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Cooper Tire & Rubber Company (NYSE:CTB)

Q4 2013 Earnings Conference Call

March 14, 2014 11:00 AM ET

Executives

Bradley E. Hughes - Chief Financial Officer & Vice President

Roy V. Armes - Chairman, President & Chief Executive Officer

Analysts

Brett D. Hoselton – KeyBanc Capital Markets Inc.

Bret D. Jordan – BB&T Capital Markets

Patrick Nolan – Deutsche Bank AG

Operator

Good morning and welcome to the Cooper Tire & Rubber Company Fourth Quarter and Full-Year 2013 Earnings Conference Call and webcast. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder this conference is being recorded. I would now like to turn the conference over to your host Mr. Brad Hughes, Cooper Tire, Chief Financial Officer. You may begin sir.

Bradley E. Hughes

Thank you, operator. Good morning, everyone, and thank you for being with us today. This is Brad Hughes, Cooper Tire’s, CFO and I am here with Roy Armes, our Chairman, CEO and President.

To begin, I would like to remind you that during our conversation today, you may hear forward-looking statements related to the future financial results and business operations of Cooper Tire & Rubber Company. Actual results may differ materially from current management forecasts and projections. Such differences may be the result of factors over which the company has limited or no control. Information on these risk factors and additional information on forward-looking statements are included in the earnings release we issued earlier this morning and in the company's reports on file with the U.S. Securities and Exchange Commission.

In association with our earnings release, we will provide an overview of the company’s fourth quarter and full year 2013 operations and results. Our earnings release includes a link to a set of slides that summarize information included in the news release and in the 10-K that will be filed with the SEC. These slides are intended to help investors and analysts quickly obtain information. They will not be used as a focus of today’s call.

Following our prepared remarks, we will open the call to participants for a question-and-answer session. As a reminder questions may also be directed to our e-mail address, which is investorrelations@coopertire.com.

We will begin this morning with Roy providing an overview. He will then turn it back over to me for more detailed review of our quarter end full year 2013 results. We will wrap up with Roy providing commentary on our outlook and then we will take your questions.

With that I will turn it over to Roy Armes.

Roy V. Armes

Thanks, Brad and good morning to everyone. It is good to have Cooper back to reporting earnings and hosting conference calls with our investors and analysts again and we indeed are moving this business forward. At the end of December, we told you that our top priority coming out of the terminated merger agreement with Apollo Tyres was to address the labor situation at our CCT joint-venture in China with a goal of returning to full production of all tire brands and Cooper resuming regular financial reporting.

One month later at the end of January, we announced that we had reached an agreement with the CCT joint-venture partner that did two things. One you confirm that operations are returning to normal as CCT including production of all tire brands and two, it outlined a process to determine the future ownership of CCT beginning with the third-party valuation of the business.

Today is an important milestone in this process as we report our fourth quarter and full year 2013 earnings. The process for determining the ownership of CCT is progressing and once ownership is defined, we will report back on it. We did not plan today to provide interim updates as we move toward this – move through this process.

I am pleased if we are able to get our arms around the situation relatively quickly after the merger termination and put our process in place to resolve it long-term. We are also happy to be returning to a position, where we can meet our customers needs with product, coming out of the CCT, and we look forward to the ultimate resolution of ownership of the joint venture, as we continue to look toward growth in China for Cooper.

Clearly 2013 was a year of unique challenges and unprecedented circumstances. Despite this, we were able to end the year with the second best annual operating profit result in our company’s 100 year history excluding the divested automotive group. And even if you include the automotive group it was our fourth best year ever in terms of operating profit.

Specifically for the fourth quarter, Cooper generated an operating profit of $47 million or 5.5% of net sales and full-year operating profit of $241 million or 7% of net sales. We were able to achieve this outcome on lower volumes which negatively impacted our results.

Fourth quarter sales, were $861 million down 19% from a year ago and our full year sales at $3.4 billion were down 18%, compared to 2012, we reported net income of $20 million or $0.31 per share in the fourth quarter, which compares to $73 million or a $1.15 a share for the fourth quarter a year ago. For the full year, we reported net income of a $1.73 per share on a diluted basis.

We ended 2013, with a strong balance sheet, this includes $398 million in cash and cash equivalents, which is an increase of $46 million compared with the fourth quarter a year-ago when we had a cash balance of $352 million.

Again, we are pleased to have the flexibility inherent and a strong balance sheet to invest in our business and deliver value to our stockholders. I want to thank our employees around the world our customers, suppliers and stockholders for their support of Cooper throughout the unusual circumstances we experienced in this past year. We held and it was not easy – it was not an easy year for anyone and we greatly appreciated the continued support.

Now to review there are several unusual items that negatively impacted our performance in the fourth quarter and full-year, let me cover those. One was the labor actions that took place in CCT and response to the merger agreement, as we noted in our third quarter release workers at CCT began a temporary work stoppage in mid-July and did not return to work until mid-August.

