Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Cooper Tire & Rubber Company (NYSE:CTB)

Q4 2009 Earnings Call Transcript

March 2, 2010 11:00 am ET

Executives

Curtis Schneekloth – Director, IR

Roy Armes – Chairman, President and CEO

Brad Hughes – CFO

Analysts

Tony Cristello – BB&T Capital Markets

Himanshu Patel – JPMorgan

Saul Ludwig – KeyBanc Capital Markets

John Murphy – Bank of America

Operator

Good morning. My name is Sumrita, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cooper Tire year end 2009 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, Mr. Schneekloth, you may begin your conference

Curtis Schneekloth

Good morning, everyone. Thanks for joining the call today. My name is Curtis Schneekloth, and I serve as the company's Director of Investor Relations. To begin with, I would like to remind you that during our conversation today you may hear forward-looking statements related to future financial results and the business operations for Cooper Tire & Rubber Co.

Actual results may differ materially from current management forecasts and projections as a result of factors over which the company 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 on file with the Securities and Exchange Commission.

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

The call will begin with Roy providing an overview of the results. He will then turn it over to Brad for a discussion of some of the details by segment and comments on other matters. Roy will then summarize and provide comments on outlook and we’ll finish with a question-and-answer period.

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

Roy Armes

Yeah. Thanks, Curtis. And good morning, and thanks to all of you for joining the call. During the fourth quarter we had a net income of $0.63 per share or $39 million. This includes restructuring charges, primarily related to the closure of the Albany, Georgia facility of about $12 million. This is a significant improvement over the prior year fourth quarter loss of $143 million or $2.44 per share.

The 2008 loss included 79, sorry, $76 million of restructuring charges and $31 million of goodwill write-off. Excluding these unusual items, our company operating profit improved by $129 million.

The demand for tires continued to stabilize during the quarter and the related indicator of miles driven in the United States our largest market showed positive improvement compared with the prior quarter.

Strong demand also continued in the Peoples Republic of China or PRC, as we continue to strengthen the foundation of our business and adapt to ever changing market conditions, we're still focused on our strategic plan. Improving our global cost structure, profitably increasing the topline and enhancing organizational capability should allow us to continue to deliver positive results.

We ceased production at our facility in Albany, Georgia in September and continue relocating equipment for installation in our other plants. Total restructuring charges are still expected to be around $135 to $140 million of which 60% to 70% should be non-cash.

To date we have incurred $125 million of restructuring costs, the majority of which were non-cash. The annual savings of the closure will be in the range of $75 to $80 million as previously communicated and this is being achieved by better optimization of the three remaining plants versus sub-optimizing the four U.S. facilities.

As we continue to move equipment and incur related expenses, there will be charges that continue into the second half of 2010. The majority of these charges are expected to be in the first quarter.

With that said, let me present an overview of the operations. On a consolidated basis, sales for the fourth quarter increased over the prior year fourth quarter by an impressive 22% to $773 million. Significant volume increases were offset by negative pricing and mix during the quarter and raw material costs were favorable during the fourth quarter on a year-over-year basis but have begun to increase markedly.

Our volume performance in the fourth quarter and second half was ahead of industry performance in the United States, this was a result of multiple factors, including the actions taken to better align ourselves with market demands. We have been actively been targeting new product launches into segments where we believe growth will occur. These new products have been well received by the market and in 2010, we plan to continue to release products in a rapid cadence. A good example of this is the new Weather-Master WSC snow tire where we recently completed a very successful ride and drive showcasing this product and we received extremely positive feedback about the performance from participants.

Operating profit for the fourth quarter was $60 million compared to operating losses of $164 million for the same period last year. Excluding the unusual items of goodwill write-off in 2008 and restructuring charges, our total company operating profit improved by $129 million. The largest drivers of this change were the impact of lower raw material costs, improved volumes and increased utilization of manufacturing capacity.

As demand increased, we operated at a level very close to full practical capacity while price and mix were unfavorable during the quarter. As our performance improved, we also had larger incentive and compensation related expenses. We benefited globally from raw material cost improvements of about $108 million. North American operations accounted for $74 million of this improvement.

We continue to experience gains around the globe from implementing lean Six Sigma in our operations. At the same time, we're benefiting, as I mentioned earlier, from optimizing the capacity at our remaining three facilities.

