate liquidity while investing in the projects that have the greatest return for our stakeholders.

For 2009, we continue to expect full year industry volumes to be down in North America, probably somewhere in the range of 6% to 8%. Europe will continue to face difficulties through the rest of 2009, while the market in China has recovered, and we believe that growth in the mid to high single digit range is possible.

After moderating during 2009, commodity prices are beginning to increase. Raw material cost during the fourth quarter will be up sequentially from the third quarter, but still down on a year-over-year basis. We do not expect to fully recover the increasing raw material costs in the fourth quarter. This, and lower seasonal volumes could put some pressure on our margins during the fourth quarter, relative to the third quarter.

This an exciting time as we begin to see the benefits of some of our work, however, we are in a very fluid industry and environment, but believe the changes that we’re making are a great start in positioning us for a more consistent level of profitability and we continue to develop in a way that will make us even stronger. Our greatest concern in the near term is raw material volatility. The excellent progress we’ve seen gives us optimism about what this team can achieve over the long term.

With that, I’d like to thank everybody for attending the conference. That does include or conclude our prepared remarks and now what we would like to do is open it up for questions, so operator.

Question-and-Answer Session

Operator

Your first question comes from Himanshu Patel - JP Morgan.

Himanshu Patel - JP Morgan

On the last conference call, I believe you guys said that, pricing discipline was still for the most part holding in, but you had sequentially seen deterioration in pricing. Can you talk about how pricing was sequentially this quarter?

Curtis Schneekloth

Pricing discipline was pretty good in relationship to where raw material costs moved. We did see a little bit of movement down in price, but our pricing results also reflected our take the money and ride promotions and some other things we had going on. So I would say pricing discipline overall was pretty solid again during the quarter. Fourth quarter, you can probably expect it to behave similar again.

Himanshu Patel - JP Morgan

Then was there a surge in Chinese imports ahead of the tariff? If so, how do you guys kind of expect that to impact your market share in the next few months or quarters?

Curtis Schneekloth

We did not see a major surge. There was some buying, but we don’t see that as a major issue that will cause a flip flop of volumes that otherwise would have been delivered in the fourth.

Himanshu Patel - JP Morgan

Then last question. Just I guess you guys are a month into the price increase that you imposed post tariffs. Any commentary on how that’s doing in terms of how well it’s sticking?

Roy Armes

We are out there executing that price increase. I think there was an understanding from our customers about the impact of this tariff and we’ve been working with our customers to get this implemented and so far, I would say, we’ve still been successful in making that happen.

Operator

Your next question comes from Rod Lache - Deutsche Bank.

Rod Lache - Deutsche Bank

I had a couple things. First, you ran through this on your North American EBIT walk. Did you say that the $13 million impact was net of some costs you were incurring and the gross savings number was closer to $25 million?

Roy Armes

Yes, I did say that.

Rod Lache - Deutsche Bank

That’s separate from the restructuring costs that you incurred in the quarter that you called out?

Roy Armes

Yes, and we wanted to make that point so that people didn’t think it was one in the same.

Rod Lache - Deutsche Bank

In the international business, can you just give us a little bit more color on how you expect this tariff to kind of play out? Is there sort of a negative impact for you over the next few quarters until you’re able to implement pricing or redirect units to other markets?

Phil Weaver

Rod, what we’re doing there is our plan really is calling for us to take about half the products that we were planning on taking in 2010 for the United States and to replace that we’ve got a step down that we announced in the maximum production facility, that we’re going to be moving that volume to CKT.

Now, over this period of time, if you look at how this really maps out, we’ll stay at these production levels. We’ll start to come down in CKT which is going to be added cost for us and then rebound back it will take about 12 months to 15 months to make this transition.

Rod Lache - Deutsche Bank

So, I guess just kind of thinking about how things go sequentially, you’ve got obviously a price increase, but you’re bearing some costs for these tariffs and higher raw materials. So, any kind of color on sort of sequentially what we should be expecting in terms of profitability for the international business and the North American business?

Curtis Schneekloth

I would say that if you’re speaking specifically of the tariff impacts here that, we implemented that price increase late in the third quarter. So, we’ll have a full impact of that coming through during the fourth quarter. Also, we will have the tires continue to import into the US from China during the fourth quarter.

Our belief is that price increase should offset most that impact from the duty cost in the fourth quarter. Outside of that, we continue to run our international to printings entire operation at a high utilization rate and in North America, we’ve talked quite a bit already I think about what we expect. We can expect seasonally expect seen to be lower demand but on a year-over-year basis we should be shipping more units during the fourth quarter than we did last year.