They then resume production but excluded Cooper branded products. These actions reduced operating profit in the third quarter and had a similar effect in the fourth quarter as Brad will detail out a little bit later in the call.

Another unusual item was the expense involved in the merger agreement and its termination in the fourth quarter. We previously disclosed that Cooper incurred a total of $9 million of such expenses in the combined second and third quarters and we incurred another $9 million in cost resulting from a merger in the fourth quarter, which brings the total to $18 million for the full year. Our third unique item was our deployment of an ERP system in our U.S. facilities.

Moving to SAP platform that will bring many long-term benefits did cause destruction for Cooper in the short-term. To put it simply as we deployed, we had issues with warehousing and shipping that made us less sufficient when moving tires from our plants to our warehouses and then to our customers, but we are addressing those issues and the situation is improving as we continue to train our teams, focus on consistency of implementation across facilities and respond to customer feedback. While these unusual items and other certainly challenged us, but took place in 2013 did serve to demonstrate the strength and resilience of our business model, which allowed Cooper to right out the many unique circumstances and still produce the solid profit.

As many of you know, our business model as continue to evolve and strengthen over the past several years. It supported by five-year strategic plan for Cooper that we developed and launched in 2008. With great execution by all of our people around the globe, we delivered on virtually all of the goals in the strategic plan ending 2012 with record sales and earnings and positioning Cooper within the first quartile of value creation for the period of 2009 to 2012 using the S&P 500 as a comparative base.

Our reference to our 2012 performance because it’s important to remember the Cooper went into the events of 2013 in an extremely strong position. Even with all that took place we’ve remind a strong company that is proud to mark its 100 anniversary in the Tire business this year and we are moving forward with confidence into the next 100 years.

We although continue to evolve and update our strategic plan and we will talk more about the specifics of our growth initiatives and targets when we host an investor event planned for the middle of May in that timeframe. More information on that will be fourth coming.

As I said earlier Brad will review all the specific quarterly and year end results on a consolidated basis and by segment. I want to take a few minutes before he does that to talk about some key areas of success and progress at Cooper that took place while we were also addressing the challenges of 2013. It’s easy to dwell on the unprecedented circumstances of the past year and in doing so over look the great work that took place during 2013 to further position Cooper for long-term success. We recognize at delivering high quality products at a good value is the key to success for Cooper, and during 2013 in North America alone we launched several new products including the CS3, which is our core mid range passion to product the HT3 which is the newest Cooper commercial grade light truck highway tire. The MXT which is the Mastercraft brand mud-terrain tire, as well as numerous size additions and proprietary lines for our national, retail and private brand customer.

Many of these new product programs received third-party aculeate such as awards earned at the most recent SEMA show and GOOD DESIGN award for the CS3 from the Chicago Museum of Architecture and Design. Our work with Ford which we announced in February of 2013, continues to progress well as our first ever U.S. passenger car OE contract.

The Cooper, ZEON RS3-A is original equipment on the Ford Focus SE and Titanium models. Now we look forward to continuing the positive relationship Cooper continue to invest in technology and innovation throughout 2013 as an example we’re in a joint pattern with our partner INSA for Silica Masterbatch technology or SMB. Cooper has used SMB to manufacture more than $2 million premium passenger tires and derived a number of benefits from the technology including improved mixing productivity and flexibility as well as environmental advantages.

We are working with INSA to fully commercial this product. Cooper’s opened a new Asia Technical Center about 30 miles from Shanghai on the grounds of our wholly owned Cooper Kunshan Tire or CKT plant. The new $2.8 million 5,000 square foot facility houses state-of-the-art testing equipment and expanded research and development capabilities. There are 70 material scientists and tire engineers on staff designing and developing new products specifically for the China and Asia market.

Allocating in Asia Technical Center in Kunshan near the CKT manufacturing plant, Cooper gains many advantages including responding faster to meet the needs of automotive original equipment manufacturers which have enhanced technical requirements. These are just a few of the initiatives that our teams around the globe are able to plan and execute within 2013.

I’ll come back to conclude our prepared marks with comments regarding our 2014 outlook. We will now turn it over Brad for a more detailed review of our performance in the fourth quarter and full year 2013. Brad?

Bradley E. Hughes

Thanks, Roy. As reported, our total company results for the fourth quarter included an operating profit of $47 million, or 5.5% of net sales, compared with $124 million, or 11.7% of net sales, for the same period last year.

North American segment operating profit was $35 million, or 5.5% of net sales and the International segment operating profit was $22 million, or 7.7% of net sales. Regarding our consolidated results for the fourth quarter labor issues at CCT negatively impacted results in 2013 by $27 million. This includes a $25 million impact on volume across both segments and $2 million attributable to manufacturing inefficiencies in the International segment. As Roy said, the company also incurred $9 million of costs associated with the Apollo transaction within SG&A in the quarter.