Separating these benefits into different categories is somewhat difficult as they are related, but in total, around the globe, these improvements are due to higher and improved utilization of our plants was about $27 million. Brad is going to cover this in more detail about this amount later in the call.

Our international segment provided a very strong result with $26 million in operating profit, an increase of $77 million over the fourth quarter of 2008. Excluding the 2008 $31 million write-off of goodwill, results improved by about $46 million. In particular, the PRC market continued to be strong.

The relationship between price, mix and raw material costs was positive on a year-over-year basis. By continue to be pleased with the performance of Cooper's employees and the results we are delivering, the hard work, staying focused on strategic direction and some tough but necessary decisions combined with the improving industry conditions have resulted in very strong margins during the second half of 2009.

During the fourth quarter, our operating profit margin for the North American segment was 7% and the international segment was 9.6%.

Now, it's my pleasure to be able to now introduce Brad Hughes, who joins us today for his first earnings call with Cooper. Most of you know, but Brad comes to us after a long career with Ford Motor Company where he gained a tremendous amount of experience that will be useful in his role here at Cooper as our new CFO. He's been on board since late 2009 and I've been impressed with the speed which he's been able to learn Cooper's business and begin contributing as a vital member of our executive committee.

So, Brad is now going to provide you with more detail on individual segments and various other financial matters. Brad?

Brad Hughes

Thanks, Roy. I will start with some detail on North American tire operations. North America segment sales were 566 million, an increase of 11% compared to the fourth quarter of 2008. Increases in volumes were offset by negative price and mix for the quarter. The market continued to show signs of improvement on a year-over-year basis. The results also benefited from relatively weak fourth quarter results in 2008.

The indicator we believe most related to demand for replacement tires over the long term is miles driven and this data continued to be positive during the quarter compared with prior year. Further supporting strong demand for shipments are the low levels of inventory that currently exist across the industry supply chain.

Operating profit for North American tire operations of $39 million, rose by $148 million when compared with the same period in 2008. Excluding restructuring charges, which remitted $64 million of the improvement, operating profit was up $84 million from the prior year.

In the United States replacement market, our unit shipments of total length vehicle tires increased 22% in the fourth quarter compared with 2008. This was double the 11% the total light vehicle shipments reported by the Rubber Manufacturers Association or RMA members and about three times the estimated 7% increase in total light vehicle shipments for the total industry during the quarter.

This improvement in our performance relative to the industry is consistent with projections we provided earlier in the year. The increases in our shipments were across all product segments. It is the result of both industry and company specific improvements and conditions.

During the quarter, we believe the implementation of the tariff on imported tires contributed to Cooper's sales results, but was not the only factor. The increase in volumes improved operating profit by approximately $29 million compared with the prior year. The relationship between price, mix and raw materials was positive during the quarter and on a net basis, bringing about $38 million of improvement to operating profit. This trend has started to come under pressure as raw material costs have been increasing.

The underlying raw material index was down approximately 24% on a year-over-year basis fourth quarter 2009 compared with fourth quarter 2008. This drove a positive $74 million improvement on a year-over-year basis. As a reminder, we use LIFO accounting method at Cooper which in the United States charges the most recent costs against sales, affecting profits more quickly compared to other inventory accounting methods.

As volumes surged during the quarter, we relieved inventory that was valued at lower historical costs on our balance sheet. The result of this LIFO cost flow assumption improved our operating profit by $15 million during the quarter. During 2010, our intent is to rebuild inventory levels, so we do not expect this effect to repeat.

As Roy mentioned, we continued to improve our underlying plant operation and had net manufacturing improvement in the North American segment this quarter of $21 million on a year-over-year basis. This is exclusive of any restructuring costs. The drivers of this improvement include three separate items. First, approximately $10 million from avoiding cost primarily related to not having Albany open. The second, worth approximately $7 million is the benefit from manufacturing at lower-cost facilities and the remaining $4 million is the net of the implementation of lean Six Sigma and other factors on manufacturing. All these benefits are calculated as net amounts and should flow through to the future results.

There was a small amount of cost, approximately $3 million, which we incurred in Albany during the quarter. This should continue to reduce as we move forward and have been netted from the benefits discussed above. Other costs, including those related to incentives and compensation were higher by $19 million over the prior year. This includes higher bonuses across the organization and higher director’s fees as the deferred fees held in stock units were priced to higher market values.