Rod Lache - Deutsche Bank

What about the sequential impact from raw materials? Can you put some numbers around that?

Curtis Schneekloth

What I can give you is the expected raw material index for the fourth quarter and that is expected to be at about 170.

Rod Lache - Deutsche Bank

That was up from where in Q3?

Curtis Schneekloth

147.

Rod Lache - Deutsche Bank

Just lastly when on the taxes, could you just kind of refresh us on when you would expect to be a North American tax payer? What is the status of that?

Roy Armes

Well, we would expect that probably in 2010, Rod, but there’s a lot of ground to cover between now and then.

Rod Lache - Deutsche Bank

So, is there any kind of guidance that you can give us on what we should be assuming for your tax rate?

Roy Armes

I don’t think at this time, because that would mean a forecast of our profits and we’re not prepared to do that at this stage.

Operator

Your next question comes from Tony Cristello - BB&T Capital Markets.

Tony Cristello - BB&T Capital Markets

Roy, maybe you could talk a little bit about your customers for a minute and given update on the health of your, you look at the larger customers versus the independents are any of them performing better than the others and are you seeing differences in purchasing patterns, in inventory stocks as we’re going through this sort of transition period right now?

Roy Armes

Well, just like in any situation like this, Tony there’s some customers that’s a little better than others depending on the region and that sort of thing, but I don’t want to really get into that detail, but I’d say that we have seen a much tighter control of inventories through our supply chain and through our customers.

I think that’s a behavioral change. There’s part of that that’s going to be a behavior of change is permanent and there’s go to be part of it that there will be some restocking that going to take place as the consumers get a lot more confidence about the economy.

So, the inventories are probably some of the lower levels that we’ve seen in a long time, if not the lowest we’ve seen forever, but I think you’ll see some restocking of this taking place over the next couple of quarters, but I don’t think it will get back to the same level as it’s historically been.

Tony Cristello - BB&T Capital Markets

You had some commentary about the Cooper brand continuing to outpace the inventory and then private label improving, but still lagging. When do you think the private label finally catches? I mean, what really has to happen there to see that sort of stabilize and then sort of be positioned more where you’d like to see it?

Roy Armes

I think what’s happening in the private label right now, I would say it has stabilized for us. It was a struggle making sure that we had the right products out there and understanding what’s going on in the market and adjusting accordingly. So I see that picking up as we speak here.

I think some of the bigger accounts, national accounts are the ones that are doing a little better maybe than others, but we’ve got a pretty good mix now of our Cooper brand growing, at the same time closing the gap on our private label. So from my viewpoint, I think the private label use the words stabilize. I would say for sure, it’s stabilized from what we can tell.

Tony Cristello - BB&T Capital Markets

Then if we look at then, Albany and sort of what you’ve done there to-date and I think you mentioned about $12 million on a per quarter run rate? Is the way to look at that basically, these are the cost savings we’ve benefited from the shutdown and then any incremental will be utilization driven metric?

Phil Weaver

Our $75 million to $80 million is a combination of the two. So it’s already included in that number. That $75 million to $80 million, just to clarify is our expected annual impact once we get past all of this closure related charges.

Tony Cristello - BB&T Capital Markets

I’m sorry if I missed it. Did you talk about where utilization is today?

Phil Weaver

We didn’t, but obviously with our inventories being constrained, as Roy said, volumes have picked up. We really are running at about, trying to produce every tire we can, particularly in North America and would expect to have that continue throughout the quarter and into next year to get our inventories built back to the level that we need to keep higher order fulfillment rates.

Roy Armes

Yes, I think Tony, in our last call we were talking about with four facilities being in that 65%, 70% utilization rate, now that we’ve made this change. We’re closer to the 80%, 85% number now and we’re anticipating that continuing through the fourth quarter and even into next year.

Curtis Schneekloth

As Phil stated, we are making every tire, we can in North America during the fourth quarter.

Tony Cristello - BB&T Capital Markets

So when you look at the cash and you’re in a very good position from a production standpoint, how do you look out 12, 18 months from now? Do you envision more JVs? Do you envision, I mean how big can Occidente be for you? Where should we think about your production if is CCT sort of peaked? I mean is there more opportunity to produce that. Can you just kind of give an overlay of where we are and where you think that can be if you’re running 80%, 85% now?

Roy Armes

In terms of a cost or…?

Tony Cristello - BB&T Capital Markets

Just in terms of overall production?