In addition to the CCT labor issues and Apollo transaction cost, our lower operating profit was driven by $31 million in lower raw material costs, $14 million of lower SG&A costs excluding those merger related expenses, offset by $68 million of unfavorable price of mix, $10 million in reduced manufacturing efficiencies and $8 million in lower unit volumes not related to the situation at CCT.

For the full year, total company results included an operating profit of $241 million, or 7% of net sales compared with $397 million or 9.4% of net sales in 2012. The North American segment operating profit was $204 million or 8.2% of net sales and International segment operating profit was $84 million or 6.8% of net sales.

Consolidated results for the full year in both 2013 and 2012 included number of unusual items. For full year 2013 results by the full year included labor issues at CCT which negatively impacted the 2013 results by $56 million. This includes a $47 million impact on volume across both segments and $9 million attributable to manufacturing inefficiencies in the international segment. The company also incurred $18 million of costs associated with the Apollo transaction in SG&A.

The 2012 results included start up cost of the company Serbia operations totaling $6 million and pension curtailment gain of $7 million in the U.K. 2012 also included $29 million of costs incurred in quarter one related to labor issues in our Findlay facility.

The net impact of all these unusual items explains $46 million of the full-year operating profit deterioration from 2012 to 2013. In addition to the aforementioned unusual items, our lower operating profit was driven by $277 million in lower raw material costs, $15 million of lower product liability charges offset by $268 million of unfavorable pricing mix, $81 million in lower unit volumes, $40 million in reduced manufacturing efficiencies and $13 million in other costs.

Reviewing our segment performance, I will start by providing detail on the North American Tire Operations. Segment sales for the fourth quarter were $628 million, a 23% decrease compared with the fourth quarter of 2012. Unit shipments for the North American segment decreased 13% compared with the fourth quarter of 2012, largely due to increased competition of imports primarily on private label and lower value entry level consumer tires.

Additionally, volumes were impacted by the effects on shipping inefficiencies resulting from the continued implementation of an ERP system in the U.S. as well as the labor issues at CCT.

Total light vehicle tire shipments for U.S. were down 10% during the fourth quarter, as compared to a quarterly increase of 2% as reported for both the industry and RMA members. In the fourth quarter Cooper's Passenger segment declined 11% and the Light Truck segment declined 7% compared to a year ago.

Commercial truck tire sales of the Roadmaster brand were down 87% for the quarter compared with the fourth quarter of 2012. This dramatic decrease is directly attributable to labor issues at CCT in the lack of production of Cooper brand products at the CCT facility. Total industry shipments within this category, as reported by the RMA, were down 1%. North American segment operating profit was $35 million for the fourth quarter, or 5.5% of net sales, decreasing $68 million from the fourth quarter of 2012.

Allow me to summarize the key drivers in the form of an operating profit walk-forward: $12 million from lower raw material costs, offset by $47 million from reduced price of mix, $22 million due to lower volumes including $13 million of reduced volume resulting from the CCT labor issues. $8 million in higher manufacturing costs and $3 million in higher other costs.

Our raw material index was 208 in the quarter, which was 8% lower compared to the same period in 2012 at natural rubber and synthetic rubber decreased in price. The fourth quarter impacts was down 1% sequentially compared to the third quarter. We expect the first quarter 2014 raw material impacts to decline approximately 3% sequentially from the fourth quarter of 2013, with periods of volatility in raw material prices Cooper’s purchasing strategy continues to place a priority on securing inadequate supply of raw materials, purchased at prices that are close to or better than industry competitors.

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

Manufacturing cost efficiencies were $8 million unfavorable during the fourth quarter, we experienced significant volume challenges during the quarter that required production adjustments at our U.S. facilities, excluding the cost associated with these production adjustments, manufacturing costs were $3 million favorable compared to the prior year.

Other operating costs increased $3 million compared to the fourth quarter last year, reflecting increased distribution costs associated with carrying higher inventories and short-term ERP related shipping inefficiencies through the quarter.

For the full year, the North America segment operating profit was $204 million, or 8.2% of net sales decreasing $92 million from 2012. The key drivers for $176 million from lower raw material costs, $15 million in lower product liability charges offset by $161 million from reduced pricing mix, $95 million due to the lower volume including $19 million as a result of the CCT labor issues, $7 million in higher SG&A costs, the result of greater investment in brand awareness and increased capitalized software amortization expense, partially offset by lower incentive related compensation expense.

$6 million in higher manufacturing costs including $34 million of production curtailment cost in 2013 offset by the non-recurrence of $29 million of cost related to labor issues at our Findlay facility in Q1 2012 and $14 million in higher other costs, reflecting increased distribution costs again driven by carrying higher inventories, and short-term ERP related shipping inefficiencies.

Now turning to our International Tire Operations. Net sales in the International segment were $283 million in the fourth quarter, down 17% from a year ago due primarily to reduced volume as a result of a CCT labor issues which impacted both domestic and inter company volumes.