Before turning to international operations, let me summarize the changes during the quarter for North America in the form of an operating results going forward. This compares the fourth quarter of 2009 with the fourth quarter of 2008. The total increase in North American operating profit was $148 million.

The key drivers of this improvement were $64 million in lower restructuring charges, $74 million improvement in raw materials, $29 from higher volumes, $21 million from net favorable manufacturing performance, $15 million from inventory priced at lower historical costs, partially offset by $36 million in weaker price and mix and higher incentive related and other costs of $19 million.

Now, turning to our international operations, the international segment had net sales of $274 million, up a tremendous fixed 56% from the fourth quarter of 2008. This was driven primarily by 92% increase in Asian Volumes, offset by slightly negative currency and mix impacts.

Increased unit sales for Asia were the result of both the stronger Chinese market and improved exports. Europe's unit sales were up about 6%. Operating profit for the international segment was $26 million, an impressive increase of $77 million from last year's operating loss of $51 million during the quarter, which included a write-down of goodwill for $31 million.

Excluding that impact, the segment improved by $46 million. The biggest driver of this was the improved price to raw materials relationship. Lower raw materials helped results by $34 million, partially offset by partially offset by price and mix on a $15 million. The net of these was a positive $19 million impact on the results. Higher volumes increased results by $12 million. Manufacturing improvements, including better utilization contributed $6 million. Currency and other expenses were favorable by $9 million compared with the prior year. As a reminder we fully consolidate both of the Chinese joint ventures.

The teams at work across the international segment are doing an excellent job of both identifying and meeting market needs and delivering profitable results. The markets they participate in were much stronger at the end of 2009 than in the prior year. However, there remain challenges of dealing with intense competition, political and economic uncertainty and changes in raw material costs. We remain determined to expand our global presence, so that we are positioned to take advantage of growth where it occurs.

Let me again provide you with a summary of the key underlying factors in the form of an operating results, walk-forward for the international operation from last year's fourth quarter to this year's quarter. Firstly, $31 million from the non-recurrings of the goodwill write-down that took place in 2008, $34 million from lower raw materials, $12 million from increased volumes, $6 from improved manufacturing and $9 million from favorable currency and other cost changes. This was partially offset by $15 million in lower price and mix.

I'd now like to cover a few other items, starting with income tax accounting. Income tax expense reported in the fourth quarter from continuing operations was about $400,000 and was computed using combined jurisdictional annual effective rates. This resulted in a full-year income tax expense for continuing operations of $231,000. More detail on our tax situation will be available in the form 10-K, to be filed with the SEC.

Our taxes and related accounting continue to be affected by tax holidays in certain jurisdictions, use of deferred tax assets and the valuation allowance we carry against certain of these tax assets. This allowance was about $230 million at December 31st, 2009. The allowance and the application of tax accounting rules impact our effective tax rates. Included in our tax items at December 31st, 2009, are U.S. federal tax losses that can be carried forward of about $32 million and forward tax losses of $8 million.

We also have U.S. federal tax credits of approximately $14 million among other items that can be used to offset taxes and future earnings. In 2010, as we generate taxable income, we will continue to benefit from allowable tax holidays and tax credits, in addition to using other tax strategies to minimize tax expense and taxes payable as appropriate.

In reporting taxes, we are required to estimate an annual effective rate that is applied to quarterly earnings. At this time, we believe that the company's effective tax rate will probably remain in the 5% to 15% range for 2010. And estimating this effective rate it's important to realize it's based on estimated earnings by tax jurisdiction, some of which are still affected by tax holidays or tax credits. We have $25 million of tax refunds reported as receivables at December 31, 2009. These related primarily to the carry-back of 10-year specified liability losses. We expect to collect these in 2010.

Now on to cash flows. Net cash provided by continuing operations in operating activities was $174 million during the fourth quarter. For the full year, cash flow generated from operations was $478 million, compared with cash out flow of $165 million in 2008. The cash flow improvement was driven primarily by changes in profitability and inventory balances. Collections of receivables generated during the third quarter, which is our peak selling season, were a positive to cash flow during the fourth quarter. We have grossed up the impact of LIFO on the cash-flow statement to highlight the cash impact of the change in inventory.