Roy Armes

Tony, what we’re doing is I’ll just start with CCT in China. We put in some expansions here. This past year have completed those expansions in CCT, particularly on the truck and bus tires and we’re already out of capacity there and are planning additional equipment to increase capacity for truck and bus tires. While we’re finishing our capacity expansion for the PCR, the passenger tires, we’re finishing that expansion and we’re starting to eat up that capacity as well, but truck and bus tires, they’re probably the bigger issue for us in terms of capacity.

The other thing that we’re doing is ramping up a lot faster in our Occidente Mexico facility. Now, we have brick and mortar or floor space there. What we’re doing is transferring some equipment from Albany down there to give them more capacity capability and that’s going on as we speak.

Plus, what we’ve done is, we just recently announced taking techs back to a 24/7 operation next year and we’re starting the hiring process there. We’re also upping the number of moles that we run per day at both the Tupelo and Finley and we’re in process of doing that now, we’re ramping that at a speed that we can really manage because we’re going to have to build the inventory in the first half of next year given where our inventory levels are right now and the demand that we’re seeing. Hopefully that answers your question.

Operator

Your next question comes from Saul Ludwig - KeyBanc.

Saul Ludwig - KeyBanc

That extra $12 million at Albany, does that go away now in the fourth quarter?

Phil Weaver

Not all of it there, I guess a majority of that actually would go away, yes. There will be a bit more restructuring, particularly in the pension curtailment area, as the last of the people are released from service.

Saul Ludwig - KeyBanc

So the $25 million run rate on savings should be at least that much, if not more, in the fourth quarter?

Phil Weaver

I think the answer to that would be, yes.

Saul Ludwig - KeyBanc

Then if you think about this, maybe we’re going to be comparing apples and oranges or maybe the same thing, but if you thing about the $75 million to $80 million that you expect to save, how should we think about the start of that rolling through your income statement and what do you see the pulse of that coming through?

Curtis Schneekloth

I’ll give you a fairly simplistic view of it. The timing could shape out a little bit differently, but you could think of the $75 million to $80 million, a part of that was the avoidance of the fixed cost and then the other part was running the other facilities fuller. I would say during the fourth quarter if you were to add those up, you might come to a benefit number, apples-to-apples with the $75 million to $80 million up maybe $15 million of it coming through.

Saul Ludwig - KeyBanc

Plus the elimination of the $12 million or does that $10 million to $15 million includes the $12 million?

Phil Weaver

I would say that includes it. So when you get out a little further then you’re going to be into 2010 already and I would say by the second quarter we should be at a pretty steady run rate on that already and we should have a large portion of it coming through in the first quarter already too, I would say.

Saul Ludwig - KeyBanc

Another question was asked earlier about Chinese imports. We know that through the Commerce Department that Chinese imports, we have data for July and August so far, haven’t seen September, but in those two months the Chinese imports were up something like 30%, which would be call it an incremental, that 30% represent about 2 million tires.

Do you think those got shipped out to customers and were counted in industry shipments in the third quarter or do you think a good chunk of those could be sitting in inventories of importers where those numbers haven’t gotten into the market yet?

Curtis Schneekloth

We of course have been looking at this and investigating it to figure out what’s going on there. In truth, 800,000 units or 1 million units out of 225 million during the year, it’s not that significant a number, but they’re probably some of them were setting out in the West Coast and we believe they have already flushed through. So we think they’re pretty much out of the system already.

Saul Ludwig - KeyBanc

Would you expect imports from China to just dive here in the fourth quarter?

Curtis Schneekloth

No, I can’t speak to the competition. We’re going to continue…

Saul Ludwig - KeyBanc

No, I mean the total number of imports that are imported into the U.S. by all manufacturers from all sources in China.

Roy Armes

It’s still too early to call on that. I would think that unless they have some other place to ship those tires or sell those tires, you’ll still see some imports coming into the U.S. I mean, we’re doing it ourselves and paying the duties on them. So I think at this point in time it’s still too early to tell or try to project or speculate.

Saul Ludwig - KeyBanc

On pension expense, this year if I recall the number’s around $34 million. Not counting the piece that’s in the restructuring number, $34 million that’s charged to ongoing operations. With pension assets having performed well this year, what do you think pension expense might be next year and embedded in that, what are you assuming for a discount rate in ‘10 versus ‘09?

Phil Weaver

Well, it’s too early yet to set the final discount rate. We think with the way that rate setting mechanisms work, it actually could be a bit lower than we used last year, maybe by 50 basis points or so and that will also impact the expense and if you have a corresponding move in the rates used under the Pension Protection Act, it could raise the obligation, but we don’t think either will exceed the amounts we have in ‘09, Saul.