Segment shipment volumes decreased to 11% compared with the same period last year. Cooper’s European operations sold 19% fewer tires in the fourth quarter of 2013 compared with the same period of 2012. This decrease was more than explained by reduced sales of lower price point tires including the impact from exiting and arrangement to sell an entry level brand exclusively through a large retail chain.

Cooper’s plant in Serbia has continued to increase production levels and consistent with our plan is now converting much of its production to traditional Cooper brands. Cooper’s unit volumes in our Asian operations declined 13% compared with the fourth quarter last year reflecting the labor issues at CCT that were partially offset by higher volumes from our CKT facility.

We remain committed to growing our presence in the global tire market and the issues we encountered during 2013 will not detour us from continuing to pursue this flow. As Roy said, operations at CCT have returned to normal. And we are in the process of determining the long-term ownership structure for that joint venture.

Regardless of the outcome China will remain a key strategic market for Cooper and we believe that we have the team and the asset succeed. International segment operating profit for the fourth quarter of 2013 was $22 million or 7.7% of net sales compared to $32 million or 9.4% of net sales for the same period last year.

The labor issues at CCT negatively impacted the fourth quarter 2013 results by $14 million this includes a $12 million impact on volume and $2 million attributable to manufacturing inefficiency. In addition, to the CCT labor issue impact the following were the underlying factors that contributed to the change in operating profit for international operations.

$22 million from lower raw material costs $1 million from slightly lower SG&A costs, $3 million of lower other costs including currency impacts, partially offset by $22 million from lower pricing mix. For the full year the international segment operating profit was $84 million or 6.8% of net sales decreasing $60 million from 2012. The labor issues at CCT negatively impacted the 2013 results by $36 million this includes a $27 million impact on volume and $9 million attributable to manufacturing inefficiency.

The 2012 results included start up costs related to the segment Serbia operations of $6 million and a pension curtailment gain of $7 million in the UK. Aside from the aforementioned unusual items are lower operating profit was driven by $128 million in lower raw material costs, $4 million of reduced SG&A, $1 million in lower other costs offset by $140 million of unfavourable pricing mix, a $11 million in lower unit volumes not related to CCT and $5 million in reduced manufacturing efficiencies not related to CCT.

As I just stated we continue to believe we’re well positioned for the future with our operation in Serbia along with our CKT plant in China, which will play a larger role as we seek to grow our sales in the domestic China market.

Once the long-term ownership of CCT as result we will move forward with our strategic plans for global growth. In the meantime we will work with our partner in the Labor Union at CCT to provide high quality products to our customers in China, the U.S, and other markets.

I'd now like to cover a few other items, starting with income tax accounting. Our income tax expense recorded in the fourth quarter was $14 million computed using the actual tax rates for various tax jurisdictions the company does business – limits the company does business.

The effective tax rate for the year with 37.3% the 2013 effective tax rate was negatively impacted by several discrete tax items. This primarily includes amount recorded for U.S. for return provision differences the exploration of unused state tax credit, the unfavorable impact on the deferred tax assets from a UK statutory tax rate reduction and additional expects for uncertain tax positions.

At this time we believe the company’s forecasted effective tax rate on a normalized basis for 2014 will be in a 29% to 35% range. In projecting this annual effective tax rate it is important to remember that it is based upon forecasted earnings mix by tax jurisdiction, which could change. For more detail on our tax and please go to our Form 10-K that will be filed with the SEC.

Consolidated, or total company selling, general and administrative, costs were $64 million or 7.4% of net sales in the fourth quarter. This amount is down from $68 million to 6.4% of net sales, in the same quarter a year ago. The higher percent to net sales was the result of reduced sales revenue in the period.

The $4 million decreased in SG&A expense was driven by our reduced incentive based compensation costs reflecting lower profits and decreases in accruals for stock-based compensation reflecting share price. These decreases were partially offset by costs associated with Apollo transaction.

We believe SG&A as a percent of net sales will be in a 5% to 7% over the near-term. Cash flows and balance sheet highlights, cash and cash equivalents of $398 million at December 31, 2013, were $46 million higher than December 31, 2012. Cash provided by operating activities was $149 million during the fourth quarter. The decrease in cash and cash equivalents followed our regular season pattern for reduced working capital. The company typically builds inventory during the first half of the year for sale during the peak third quarter selling season.

Accounts receivable of $360 million decreased from December 31, 2012, balance of $415 million. Our decreased fourth quarter sales resulted in lower accounts receivable balance. Net property, plant and equipment was $974 million at December 31, 2013, compared with $929 million at the end of 2012 as capital spending in 2013 exceeded depreciation.

The notes payable balance of $22 million relates to our operations in Mexico and China. These are typically refinanced as they reach maturity, with an ongoing goal to convert a portion to long-term instruments.