Some balance sheet highlights included -- include cash and cash equivalence of $427 million at December 31, 2009. That's up $17.9 million from last year, 2008. The decrease in inventory balances from the prior year is primarily related to decreases in the quantity of finished goods inventory we had at year end. Although we are running our plant at full capacity we could not keep up with the surges in demand that occurred during the fourth quarter and for liquidated inventory.

Net property and equipment is down about 6% from the prior year as capital spending was constrained to amounts less than depreciation during 2009. Almost all of the short-term notes payable related to our joint ventures in the People's Republic of China whose operations are included in our consolidated balance sheet. This are typically refinanced as they become due with an ongoing goal of converting a portion to long-term instruments. Refinancing of these balances continues to be on plan.

In December of 2009, we repaid $97 million of maturing parent company debt. We also paid $31 million during the quarter related to the tax liability associated with the Cooper-Standard Automotive, our discontinued operations. Intangible and other assets increased $26 million as a result of increased deferred tax assets related to changes in pension liabilities in Europe. Shareholder's equity reflects the new requirement to include non-controlling shareholder's interest rather than reporting it in a mezzanine position between liabilities and equity.

A few words about our credit facilities and liquidity, we have two primary parent company credit lines to provide sources of liquidity. The first is a $200 million asset-backed credit revolving 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 of 2010. Both facilities remain undrawn with approximately $36 million of the lines 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 a reduced to specified levels.

Additionally, we have unsecured annually renewable credit lines in Asia that totaled $200 million, of which approximately $119 million remains available. These credit lines do not contain financial covenants. All related borrowings are due within one year and are included in notes payable on the balance sheet.

We will continue to vigilantly monitor our cash position and available liquidity. In the future, we are planning for some calls upon our liquidity, which include $18 million for the put option, which will be exercised by our partners at Cooper Chengshan Tire and about $70 to $100 million of inventory build anticipated in 2010 related to normal seasonality and rebuilding inventory levels from the levels at 2009 year end. The company has remaining authorization to repurchase $104 million of debt and $40 million for share repurchases, but the company has temporarily suspended its debt and share repurchase programs.

Now, with regard to capital expenditures, capital expenditures in the fourth quarter of 2009 was held to $15 million. We continue to rigorously review capital expenditures. Assuming the current business environment continues we will probably increase capital expenditures levels in 2010 compared to 2009, but will keep these items close to depreciation levels.

We currently believe that capital expenditures for 2010 will range from $120 million to $135 million, including initial investments in an ERP system. I will now turn it back over to Roy.

Roy Armes

Yeah. Thanks, Brad. In September United States government imposed a tariff on tires imported from the PRC and this tariff was imposed effective September the 26 and creates an additional 35% duty on tires imported into the U.S. during the first 12 months, 30% during the second 12 months and 25% during the last 12 months.

We implemented a price increase and began to make a tactical move to minimize the cost and disruption to our customers. And we've been successful thus far in minimizing the impacts to our bottom line and intend to continue bringing tires to the U.S. from the PRC during 2010.

We believe this will prove to be the right long-term plan for both Cooper and its customers. That does not mean that we can fully predict what the long-term impacts of this situation will be. Our goal is to continue strengthening our foundation and our flexibility so that we can quickly and effectively react to whatever changes that may result from the current economic environment. The one certainty in this situation is that changes will continue to occur and we're working so that we'll be ready to meet any new changes, challenges and changes that may arise.

Before taking your questions, let me give you some other thoughts about the quarter and our outlook for 2010. There are several items that give us reason to be cautiously optimistic in our outlook. Demand for replacement tires seems to be in better shape than it was a year ago. There were both signs of stabilization and improvement in the fourth quarter. This is driven partially by consumer confidence and the miles that people are driving.

There's also been statistically measurable improvement in the miles driven but consumer confidence has remained somewhat constrained through improved off the lows it hit in 2008. This leads us to believe that growth in the United States our largest market could return to normal historical growth rates in 2010 after two consecutive years of declines and three out of the last four years being down in the industry.

We've worked to position ourselves to exceed that level in 2010 and in the PRC high single-digit growth is a reasonable expectation. The European markets vary significantly from country to country but in the more established markets we expect there to be modest growth similar to the United States.

Growth combined with our need to increase inventory levels will allow us to run our facilities at very high utilization levels in 2010. And we're simultaneously working to continue to provide service levels that meet or exceed our customer's expectations.