Saul Ludwig - KeyBanc

Could do you think the $34 million pension expense would be about the same? Go down a little and go up a little?

Phil Weaver

I’ll just say we’ll give you an update on the fourth quarter call because we should have better estimates by then.

Operator

Your final question comes from Kirk Ludtke - CRT Capital Group.

Kirk Ludtke - CRT Capital Group

I just wanted to double back to the tax refund and then China strategy and Phil; I think that you mentioned a tax refund earlier in the call. I’m really focused on the tax. There’s a sizable tax refund that I think some of it went to Cooper standard and you feel you have a claim on that tax refund. Could you just elaborate on where that all stands?

Phil Weaver

Well that reference here is in the context of the parent company there and certain of its subsidiaries filed for bankruptcy protection in early August and that process is slowly moving through the courts so at this stage we don’t a better view, really than we had on our call at the last quarter. The refund I was talking about does not relate to that. It relates to Cooper Tire & Rubber Company’s refunds.

Kirk Ludtke - CRT Capital Group

How much of the refund went to Cooper standard and how much do you feel you have a claim on?

Phil Weaver

Well, I think a portion of it has been paid, we think we have a claim on a pretty sizable amount, I would say in total, in US dollars, at maybe a slightly outdated exchange rate, it just short of $70 million would be we’re entitled to, in our opinion.

Kirk Ludtke - CRT Capital Group

Is that pretty much the entire refund?

Phil Weaver

No. There is a portion that relates to the time period after we sold it which would be attributable to them.

Kirk Ludtke - CRT Capital Group

What kind of a claim do you have on the estate it’s a general unsecured claim?

Phil Weaver

No, we don’t view it as that at all. We view it is our money we’re entitled to it and it insured be outside of the determinations for unsecured creditors.

Kirk Ludtke - CRT Capital Group

Any timing as to when you might or do you have to wait until the whole thing is wound up.

Phil Weaver

We have to wait until this advance is through the courts. So we really can’t predict the outcome or the timing at this stage.

Kirk Ludtke - CRT Capital Group

Is it escrowed somewhere? Is there anyway to get them to set it asides so they can’t consume it?

Phil Weaver

It is not escrowed. There was no provision in the agreement to do that, but we’re working to try to protect our interest. At this stage, first of all, they’ve only gotten part of the refund. They haven’t received all of it, to my knowledge, anyway. So, it is not set aside in an escrowed.

Kirk Ludtke - CRT Capital Group

With respect to the China strategy, it would seem overtime that all of those tires have to be all the tires from Cooper Kenda have to be redirected to other markets, but at least that’s the way it would seem to us, just given the magnitude of the tariffs, but I guess you have a different view. I’m just curious, how do you overcome the tariff, the magnitude of these tariffs?

Roy Armes

What we’re doing Kirk, and that is raising the prices up to 12% to offset those costs, that’s one thing that we’re doing. Secondly, we’re shifting product from other locations to CKT, in this particular case Melksham, and we’re going to continue to take tires out of there on specific product segments and import into the U.S. and we’ll have to do it through pricing. Offset the difference.

Kirk Ludtke - CRT Capital Group

Aren’t the tariffs like you said 35% for the first 12 and then go up another 30.

Roy Armes

They start going down, the first…

Kirk Ludtke - CRT Capital Group

It have been still, 35%...?

Roy Armes

That’s why up to 12% spread across more products. It’s not just the tires coming in from China we’re spreading those across other products as well.

Kirk Ludtke - CRT Capital Group

I guess there’s the costs of the tires coming out of China are that much lower that the math works?

Curtis Schneekloth

The math on the overall scenario works for us. With the way we’ve done the price increases and our desire to continue to support our customers with the products they need, we need to bring these tires in for them. We could have cut some people off and ended up not bringing tires in but that was not throughout we decided to go on this.

Kirk Ludtke - CRT Capital Group

The tires that you did say that you’re going to redirect some of the tires to Europe?

Phil Weaver

Yes.

Kirk Ludtke - CRT Capital Group

What are the challenges with that? I guess you need to -- do you have a -- like what percentage increase of the tires you sell in Europe would that represent?

Phil Weaver

Percentage of increase?

Roy Armes

It’s not necessarily a percentage increase. We’re stepping down our production there, so it’s just displacing tires that were being produced in the U.K. to start with.

Operator

You’re welcome. This concludes today’s conference call. You may now disconnect your lines.

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