A few words about our credit facilities. We have two primary parent company credit facilities to provide sources of liquidity. The first is a $200 million asset-backed revolving credit facility, which expires in July 2016. We also have an accounts receivable securitization program with a limit of $175 million expires in June 2015. Both facilities were undrawn at December 31, 2013, with approximately $45 million of the lines used to back letters of credit. The amounts that can be borrowed are subject to the availability of certain assets that can be pledged. These two credit facilities do not contain any significant financial covenants until availability is reduced to specified levels.

Additionally, we have unsecured annually renewable credit lines in Asia, of which approximately $407 million remains available. These credit lines do not contain material financial covenants. All related borrowings are due within one year and are included in notes payable on the balance sheet.

Capital expenditures in the fourth quarter of 2013 were $45 million and totaled $180 million for the full year, which was at the lower end of the range provided throughout the year. We believe capital expenditures for 2014 will range from $165 million to $175 million.

With that I will now turn it back over to Roy.

Roy V. Armes

Thanks, Brad. We are looking forward to moving ahead in 2014 with the merger agreement terminated, operations returning to normal at CCT, and our ERP deployments in the U.S. nearly completed, the challenges of 2013 are largely behind us. Cooper as continue to drive our new product engine and we expect to launch a number of new products in 2014 in all product categories for markets around the globe.

Technology and innovation and support product development will continue to be invested in as we know that new products which we can offer at a good value in the marketplace will continue to distinguish Cooper with our customers. We are through the tough stages of the initial launch of ERP and expect in the long run that the implementation of SAP will benefit us in terms of having consistent information on a global basis in real time. And our efforts to drive for cost efficiencies at our plants will continue in North America, Europe and Asia. These programs have shown promise to make our plans even more competitive in the future.

We are projecting growth for Cooper Asia as the economy there grows and Cooper continues to rapidly expand our points of sales in that region. Growth is also expected in North America where the RMA is projecting approximately 1% replacement tire industry growth in the U.S. for 2014 and in Europe, we will likely see a continuation of current trends as the economies expected to display a very modest and slow recovery.

Cooper believes that we will begin to recover unit volumes and grow at a rate that is equal to or better than the industry in our key markets. This will allow us to continue to leverage our flexible global footprint to deliver on the goals of our strategic plan. And as mentioned earlier, we continue to move forward with the process of determining the future ownership of CCT. Once this has established we will continue to address our capital deployment options to deliver maximum value for our stockholders.

Now with that it’s time to get your questions. Operator, we’ll take the first questions please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brett Hoselton with KeyBank.

Roy V. Armes

Brett.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

Roy.

Roy V. Armes

Yes, hi, Brett.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

Good morning gentlemen, how are you?

Roy V. Armes

Good.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

Thanks for sending us to warmer weather.

Roy V. Armes

I would like to take credit for that.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

Here, we go. Let’s see – I'm looking at slide number 11, the full-year operating profit walk, and had a few questions. And first question is, as I think about the $74 million headwind that you experienced on the merger and the CCT-related issues, how do we think about that $74 million number changing as we move through 2014 and 2015? Obviously, the expectation is it will improve. Does that go to zero? Does it become a $74 million tailwind in 2014, or do you get maybe half of it back or what your thoughts there?

Bradley E. Hughes

Hi, Brett, it’s Brad I think the first part of those cost when you think about the transaction related cost we wouldn’t expect to have much in the way of that type of activity in 2014, certainly not in 2015 so that part of it and we think is behind us with regard to the CCT circumstances, they are ramped up and producing a full line up of products, it will take a little bit of time to fill the pipeline with inventories of products, so far example we have TBR products that are just arriving to our customers in the U.S. now and we will continue to improve from that basis we walk-forward. So we will have the majority of that behind us, and there will be a little bit of time that will take to build the inventories and recover some of the customer activity related to the CCT volume impact.

Roy V. Armes

And we will also have some Brett this is Roy. We will also have some costs associated with our advisors and things that we are still trying to clean up from this acquisition, I don’t know what those costs are, roughly but there will be some of that fits in there as well.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

Okay, and then switching just to the left, the volume, the $81 million number, it sounds like that has been impacted by a few factors: the ERP and the competition. Is there any way that you can kind of quantify the impact that you have experienced as a result of the ERP? And secondly, can you talk about the timing that you might expect to see some potential recovery there?

Roy V. Armes

Brett, let me go back and talk about the things that did negatively impacted us and then I’ll ask Brad to answer the rest of your question, I think from our view point, there were probably four things that impacted this volume, because I want to make sure that we are clear with that.

One is the intense competition as you mentioned, because the imports did increased last year from the in total light vehicle, because you had an industry that was in total that included import that was up about 4% when the RMA members were down percent and a half. And most of that was affecting the private label and lower entry level product and another part and intense competition, with really our delayed pricing adjustments in Q1 that impacted our volume as well.