In addition improving industry conditions, we believe that the sustainable improvements we've made are a reason to have a sense of confidence that our strategic plan is working. And visiting our facilities and customers, I still believe that we have a substantial amount of improvement available to further enhance our competitiveness.

The continued guiding path in these changes will be the strategic plans, imperatives of improving our global cost structure, profitably increasing the top line and enhancing organizational capabilities. Raw materials in the fourth quarter continued to increase in price along with underlying commodity prices. We project raw material costs in 2010, on average will be higher than in 2009.

Our balance sheet remains a very positive story as we successfully manage our critical resources and liquidity to enhance shareholder value and there's several factors that should be noticeable as we continue to transform Cooper in 2010. And they include improved utilization rates as we optimize our manufacturing footprint, new product launches and initiatives that will help strengthen our core business and build momentum for our top line growth. Improvements in our global cost structure through the implementation of LEAN Six Sigma improved process efficiencies and automation.

We also have investing to further enable our people and organization to respond to this ever changing global environment. And our preparation will start for the implementation of our BRP system that allows us to be a more nimble and effective company and continued focus on managing our resources to maximize shareholder returns.

The tire industry, inner global environment continued to be fluid and we recognize our results may also be subjected to uncontrollable factors that impact the replacement tire industry. But we're cautiously optimistic that recent trends the successes we've achieved and improved global industry conditions can result in even those -- stronger company with a more consistent level of profitability.

That ends our -- or concludes our prepared remarks and comment. So now we'll open it up for questions that you may have. And lastly, thanks for attending our conference.

Curtis Schneekloth

Before we start with questions -- this is Curtis. I have one point of clarification. The valuation allowance related to our taxes was $230 million as of December 31, 2008. As of December 31, 2009 it was $177 million. And we're now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tony Cristello.

Curtis Schneekloth

Hi, Tony.

Tony Cristello – BB&T Capital Markets

Hey, thanks. Good morning, guys.

Roy Ames

Hey, Tony.

Tony Cristello – BB&T Capital Markets

One question, if you could maybe give a little bit more color on is the volumes were fantastic and I'm just wondering, you talk about supply and inventory being somewhat LEAN in the channel. Why wasn't there, a little bit more benefit on the price mix during the quarter?

Roy Ames

The -- I think from our view point, Tony, some of these things that we put in place we are put it earlier in the year. If you remember in our previous conference calls, we talked about closing this gap with where our volumes and share was from the first half into the second half. Secondly, we had -- some of this to get the volume that we needed was shifting more toward a lower end mix of products. And we had introduced at that time our new opening price point tire the Starfire line that was -- we were expecting some pretty good benefits are from a volume standpoint and also on the profitability line.

So when we step back and look at the fourth quarter itself I think these things were all coming to fruition at the same time. And we already with the raw material prices being down are early in a year starting to pick up as the year went on. We felt we were pretty well-positioned to take advantage of that volume and that mix that we were pushing for.

Tony Cristello – BB&T Capital Markets

Okay. And when you look at where you end it and you had some commentary about inventory and where you ended the year. Do you think you're going to be able to get that inventory up in sort of that time and manner? In terms of one preventing that sort of situation that happened in the fourth quarter and then two, if you go back, I can't remember if it was 2007 or 2005. There were a few years where you had some inventory issues of not enough build or not enough ramp. What do you do in this situation from a capacity standpoint to prevent that from happening again as we move through the year?

Roy Armes

Well, first of all, let me go back and just kind of recap last year a little bit. In the first half of last year, industry was down double digits. I think everybody was adjusting inventories. We were even shutdown manufacturing days in the first half.

Then the industry was up 6% to 8% in the second half, that's a 20 plus percentage point swing in that short period of time. So I'm not sure how anybody could really plan effectively with that kind of pendulum swing in the industry.

Now, having said that, for us to get our inventory back, what we have done are several things. One, we're increasing the mold levels that we have with everyone of our U.S. plants. We're ramping those up as we speak.

And secondly, we're taking Texarkana to a 24/7 workweek from a five-day workweek we had before. We are ramping up faster than we have planned in our Mexico operation and we’ve decided and elected to take more tires out of China than what we originally planned just to satisfy some of this demand. And we think, through this first half we'll be able to build back some of our inventory. I think the thing what we have to watch is, by the time we get the inventories built, we're into the third quarter, which is typically our seasonal high.

Tony Cristello – BB&T Capital Markets

Okay.