The second thing that negatively impacted that was a CCT situation, which impacted the product availability, specifically in the U.S. and in China. The third thing was the ERPs you mentioned the U.S. deployment there, we launch that last year in the first quarter we did experience some initial issue, but we started focusing on the enhancements in the later part of last year.

And I think we are much, we are in a position now that’s much more manageable, but we still have improvements that we’ve got to make this year, to get this to where we really wanted, but its something its much more manageable now and before and it should have a less impact going forward.

There was a fourth time, too that the customer inventory adjustments that were being made last year, in the first quarter and as they were exciting 2012, and I think some of these we got behind us there is and the other ones are really being addressed right now. Brad I’d ask would you kind of – answer to the question or just more to add to my comments.

Bradley E. Hughes

Just a couple of quick comments to add to what Roy’s described and you’re focusing on that the elements of it – that work related to CCT, so the increased competition, Roy talked about the impact from imports in the private label and lower priced entry level tires. In addition, you may recall we communicated in the past in the second quarter in particular we were little bit behind in adjusting our prices. We did adjustment them at the end of the second quarter, but it did affect our performance in the second quarter and it did into the third quarter.

We believe that we made the right changes at that point in time and that we’ve been staying at the right competitive positions from that point forward. So I just would include that in that overall competitive umbrella that Roy commented to and then the ERP as Roy said, I mean that’s we had some challenges, we think for the most part we’re managing that situation that should not be the kind of decremental volume going forward that we saw last year.

Roy V. Armes

So largely answered question Brett, we see a lot of this behind us, we see markets, China continuing to perform well in terms of market growth in both the PCR and the TBR product, Europe is going to be – its stabilizing in fact a slow recovery and there is very modest growth in the U.S. so we don’t see that same impact, that large impact in 2014 as we had in 2013.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

And then final question is, as we think about the potential outcome of the CCT joint venture that's on the agreement that you've signed with Chengshan, if Chengshan were to buy the 65% stake, how does the fact that you had moved from part owner or majority owner of that to getting offtake rights for some period of time, how do we think about that potentially impacting your EBITDA? That's question number one. Question number two is, do you get out of the truck business at that point in time, or do you look to ultimately maybe build another plant? Or what would be your strategy following that?

Roy V. Armes

Let me answer the last part first Brett. First of all we have no intention to getting out the truck tire business, okay. Secondly, we’ll have a minimum of three year sourcing arrangement, or agreement, or supply agreement from CCT if we are bought out of that. Thirdly, our intent is that we would go in and look at the money that we would get out of that if we’re bought out to reinvest into China and reinvest into continuing to grow that business. So it’s a key part of our strategy and we are not going to be walking away from that.

Bradley E. Hughes

And then Brett with regard to the EBITDA, while we have not crossed the bridge of an agreement around how that off take commercial arrangement would be established. We wouldn’t expect for there to be a significant impact on our EBITDA there maybe some we haven’t – we don’t have an agreement in place, so we’ll have to see, but we wouldn’t expect that it would be a significant impact on that business.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

And I apologize, just one follow-on question. In the event that Chengshan were to buy it out, and it sounds like you’d look to replace that capacity – and it sounds like you would potentially look to replace that capacity in China – how much would something like that cost, and what kind of a time frame might that take?

Roy V. Armes

Right now, it’s really too early to talk about, what it would cost because there is a several options there, Brett I think the first option for us is I think is a very good one, and that is we get very good products out of Chengshan and CCT, joint venture and we’re going to continue to work with them going forward depending on what happens here if they buy us, so for example we’ll continue to work with them to get that supply, at the same time whether we stay with CCT or not we still have to mitigate our risk by binding other sourcing arrangements. And that could be in China, it may be in another places, we’re not really sure at this point in time, but I think our first priority is to work with the CCT to continue the flow of our product coming out of there.

Brett D. Hoselton – KeyBanc Capital Markets Inc.

Roy, Brad, thank you very much, gentlemen.

Roy V. Armes

Thanks, Brett.

Operator

Our next question comes from Bret Jordan with BB&T Capital Markets.

Bret D. Jordan – BB&T Capital Markets

A couple quick questions. And I guess one of them as it relates to the emerging recovery in unit volumes and I guess to the expectations kind of track along with market demand – is that something that is going to require incremental pricing, I guess, to some extent as you have trailed the market and the market has certainly trended down in the lower price-point units? Do you think where you are priced now is set up to participate in market share growth with sort of in line with market?

Bradley E. Hughes

Yes. It’s a good question Bret. I think that will there be some pricing adjustment needed, that there maybe in some cases. But overall we think we’re pretty well positioned right now with our products due to start hitting our volume back. And we feel pretty confident with that I think that the one thing that really is in our favor, the one thing is really in our favor here is, we tested our business model in 2013, and I think we confirmed its resilience. And it give us confidence, I think moving into 2014 that we’re – our customers are loyal, they’re waiting for us or not waiting for us as much they have confidence in us. And I think we’re positioned to continue to at least perform at the market levels and our belief now is that and we can perform above the market.