Curtis Schneekloth

Tony, this is Curtis here. Also to circle back to your original question. You hit two or three kind of legs of the stool and then you talk about the volumes and you talk about price mix. But you left out raw materials in that equation.

And if you were to look at price mix versus raw materials, we still had pretty strong quarter there. In North America, for example, we had $74 million improvement in raw materials year-over-year and price mix was down $36 million. So there was still a benefit there.

Tony Cristello – BB&T Capital Markets

Yeah. And I guess, I just -- with the tight supply would seem that it's still favorable for potential price increases as we go forward. Just wanting to make sure you also have the inventory to sell-through and take advantage of that other supply chain right now?

Roy Armes

Yeah. And Tony, what we did, as a result of that, we did announce in the fourth quarter our price increase that took effect up to 7% in January 1, 2010.

Tony Cristello – BB&T Capital Markets

Okay. Perfect. Thanks, guys. I appreciate it.

Roy Armes

Yeah.

Operator

Your next question comes from the line of Himanshu.

Himanshu Patel – JPMorgan

Hi. Good morning, guys.

Roy Armes

Hi, Himanshu.

Curtis Schneekloth

Hi, Himanshu.

Himanshu Patel – JPMorgan

Two questions. It looks like international segment has done about 9%, 10% margins for the last couple of quarters. North America is doing what looks like 6% or so pretty consistently. What's your kind of view on sustainable margins for each of these divisions?

Roy Armes

Well, I'm going to go back a little bit Himanshu and talk about some of our previous discussions. And I thought in the short-term for North America overall we should be in the 4% to 5% range with medium-term pushing toward the 6% to 8% range. A lot of factors have to take place for us to be able to do that. We also said that we felt that we could get our international operations specifically in Asia to a higher single-digit operating margin and that's really what we're targeting.

Himanshu Patel – JPMorgan

Okay. Going back to Tony's earlier question, North American revenues I think they were down 11% volume, in the U.S. were down 22%. But if we just ignored currency in Canada, Mexico, sort of implied price mix was worth negative 11% on revenue. Can you at least directionally help us of that 11 percentage point negative price mix, how much of that was price versus mix this quarter?

Brad Hughes

I wouldn't say that was necessarily down 11% mostly after that number, Himanshu. But the majority of it was price.

Himanshu Patel – JPMorgan

The majority was price, okay.

Brad Hughes

Yeah.

Himanshu Patel – JPMorgan

And then if we think about, you mentioned utilization rates a couple of times. Can we understand what your expectations are for utilization rates for full year '010 and then what were they in the fourth quarter of '09?

Roy Armes

Well, I think in our last call, we talked about our utilization being over 85% approaching 90% and I think that's what our expectations are. But, well, in some cases as we start to ramp up these mold levels, we're exceeding the 85%, 90% utilization. And we expect that we will need that for the remaining part of the year.

Himanshu Patel – JPMorgan

And how were they in Q4?

Roy Armes

In Q4, we were, now remember in Q4, we were at five to eight weeks with Texarkana, so we were closer to the 85% range.

Brad Hughes

On the existing schedule that we were set at, we were running every day we could.

Roy Armes

Yeah, yeah.

Himanshu Patel – JPMorgan

Okay. And I know you guys, I mean this is a little bit volatile. But can you help us a little bit with this incentive bonus accrual line item. How should we think about that if we were constructing a year-over-year walk for 2010? And, does this -- the hit that we saw in the fourth quarter from this, does it repeat in Q1 or was that kind of Q4 issue and then a sort of was non-repeat thereafter?

Curtis Schneekloth

Himanshu, we had recorded some amounts earlier in the year and we had a larger accrual then in the fourth quarter also as the year delivered above where we needed to be to pay bonuses out. So I would say in 2010, we would expect the bonus levels and nominal dollars to be less and the accrual are to be more even throughout the year.

Himanshu Patel – JPMorgan

Less than full year '09?

Curtis Schneekloth

Yes.

Himanshu Patel – JPMorgan

And then if I can't sneak in one last one. I know you guys don't provide specific raw materials guidance, but can you just help us think through what the level should be for Q1? And then if you just straight line current stock prices, what should raw materials look like in Q2?