Bret Jordan – BB&T Capital Markets

And I guess as you look at that growth, I mean relative to growth rate of Cooper-branded product versus some of the non-brand products you've manufactured, could you sort of weight the significance, which category might grow more? It would seem that maybe the tier 3 products may have permanently lost some share to Asian imports. But maybe talk about which one grows better in 2014. And then I guess, it's not a number you'd throw out there, but is there a way to look at your business mix in Q4 as it was weighted to Tier 2 versus Tier 3?

Bradley E. Hughes

Bret, it’s Brad, looking forward I think that in 2014 and historically, our strategy as always been than we were going to continue to participate in some private label business for it makes sense and in some entry level business, but the growth was going to be in Copper branded products and in some of the more premium segments.

And we continue to move in that direction, I think when we look at 2014 that maybe moving even a little bit faster than we would have thought it was going to on a year or two years ago on as we were planning for what the world might look like in 2014.

So, I think that it will be more heavily weighted towards the Copper products, I no means that means that we are moving round up completely private label or entry level business at that is a part of our business we can be competitive there and so we will be there. But I do think that will be more weighted towards the Copper products.

The fourth quarter on I think that, at the four quarter is given the supply of product and the situation with the overall circumstances of the business on it’s difficult to put a real handle on what the – was driving the business versus what was happening because that was the product that we had available itself.

Bret Jordan – BB&T Capital Markets

Okay. And then one last question, as we go back a long time as there was sort of general discussion about longer-term operating margin targets sort of 6% to 8%, is there any reason to think differently about the business now? Is the margin target higher or still in that range?

Bradley E. Hughes

Well, I think that 6% to 8% is still a good number, but I would tell you Bret, the way we are shifting the business, we’re going to be continuing to push higher margin improvements.

Bret Jordan – BB&T Capital Markets

Okay, thank you.

Bradley E. Hughes

Okay, thank you.

Operator

Our next question is a follow-up question Brett Hoselton with KeyBanc

Brett D. Hoselton – KeyBanc Capital Markets Inc.,

Hey, Roy, Brad gentlemen, thank you. Brad, just a couple of housekeeping -- can you give us an update from a balance sheet perspective the unfunded portion of your pension balance and also the minority interest?

Bradley E. Hughes

The couple – starting with pension will be filing on two likely later today our 10-K and so you can see all the details there, but you’ll see that there has been a relatively significant drop in the unfunded portion of the pension particularly in the U.S. we benefited as all folks that have pension these days from a lower discount rates excuse me increased discount rates. And also from asset performance and importantly we’ve continued to contribute at what we believe is an appropriate and prudent level even through the course of last year. So you’ll see a reasonably significant drop in the overall unfunded pension obligation.

With regard to the minority interest, there isn’t a significant change in the trend if what that look like and again that will be – you will have the traditional walk in the table form in the 10-K that will be filed soon.

Brett D. Hoselton – KeyBanc Capital Markets Inc.,

Perfect. And then just for clarification purposes, in your comment about the volume – and again, I’m looking at that slide 11, the $81 million in volume, you attribute it to four different items, one of which was CCT. And I guess what I – I just want to make sure I understand this because I know that you’ve got another bar here that says $74 million, which is merger-and CCT-related issues. So as I think about the volume impact year-over-year for the full year that $81 million number there, that includes some impact from the CCT issues?

Bradley E. Hughes

I’m sorry Brett, that Roy was just trying to cover the overall…

Brett D. Hoselton – KeyBanc Capital Markets Inc.,

That’s fair.

Bradley E. Hughes

encompassing impacts or the variables that were affecting our volume situation. This is separated and those that we can directly attribute to CCT or in that the [indiscernible] is identified as such.

Brett D. Hoselton – KeyBanc Capital Markets Inc.,

Excellent. Very helpful, gentlemen. Thank you very much.

Operator

Our next question comes from Rod Lache with Deutsche Bank.

Patrick E. Nolan - Deutsche Bank Securities, Inc.

Good morning, it’s actually Pat Nolan on for Rod.

Bradley E. Hughes

Hey, Pat.

Roy V. Armes

Hi, Pat.

Patrick E. Nolan - Deutsche Bank Securities, Inc.

Roy, I just wanted to follow up on your comment about performing in line better than the industry. Based on some of the comments, it seems like some of the supply issues with CCT – you are getting – you’re in the process of filling out the channel now. So maybe is the way we should think about the cadence of volume throughout 2014 that maybe you underperformed the industry a little bit in the first and second quarter as you are still getting that supply out there, then maybe you outperform in the back half, when you think about it?