Curtis Schneekloth

All right. I will give you the raw material index. And to get everybody calibrated, I'll start with the first quarter of 2009 and walk through first quarter of 2010 with our expectation. For Q1 of 2009, the number was 154. For Q2, 137, Q3, 147, Q4, 168 and in Q1 of 2010, we expect it to be up about 15 to 20% over the last year. So it will be in the 180 to 185 range. And right now, we do expect that the second quarter will be higher than the fourth quarter.

Himanshu Patel – JPMorgan

And just to clarify, is that -- do you mean higher on a year-over-year percentage basis, or higher sequentially?

Curtis Schneekloth

Higher sequentially from the first and second.

Himanshu Patel – JPMorgan

In that second quarter?

Brad Hughes

Yes.

Himanshu Patel – JPMorgan

Okay. Very good. Okay. Thank you very much.

Roy Ames

All right. Thanks.

Operator

Your next question comes from the line of Saul Ludwig.

Saul Ludwig – KeyBanc Capital Markets

Hi. Good morning, Brady. On this topic of raw materials and pricing, given that the raw materials have continued to move higher even after you announced the date of the announced price increase, do you think that both your company and the rest of the industry needs to move prices again in order to adequately cover the raw material picture as it now appears to be although?

Roy Ames

I will not going to speak on behalf of the industry, Saul, but I will on from Cooper standpoint. We're going to watch this very closely, as I said in my comment here. Right now with what we're seeing with material costs, it's going up at a rate that we don't have any other way to offset that and we would have to take a look at whether that makes sense for us or not, just depending on how this trend continues. But we are watching it very closely and we're going to make the best decision for our business as a result of that.

Saul Ludwig – KeyBanc Capital Markets

And for raw material costs, let's just say stayed where they are today, right? Just let's assume they flat line from this point forward, would that imply a need to get some additional pricing somewhere along the second quarter in order to maintain your margin levels?

Curtis Schneekloth

Saul, this is Curtis. We can't answer it with that level of specificity. What Roy said, I think, is true, that we'll continue to monitor the situation and it's a balance between raw materials and what's happening with market pricing and we have to be market facing on that. So we'll have to wait to see what's going on.

Saul Ludwig – KeyBanc Capital Markets

Okay. Second question, Roy, did you mention earlier in the conversation, I may not have pick this up. The benefit to earnings from higher utilization in your facilities in the fourth quarter of this year versus fourth quarter of last year, was there a $27 million number tossed out?

Curtis Schneekloth

That's the combination of North America and international the $21 million and net favorable manufacturing performance in the U.S. and $6 million in international. That's better utilization and higher utilization.

Saul Ludwig – KeyBanc Capital Markets

So did you produce -- just thinking about production, how did your production of tires in your fourth quarter compare to production of tires in the fourth quarter a year ago? Were they up $1 million or $2 million or $1.5 million or -- ?

Curtis Schneekloth

We don't give out the units, but I would say that our utilization rates were much, much better in the fourth quarter 2009 than they were in the fourth quarter of 2008. Because if you remember that we still had some manufacturing in the fourth quarter of 2008 at our Albany facility, so…

Saul Ludwig – KeyBanc Capital Markets

Got it. And finally, I think Tony touched on this, but if you run your plans pretty much full-out, right. If you're talking about building inventories by $70 to $100 million dollars that sums could be $2 to $3 million tires. Are you going to be able to meet customer demands and actually sell more tires in 2010 than you did in 2008 while building inventories? You know, you don't have Albany and with these other moves that you're making, how would your able to -- if you could sell every tire that you could produce, would you be able to sell many more tires?

Brad Hughes

Saul, with the capacity increases that Roy was eluding to the actions that we had taken in the United States and what's happening in Mexico and what we're now doing out of China, we can accomplish both, selling more tires and building inventory. The balance of how much inventory we can build will to some extent depend on how quickly demand grows in, particularly in the United States.

Curtis Schneekloth

Brad -- I would add to Brad's comments, it's Curtis, again. If you look at our manufacturing network, we tend to convert our Texarkana plant from a five-day operation to a seven-day operation. So that will give us more tires. We are ramping up or helping to ramp up at the joint venture we participated in Mexico. So that we should be able to, hopefully get more tires from there this year.