Roy V. Armes

Well, no I don’t think that would be way to think about it Pat, we believe that with – I’ll talk with our customers and I think our customers have been extremely loyal and supportive and I think they’re willing to take product as soon as we have it available, we have that flowing now. And we said that, by the time we fill the pipeline and the products starts flowing it could be in the middle of the first quarter into the second quarter. So, I think overall we were speaking about the year in terms of performing at or better than the market, but I certainly think we will be ramping this up in the first quarter.

Bradley E. Hughes

I think Pat, if you think back to a year ago, we also had our first major deployment of the ERP system in the first quarter and that had an impact in particular in February that effected the quarter, Roy talked earlier about the some of the inventory adjustments that some larger customers were making coming out of 2012 into 2013 that affected the volume in 2013 first quarter. So you should take that into account when you’re thinking about the quarterly performance.

Roy V. Armes

Basically, it was easier comps in the first quarter given what happened last during the first quarter.

Patrick E. Nolan - Deutsche Bank Securities, Inc.

That’s helpful. If I could, just seeking one housekeeping, what was total Company volume? What was the total Company volume change for the full year?

Roy V. Armes

Pat we don’t normally communicate that information, so I don’t know what we had into the first quarter anyway. So we don’t normally communicate that information.

Patrick E. Nolan - Deutsche Bank Securities, Inc.

Okay, thanks.

Roy V. Armes

Right.

Operator

Our next question is a follow-up question from Bret Jordon with BB&T Capital Markets.

Bret D. Jordan – BB&T Capital Markets

Just a question around the CCT resolution. And I guess on the off chance you wind up owning all of it, and is there an incremental investment required as you look at that business in possibly managing it directly? I mean I guess the cost of moving Brad to China, or is there CapEx or anything that would sort of up the investment required if you take out that 35%?

Bradley E. Hughes

I think you’re suggesting that I move to China, I hope that due to my performance on the call this morning quite not. I don’t – that facility we’ve been investing in appropriately on between the two partners on to meet the standards that we want to meet and to produce the product that we want to produce. I wouldn’t anticipate that there would be any significant change beyond what we are up, we are already planning to deal with that facility, moving forward that we would, I think either part you would be able to say with about the same plant from a capital investment and just to reinforce historically they have funded all of their capital on spending requirements out of the cash flow that they generate out of that facility

Roy V. Armes

Out of joint venture.

Bradley E. Hughes

Out of the joint venture, we would expect that to continue.

Bret D. Jordan – BB&T Capital Markets

Okay. And then one last question around – this maybe unknowable, but around litigation related to Apollo, is there any sort of visibility on time frame there? Is there anything coming up that will be news either way?

Roy V. Armes

Not at this point in time Bret and there is nothing really to report there, there is some litigation that’s still hanging out there. I understand the question, but there is nothing really to report at this point in time. We’ve been so focused on trying to get this business go in the right direction. I certainly had to spend a whole lot of time on that part of it.

Bret D. Jordan – BB&T Capital Markets

Okay, great. Thank you.

Bradley E. Hughes

One of the thing I would mentioned here Pat from DB. I wanted to make sure my comments will clear that we don’t, we really don’t report the sales unit volume, but I think in our numbers we typically do report production volume on a quarterly basis that comes out in some of our numbers. So, I just want to be clear on that. Operator we have a time for maybe one more question.

Operator

Okay. Our last question is a follow-up from Rod Lache with Deutsche Bank.

Patrick E. Nolan - Deutsche Bank Securities, Inc.

Hi, guys it's Pat again. Thanks for that follow-up. I just had one more follow-up on price mix versus raws they were pretty much a wash on the full-year basis in 2013, which was a pretty good performance considering the price pressure that was going on in the low end of the market in private label. What are your expectations, price mix versus raws, on a go-forward basis?

Bradley E. Hughes

We think that on, as we look forward Pat you’re right, I mean it’s a good observation when you look at it in a full year basis, which I think is the way to look at 2013. Because if you look at the fourth quarter you’re going to see some of the catch up of the pricing that we did in the second quarter in the U.S. market in particular on that beyond what the raw material price reductions were in that one quarter, but when you look at over the full year pretty balanced.

I think going into next year that we do think that the markets relatively balanced right now in terms of acknowledge, raw materials continue to move down, we may see some pricing, but our perspective is that we are pretty balanced right now with regard to the position that we got in the market and as raw materials move will watch to see what competition does and if that it takes that we should be moving we will, but that from our perspective, most of that price as caught up with where raw materials are?

Patrick E. Nolan - Deutsche Bank Securities, Inc.

That’s very helpful guys, thank you.

Bradley E. Hughes

Well that concludes our call. I want to thank everybody for that’s on the line here today. It’s been a long time since we’ve been able to have a Q&A session here. The teleconferences we’ve had it here. But last couple of times we’ve been basically one way communications and it’s great to be able to open this backup to get into live Q&A questions and answers. So, again thank you for all the support. Thank you for being here today and we are looking forward to the first quarter.

Operator

Ladies and gentlemen this does conclude today’s presentation. You may now disconnect and have a wonderful day.

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