Our CKT operations, which I think some people, maybe have discounted how many tires we'll get from there. We expect to get the same or more tires from there next year. Meanwhile, we have also increased the amount of tires that we can get from Tupelo and Findley. So at all of our existing manufacturing locations -- and CCT is also going to be able to do more tires this year. We are getting more tires out there than we have in the past. And you take that in combination with the fact we won't have the shut-down days we had in 2009. And we can do both those items that Brad mentions in terms of getting some of the levels back and better meeting customer expectations.

Saul Ludwig – KeyBanc Capital Markets

And final question, Brad, the operating income internationally, I think, from the second quarter -- excuse me, from the third quarter to the fourth quarter went from something like $29 million to $26 million. And I understand the seasonal factors there. Yet the minority interest in the second quarter was $10 million and was only $6.5 million in the fourth quarter. Why was it only $6 million in the fourth quarter? Why wouldn't the minority interest have been a bigger number given that there was just a modest change in the operating income in the international is segment, third to fourth?

Brad Hughes

Well, I think -- I mean, Saul, the key determinant there is going to be in which entities we actually made the profit and, therefore, how much of it is shared back with the partners. And frankly, I'll have to get back with offline to give you a better sense of why that was different. But it would have been dependent upon which partners through which we were making that profit.

Saul Ludwig – KeyBanc Capital Markets

Okay. Thank you very much.

Brad Hughes

Thanks, Saul. We'll take one more question.

Operator

Your next question comes from the line of John Murphy.

John Murphy – Bank of America

Good morning, guys. If I could sneak two quick ones in here, on the price-mix side, I just wonder if you could talk about what that was for the full-year 2009. And as we think into 2010 -- and I hate to beat a dead horse here, but potential big swing factor versus raws. I mean could that potentially go positive? Is there anything on the mix side of the equation that you see in the market or you see that happened in 2009 that would allow that to turn to a potential positive just, based on what you're seeing in the market?

Brad Hughes

Yeah. John. Curtis is looking up some of the numbers and stuff now, but just a general comment here, yes, that's something that we watch to try to make sure that it stays on the positive side. That's how we're able to balance both the raw materials and our internal cost reductions as well as the pricing announcement that we've recently made here. Did you find the numbers?

Curtis Schneekloth

Yeah. John, for the full year -- I want to make sure we get this into perspective. The price-mix combination was a negative of about $108 million, but the raw material was a positive at $411 million. In 2010, you're going to see those raw material numbers come up a little bit. But we started the out the year with a January, first price increase, which is always good. It was up 7%. I'll let you do the math on the rest of it, but, we'll do our best to get the pricing back to raw materials.

John Murphy – Bank of America

And that 7% increase, you're getting good steak on that? I mean they can still, will.

Curtis Schneekloth

Right now, John, yes. Our historical average has been netting about 40 to 50% of that number and I feel confident that that tells you that we've been able to do that.

John Murphy – Bank of America

And Brad, maybe just, I'd like to -- let you off the hook here in the first call, if you look at the raw math benefit particularly in North America, about $74 million versus the LIFO liquidation of about 15 million, I just trying to understand where you draw the line in the sand there. As you go lower in the LIFO layer -- is there a reason it is less expensive, because there are lower raw material costs going into those – the cost of the tires, so. I'm just trying to understand if maybe – you are understating in some ways -- it's an accounting question, the, understating the benefit of the raw materials and is that potentially even higher in the quarter than what we're looking at?

Brad Hughes

No. I think we've accurately represented what's attributable to raw materials. And then I would just go on to say that while we did have that benefit in fourth quarter from the LIFO, with our plan and expectation that we will be able to begin to build inventories back, that you're not going to see that continue into next year. We won't be digging into the historical layers of LIFO.

So, I think that you have an accurate representation of what's attributable to raw materials. We've given you a good sense of what happened in the fourth quarter with regard to the historical cost of inventory, but as we build inventories, don't expect that to continue.

Curtis Schneekloth

John, I'd also -- John, I'd also throw out there that if we hadn't eaten into the lower inventory levels, we wouldn't have had the volume benefit we had. So it didn't benefit us to do that.

John Murphy – Bank of America

Okay. Great, thank you very much.

Curtis Schneekloth

Thanks, John.

John Murphy – Bank of America

Okay

Brad Hughes

Well, first of all, let me thank everybody for attending the conference here. We feel very good about our quarter and the year. And we've got some good momentum going here. We see a lot of positive signs that keep us, while optimistic in some factors or some elements, it's cautiously optimistic in others. So again, appreciate your attention and thanks again.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts