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Cooper Tire & Rubber Company (NYSE:CTB)

Q4 2011 Earnings Call

February 27, 2012 11:00 a.m. ET

Executives

Curtis Schneekloth – Director, IR

Roy Armes – Chairman, President and CEO

Bradley Hughes – VP and CFO

Analysts

Ravi Shanker – Morgan Stanley

Pat Nolan - Deutsche Bank Securities

Brett Hoselton – KeyBanc Capital Markets

Saul Ludwig – NorthCoast Research

Amy Carroll - JP Morgan

Elizabeth Lane – Bank of America/Merrill Lynch

Operator

Good morning. My name is Tanya, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cooper Tire Fourth Quarter 2011 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)

I will now hand the floor to Curtis Schneekloth, director of investor relations. Thank you. The floor is yours.

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 the future financial results and business operations of Cooper Tire & Rubber Company.

Actual results may differ materially from current management forecasts and projections. Such difference may be a result of factors over which the company has limited or no control. Information on these risk factors and additional information on forward-looking statements are included in the press release, and in the company’s reports on file with the Securities and Exchange Commission.

With me today are Roy Armes, Chairman, Chief Executive Officer and President; and Brad Hughes, who serves as our Chief Financial Officer. In association with the press release which was sent out earlier this morning, we will provide an overview of the company’s quarterly operations and results. The press release contains a link to a set of slides that are a summary of information, included in the press release and the information that will be in the 10-K on file.

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 comments, we’ll open the call to participants for a question-and-answer session.

Today’s call begins with Roy providing the overview of our results. He then turns it over to Brad for a discussion on some of the details by segment and comments on a few other matters. And then Roy will summarize and provide comments on our outlook.

Now let me turn the call over to Roy Armes.

Roy Armes

Yeah, thanks Curtis and good morning to everyone. I am pleased today to report that during the fourth quarter, we were able to demonstrate continued progress towards our goals even as we faced several challenges. This resulted in our tenth consecutive quarter of profitability, our second quarter of over $1 billion in sales and continued recognition of the excellent performance and value of our products by independent parties.

Before I provide an overview of the specific results for the quarter, I want to make a comment regarding our labor situation. We’re happy to have reached an agreement with United Steelworkers Local 752L in Texarkana, Arkansas in January. This agreement will improve our long-term competitiveness at that plant, which is crucial to our success. We also have reached agreements with the Teamsters, which is our truck drivers in Findlay and the United Steelworkers at our Clarksdale, Mississippi facility.

We have also reached a tentative agreement with United Steelworkers 207L at our Findlay plant. Ratification of this agreement will be voted on today, and during the lock-out, we are prioritizing the supply of tires to our customers and shifting to production as necessary to ensure the supply and availability. We’re not going to comment on the specifics of the tentative agreement but Brad will have more information on the potential impacts of the situation later in the call. Should the labor situation persist beyond the first quarter, we will implement additional measures to further reduce premium costs.

During the fourth quarter, we had net income attributable to Cooper Tire & Rubber Company of $209 million or $3.33 a share, including the impacts of the release of most of the valuation allowance against our U.S. deferred tax assets. This compares with the prior year fourth quarter net income of $40 million, or $0.64 per share.

As we anticipated and previously communicated, during the fourth quarter, we were able to release most of our valuation allowance against U.S. deferred tax assets which had a positive one-time non-cash impact on net income of $167 million, or $2.66 per share. Also, due to this release, the company’s tax expense for the quarter benefitted from $10 million, or $0.16 a share relating to the reversal of tax expense recorded in previous quarters because the company had a U.S. valuation allowance at that time.

Consolidated net sales were up 14% from the fourth quarter of 2010, primarily driven by higher prices while volumes were about flat for the total company. Net sales were over $1 billion for the second consecutive quarter, and unit volumes were up 4% for the North American segment and down 11.4% for the international segment. Our volume growth in the United States was strong relative to industry shipments which were down 3.4% in the quarter, and demand for new products continues to be a driver of our strong performance.

For the industry, broadline shipments were again relatively weak, though we outperformed the industry in the segment as well. We believe that pent-up demand exists for broadline and value tires but however, it is extremely difficult to predict when and how that demand will manifest.

Within the international segment, both Asian and European volumes decreased. The decrease in European demand was partially reflective of market conditions, including weak demand for winter tires when comparing to a extremely strong winter season in 2010. The decrease in volume in Asia was a combination of a slowdown in the overall demand for tires that we produce in Asia and our continued exit from bias tires which are less profitable. The conditions in Asia are largely driven by the economic environment and we remain optimistic about our growth opportunities there.

Operating profit for the fourth quarter was $60 million, or 5.7% compared with $55 million or 5.9% for the same period last year. The North American segment’s operating profit was $35 million or 4.5% of net sales, and the international segment operating profit was $29 million or 7.7% of net sales. Improved price and mix of $128 million during the quarter was partially offset by $119 million of higher raw material costs.

Also, improving profit were $5 million of lower products liability costs, $3 million of lower selling, general and administrative costs and $2 million of lower other costs. Higher manufacturing costs included the impacts from the labor situation in Findlay and lower production volumes in Asia, which decreased results by about $15 million.

For the full year 2011, net sales were a record $3.9 billion, an increase of 4566 million or 17% from 2010. The company reported net income of $4.02 per share from continuing operations on a diluted basis compared with $1.86 for 2010. Excluding the one-time non-cash valuation allowance release, net income was $89 million or earnings per share were $1.36.

We were pleased to announce in late 2011 a deal to acquire the assets of a tire plant in Serbia. This deal closed in January and is another great step forward in building our global manufacturing network or global manufacturing footprint.

Now I would like to turn it over to Brad. He is going to provide you a little bit more detail on the individual segments and financial – and other financial matters.

Bradley Hughes

Thanks Roy. I will start with detail on the North American tire operations. The segment’s sales were $777 million, a record for any fourth quarter and a 16% increase compared with the fourth quarter of 2010. The top line increase was driven by stronger pricing and mix and higher unit volumes.

Unit sales for the North American segment increased 4% compared with the prior year fourth quarter. Cooper's total light vehicle shipments in the United States increased by 4.1%, compared with total industry shipment decrease of 3.4% as reported by the Rubber Manufacturers Association or RMA, and also better than the estimated 3.8% decrease in total light vehicle shipments for RMA members during the quarter.

During the fourth quarter of 2010, Cooper had a relatively tight supply situation as we were still increasing production and dealing with lower inventory levels. In the fourth quarter of 2011, broadline and value segments were the weakest performers for the industry but we were able to offset this disadvantage to Copper by outperforming in all light vehicle segments, including broadline. It’s also worth noting that our UHP product line sales during the quarter were up more than 49% from the prior year.

Year-to-date, Cooper’s light vehicle shipments are up 0.4%, compared to a decrease of 2.2% for the industry. Commercial truck tire shipments of the Roadmaster brand were down 14% during the quarter but have been our bright spot through most of the year, up nearly 35% for the full year.

The segment's operating profit was $35 million for the fourth quarter, or 4.5% of net sales. This is a decrease of $7 million compared with the same period in 2010. Let me summarize the operating profit walk forward and key drivers before providing more detail.

Operating profit for the quarter reflected $71 million from improved price and mix, $5 million of lower products liability costs, $2 million from higher volume, other costs were lower by $2 million and selling, general and administrative costs were lower by $1 million. These favorable factors were offset by $78 million in higher raw material costs and $10 million in higher manufacturing costs. The favorable pricing and mix of $71 million were more than offset by $78 million of higher raw material costs.

You may recall that we implemented a price increase in the United States in December of up to 5%. Our underlying raw material index of 253 was up approximately 23% on a year-over-year basis for the quarter but sequentially was an 8% decrease from the third quarter. 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 and this impacts profits more quickly than other inventory accounting methods.

During the fourth quarter, decreases in certain raw materials, including butadiene, exceeded the estimates we used to calculate the projection of a 5% decrease that was communicated during the third quarter call. Even with the decreases during the fourth quarter, the overall cost of raw materials remained high on a historic basis.

Since the fourth quarter, several raw materials, including carbon black, butadiene and natural rubber, have increased in price. We now expect raw material costs to remain at elevated levels but to be relatively flat in the first quarter of 2012 compared with the fourth quarter of 2011. Raw material costs remain inherently volatile. Our purchasing strategy at Cooper continues to place a priority on securing an adequate supply of raw materials, and purchasing at close to or better than industry competitors’ cost.

Products liability costs were $5 million favorable when compared with the same period of 2010. During the fourth quarter of 2010, products liability costs were elevated as a result of adjusting charges on existing reserves. During the quarter, manufacturing costs increased by $10 million.

There were several factors contributing to this increase. First, the company incurred costs to mobilize and train the temporary workforce at our Findlay, Ohio plant. In order to secure the quality operators we wanted to produce our tires, we brought experienced tire and manufacturing people from our long distances to Findlay. We also placed them through training on Cooper’s quality and manufacturing systems. These costs totaled $3 million.

Second, the manufacturing costs for the quarter were spread over fewer units produced during the quarter, particularly in December. Fewer units were produced because the plant was not producing for the better part of 14 days which started in late November and continued into December. The plant was then ramping up production for the limited days left during December. These costs totaled approximately $8 million and will decrease as we continue to ramp up production volumes.

Last, net efficiencies at all North American plants for the balance of the quarter were $1 million favorable. The costs associated with the lock-out in Findlay will continue to impact results in the near term. Our number one priority is continuing to protect the supply of tires to our customers. To protect the supply, we will incur premium costs in the form of overtime and other costs to mobilize and train the workforce.

Our cost per unit will also be higher as we operate at levels below capacity at Findlay, resulting in unabsorbed overhead. As we are on LIFO, most of the costs in part are income statement in the quarter in which they occur rather than being carried forward in inventory. These premium costs will potentially be as high as $30 million in the first quarter of 2012. Even with the premium costs, we expect operating profit in the first quarter of 2012 to be similar to the first quarter of 2011.

Should the labor situation persist due to an adverse vote today, premium costs would decrease in the second quarter and beyond as we operate at higher capacity utilization and implement other actions to further reduce premium costs. Our manufacturing facilities are doing a great job of adjusting to very fluid conditions. The efforts we have made to improve our cost structure and increase the flexibility of our footprint over the last few years are evident in our results during the situation. And we believe further improvement can contribute meaningful results over the next couple of years.

Now turning to our international tire operations, the International segment had net sales of $376 million, up 10% from the fourth quarter of 2010. This was driven by price and mix improvements partially offset by an 11% decrease in shipment volumes for this segment. Decreased sales volumes of 5% for Asia included intercompany shipments that support both the European and North American operations.

The Chinese market for TBR tires softened during the quarter as the economy cooled. Our efforts to expand distribution and supply of light vehicle tires in China continued to be very successful, including the doubling of Cooper brand sales compared with the prior year. The ongoing impact of exiting bias tires reduced volumes during the quarter as we continued to focus on more premium products. On an overall basis, we are very pleased with the direction and our future opportunities in China.

European volumes decreased by 20% as we encountered weak industry conditions for winter tires and faced a very strong prior year comparable. The following were underlying factors impacting operating profit for the international operations. The operating profit walk forward compares last year’s fourth quarter to this year’s. The net increase was $11 million.

Operating profit reflected $59 million from improved price and mix, partially offset by $41 million from higher raw material costs, $5 million in higher manufacturing costs and $3 million in low volume. The manufacturing costs are related primarily to lower production levels during the quarter relative to last year. These changes are reflective of balancing production levels to manage inventory and market demand all the while adjusting our sourcing to optimize our network.

In addition to the individual segment results, at the corporate, unallocated charges were $5 million during the quarter, down from $8 million in the same quarter of 2010. This reduction was primarily the result of lower incentive compensation related costs.

I’d now like to cover a few other items starting with income tax accounting. Our income tax benefit recorded in the fourth quarter from continuing operations was approximately $165 million, computed using the actual tax rates for various jurisdictions in which the company does business and including the $167 million for the release of most of the U.S. valuation allowance on deferred tax assets. The release is calculated as if it happened at the beginning of the year. In addition to the $167 million, certain credits and deductions recorded during the year also impacted the tax benefit for the quarter.

During the fourth quarter, this benefit was $10 million or $0.16 per share. Exclusive of these two items, the company would have had a tax expense of $12 million during the fourth quarter. In the third quarter, the company had recorded $9 million of additional expense because of the timing of credits and deductions.

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

In conjunction with the ongoing review of actual results and anticipated future earnings, the company will continue to reassess the possibility of releasing all or part of the valuation allowance that remains on a portion of its U.S. and non-U.S. deferred tax assets in the amount of $28 million. This includes a $19 million U.S. valuation allowance on capital loss carryforwards whose utilization cannot be assured prior to its expiration.

The effective tax rate for the year, including the valuation allowance release and prior to the elimination of minority interest, was a tax benefit of 101%. The effective tax rate after adjusting for the impact of the valuation allowance for the full year would have been approximately 24%. At this time, we believe that the company’s forecasted effective tax rate on a normalized basis for 2012 will be in a range of 26% to 34%. In projecting this annual effective tax rate, it is important to realize that it is based upon forecasted earnings mix by tax jurisdiction which may change.

During the fourth quarter, the company effectively settled the U.S. tax examination that covered years prior to 2011. The settlement resulted in a tax assessment which was offset by previously recorded tax reserves for a net benefit to tax expense of $1 million. We had $10 million of anticipated tax refund receivables recorded at December 31, 2011. This included the refund from the U.S.10-year specified liability loss carrybacks that were partially offset as a result of the effective settlement of the U.S. tax examination.

The collection of these receivables is expected to occur during 2012. More detail on our taxes is available in our Form 10-K that will be filed with the SEC.

Overall, we held selling, general and administrative costs equal to 5.1% of net sales. This is a result of our continued focus on making sure that we effectively manage these costs while continuing to invest appropriately in our business. The percentage to net sales is lower partially due to higher net sales. We will continue to invest in this area where appropriate and expect that for 2012, it will range between 5% and 7% of net sales.

Balance sheet highlights include cash and cash equivalents which were $234 million at December 31, 2011 and were $180 million lower than December 31, 2010. During the first quarter of 2011, the company invested $134 million to increase ownership levels and support future growth at affiliated operations in China and Mexico.

Cash and cash equivalents increased during the fourth quarter by $143 million, following the typical seasonal pattern for working capital. The company typically builds inventory during the first half of the year but release during the peak third quarter selling season.

Accounts receivable of $428 million decreased from the September 30, 2011 balance of $555 million. It is normal to have receivables collected during the fourth quarter that are generated during that peak selling season in the third quarter. Net property, plant and equipment was $969 million at year end compared with $964 million at September 30, 2011.Almost all of the current notes payable balance of $117 million relate to our operations in the People’s Republic of China whose operations are included in our consolidated balance sheet. These are typically refinanced as they become due with an ongoing goal of converting a portion to long term instruments.

During the fourth quarter, the contractual put option available to our partner at Cooper Chengshan Tire expired. This resulted in a change on the balance sheet where amounts previously classified as redeemable, non-controlling shareholders’ interest are now included within equity. At December 31, 2011, the related amount was $83 million.

Regarding liquidity, 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 that expires in June 2014 with a limit of $175 million. Both facilities were undrawn at December 31 with approximately $67 million of the lines used to back letters of credit.

The amount that can be borrowed is subject to the availability of certain assets that can be pledged. These two credit facilities do not contain any significant financial covenants until availability is reduced to specified levels. Additionally, we have unsecured annually renewable credit lines in Asia of which approximately $242 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 2011 were $34 million and totaled $155 million for the year. We believe capital expenditures for 2012 will range from $180 million to $210 million, including investments in an ERP system and the increased investments for the plant we are now ramping up in Serbia. While this is higher than recent years, we believe it is an appropriate amount relative to our depreciation levels of approximately $130 million, based on the strength of our balance sheet and our business goals.

During the third quarter call, I provided an update on how we believe Cooper and the tire industry will be impacted by the expiration of the 421 tariff. I am not going to repeat all of the details in this call but we continue to believe that on balance we are well positioned to handle the changes given the strength and flexibility of our sourcing footprint.

The other final item I would like to cover is that we anticipate products liability expense will be moderately higher in 2012 than 2011. This is the result of two factors. The first is an expectation that during 2012 we will have increased legal fees and expenses of around $5 million as a result of a more active trial docket and other activities. The second is increased charges to reserves consistent with the long term trend.

To clarify, the active trial docket this year does not indicate a change in the trend, occurrence or number of cases. Products liability expenses by their nature continue to be lumpy from quarter to quarter and year to year due to the timing of events.

I will now turn it back over to Roy.

Roy Armes

Yeah, thanks Brad. Before taking your questions, I would like to spend just a few minutes on full year of 2011. As a backdrop, when we exited 2010, one of the most frequently asked questions was whether the 10% increase in production we targeted for 2011 would be enough to meet the rapidly increasing demand for our tires. Well, natural rubber was around $2.20 per pound and oil was around $95 a pound, or a barrel.

During the first quarter, there was continued strong demand for tires and raw material prices climbed rapidly. We announced the purchase of the other half of CKT and completed the purchase of additional ownership in our affiliated Mexico operations. In short, the first quarter continued through the momentum that we built in 2010.

But during the second quarter, there was a sudden and dramatic change to market conditions as gas prices surged in the U.S. and the global economy started to weakened. This had a significant impact on our largest customer base which along with a temporary dislocation in our pricing versus the market had a negative impact on our sales. We quickly adjusted and were able to still post a profit during the quarter.

Had we not made significant improvements to our business model over the last several years, it is unlikely we would have achieved the profit. This was just one demonstration of our progress.

During the third quarter, we performed better than the market but weakening industry demand forced us to adjust production to manage inventory levels to projected demand. The third quarter also represented another peak in raw material prices as we reached the historic high on our raw material index that was 38% above the prior year. Against these challenges, the third quarter was still a first ever $1 billion sales quarter.

The fourth quarter presented different challenges and represented an environment that was very different from how the year had started. We again continued to adapt and through the successful efforts of our people, we were able to post a solid result that we covered earlier in the call.

Throughout the year, we kept sight of the long term vision and strategic plan we have for Cooper. And as this guided us, we enjoyed several other successes that reinforce the capabilities we bring to the market. This included independent recognition as best in category for products we launched in both the UHP and light truck categories. We had multiple facilities during the year achieve the milestone of one million hours work without a lost time accident. We continued working on the implementation of our ERP system and had an effective first launch at our Mickey Thompson subsidiary.

Our team in China almost doubled light vehicle domestic sales compared to an industry growth of about 17%. They also supported our Roadmaster commercial tire products in the U.S. which have been doing very well. Europe once again delivered an excellent operating result while identifying and preparing to support the acquisition in Serbia. In Mexico, we both increased production at our plant and began to realize economies of scale in our sales and marketing operation.

While the U.S. remains our largest market, we have been successful in reducing our overall dependence on this business through growth in the international segment. So I was very pleased with the progress throughout the year and this record of achievement gives us confidence that we will continue to move the business forward despite the headwinds facing the industry and company. The path forward may wind and curve at times but we remain optimistic about our future.

So thanks for attending the conference call here. That concludes our prepared remarks. So we’d now like to open it up for a question and answer period. So operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ravi Shanker.

Ravi Shanker – Morgan Stanley

Roy, with gas prices pretty high right now, are you seeing any early signs of a collapse in volumes like we saw at this time last year when gas prices the same thing?

Roy Armes

It’s a good question, Ravi. We watch that pretty closely the gas consumption, gas prices, miles driven, and we have not seen the collapse that we’d seen in the past. And that doesn’t mean it’s not going to happen. But we certainly haven’t seen at this point in time.

Ravi Shanker – Morgan Stanley

Great. And also, your 4Q volume performance was really impressive versus what the industry did, especially in fast cars. You did touch on a little bit but can you elaborate little bit more on what exactly drove that outperformance?

Roy Armes

Really, Ravi, it was good timing for us because of our product launches that were coming out throughout the year. They just gained momentum from -- basically from the second quarter started picking up momentum, and the third and fourth quarter continued that momentum. So that really helped us a lot. And then the recognition that we got in some of the magazines particularly for our UHP product and our Discover AT3 light truck product, those were really some pretty strong drivers.

Also what helped us was shifting a little more out of the broadline category where we were able to shift our mix to a higher mix during the quarter. The broadline is still not performing very well. Overall it’s an industry but we outperformed the broadline category but it’s still weak at this point in time. But I think the new product launches has really picked up some good momentum for us.

Ravi Shanker – Morgan Stanley

And finally, you may not be able to comment about Findlay but Texarkana, you’ve already ratified the agreement. Can you talk about what potential benefits that might mean in terms of numbers, labor cost savings, that sort of thing?

Bradley Hughes

Hey Ravi, it’s Brad. We won’t specifics from that. But clearly the contract we believe is going to allow us to improve our productivity at that plant and maintain it as a part of our competitive cost footprint in the U.S.

Ravi Shanker – Morgan Stanley

So it’s more of a productivity gain rather than explicit cost cuts?

Bradley Hughes

Yes, yes.

Operator

Thank you. Your next question comes from the line of Rod Lache.

Pat Nolan - Deutsche Bank Securities

Good morning everyone. It’s Pat Nolan for Rod. Just a couple of questions. Just looking at the math of the impact in the lock, it looks like the P&L raw materials maybe declined as much sequentially as the index did. Did the P&L impact kind of decline about 5% to 6% sequentially? Does that sound about right?

Bradley Hughes

That’s about right, Pat. Yes, but it’s a little bit less than the raw material index.

Pat Nolan - Deutsche Bank Securities

As you look out to Q1, we think about the P&L impact is but it actually had a slight positive sequentially because it will catch up to the index or still kind of flattish?

Bradley Hughes

We’re still suggesting that flattish is the way to think about the first quarter sequentially from the fourth quarter.

Pat Nolan - Deutsche Bank Securities

Just on the fourth quarter volumes, when you talked to your customers, were any of them stocking additional inventory as they fear potential volume disruptions, there is also the Findlay shutdown?

Roy Armes

No, we didn’t so much of that, Pact. In fact, we’ve been able to keep up with the basic demand. We got a higher demand for some of the new products that we have out there. There’s been more of a struggle for us availability wise. But we see the inventories dealer network being in pretty good shape at this point in time, overall being in pretty good shape at this point in time. I think the one thing is that the winter tires have not -- because of the mild winter, has not been as great as we originally anticipated. So I think the bottom line here is I think there is a pretty good balance there with the inventory levels.

Pat Nolan - Deutsche Bank Securities

And one last one, SG&A you’ve typically been in that 6% to 7% range this year, on an adjusted basis was 5%. I know you talked a little bit about the legal costs and some product liability. But overall SG&A as a percentage of sales, where do you see that kind of on a go forward basis?

Curtis Schneekloth

Pat, it’s Curtis here. Our product liability costs actually go through our cost of goods sold line, not the SG&A line. Brad’s got some comments on the SG&A.

Bradley Hughes

On the SG&A, we had indicated that 5% to 7% of net sales for 2012 is the range to plan to, and that’s still what we would suggest you to look at.

Operator

Thank you. Your next question comes from the line of Brett Hoselton.

Brett Hoselton – KeyBanc Capital Markets

North America, looking into volumes, you outperformed by about 150 basis points – outperformed the industry. Third quarter, you outperformed the industry by about 300 basis points. As you look out into 2012, do you anticipate that you’re going to continue to outperform the market? And do you think the order of magnitude that we’ve seen in the third quarter and fourth quarter is representative of how you might do in 2012, or do you think you might come up against some difficult comps or more difficult comps in the back half of 2012, maybe that number kind of comes down a little bit?

Curtis Schneekloth

Brett, it’s Curtis here. The basis point increases that you are talking about were correct. I think we will continue to outperform the market. Of course, things can change quarter to quarter but the new products that we have launched and are going out there to the pipelines are doing very well. We’re continuing to get good feedback on those. We also have improved our performed in the broadline area. So we’re at or better than the industry in that crucial segment for us. So I think we’re posed to continue to outperform the market in the U.S. going forward for a while.

Roy Armes

Yeah, I think I like to – Brett, we’ve talked a bit about pent-up demand, and we don’t know when that’s going to manifest itself. But we certainly believe that there’s still some of that out there, particularly on the value segment.

Brett Hoselton – KeyBanc Capital Markets

It seems like a number of peers have been thinking that North America’s going to be kind of flat demand wise or something along those lines, give or take. Is that kind of your expectation into 2012 for the industry?

Roy Armes

Yeah, I think directionally we would feel the same way.

Brett Hoselton – KeyBanc Capital Markets

Okay. And as we look at Asia, you’ve been exiting the bias supply I think since the first quarter of ’11. In what point of time do we see that start to comp out and therefore no longer be the headwind that we have seen in the first or in 2011?

Curtis Schneekloth

Brett, it’s Curtis here. The exit of bias tires has been a little choppy I would say, or lumpy from quarter to quarter as we exit kind of at different speeds. I think by the back half of 2012, we would see lesser impacts from that.

Brett Hoselton – KeyBanc Capital Markets

And then the $30 million in increase cost, what happens if the contract is ratified today, if vote goes yes, I mean, does the $30 million get cut in half, or does it get reduced by $1 million or $2 million or something along those lines?

Bradley Hughes

Yeah, Brett, I think directionally it will be materially correct at $30 million even if the vote goes our way today. There will be a transition period at the plant that will be required with the temporary workforce exiting and the permanent workforce returning. So the volume levels of that we’ll be able to achieve, will continue to have an impact on the cost per unit. So I think we believe that at about that $30 million regardless out of the outcome today.

Brett Hoselton – KeyBanc Capital Markets

And I have one last question. Europe down 20%, winter tires, it sounds like that’s kind of this quarter event, it doesn’t sound like we should see a down 20% into the first quarter and second quarter and so forth. Is that a fair statement?

Roy Armes

I think, no, I am not sure Brett, because the expectation of the European market is being down for this year. I mean, there’s still the debt crisis being dealt with and some other things there. So – and you are right on the winter tires. That’s been very slow there relatively speaking. So I wouldn’t assume that it’s going to be at the 20% level going forward.

Curtis Schneekloth

Yeah, we don’t expect it to be down 20% for the full year 2012.

Operator

Thank you. Your next question comes from the line of Saul Ludwig.

Saul Ludwig – NorthCoast Research

In 2010, there was snow to beat the band, and everybody else had very, very strong snow tire shipments typically in the third quarter. And now your dealers are loaded up with lots of snow tires that haven’t been sold. How is this going to affect your snow tire strategy, if you will, for 2012? And by the time we get to the third quarter, would you expect there to be a fairly sharp decline in your snow tire shipments which are also one of your more profitable products?

Roy Armes

What I would say on that one, Saul, is yeah, this is one of the few years, certainly since I have been here that we will go into this year with some inventory little heavier than we had seen in the past. I think in some cases, we will probably delay some of our winter tire production or certainly not produced, because we usually start that earlier in the year -- start the production, we will probably curtail that to some degree and replace it with some of the tires that we have today with, that has a higher demand.

Are we expecting a sharp decline later on this year? I think it’s still little early to determine that, because I think they are going to still have to sell out that inventory, and we just don’t know what the next winter is going to be like that would consume that. So I think it’s too difficult to try to predict at this stage.

Saul Ludwig – NorthCoast Research

Okay. Next question, certainly pricing and raw materials are difficult to project, it’s just hard to do. But in North America in 2011, you had for the year over $100 million shortfall between what you got in price and what you incurred in raw material costs, and $100 million is like a $1.50 a share. In your planning for 2012, are you starting out with the assumption that price and raws will kind of be in balance so that you could not incur that decrement, or how you’re sort of thinking about the price raws ratio in 2012, at least as at this moment as the year begins?

Bradley Hughes

Hey Saul, it’s Brad. A couple of comments. One is as you know, and as everyone knows, we are on LIFO. And so the impact of the sharp increases in raw materials at the outset of 2011 compared with when we took pricing on affected that relationship between price and raw material during the course of last year. And there will be a little bit of impact flowing into 2012 from the pricing that we took in 2011 as the catch-up completes the cycle on a full year basis. So there will be a little bit of catch-up that we’d see all else equal on the price raw material relationship coming out of 2011.

As we look forward, we will continue as we always do to monitor very closely what competition is doing. There has been limited activity, there has been some but limited activity at this point. And right now, I think most of our customers and many others in the industry are trying to see where raw materials are going to go. We’re doing the same, and so we will let flow through what happened in 2011, flow through to this year, and we will monitor what competition does and where raw materials go from here.

Saul Ludwig – NorthCoast Research

I guess the question is if today’s prices that are in place were to stay in effect for the whole year and if your raw material cost index of 253 were to say in effect for the whole year, then your price mix would be in balance, it would seem like it.

Roy Armes

That’s probably true.

Saul Ludwig – NorthCoast Research

And then my final question, with the volume increase in your fourth quarter, which 4% is approximately $300,000, $400,000 higher. And you said you only had a $2 million profit increase from volume, which would imply a contribution of only $5, $6 a tire which is much, much less than what has been experienced in all other periods. Is there any reason why your unit profit at least on the increment units that you sold particularly since so many of them were high end tires, why that was such a low number?

Curtis Schneekloth

Saul, it’s Curtis here. There is a lot of different factors that have flowed through to get to that calculation. I don’t think it’s – we don’t break down by tire our profitability. So I am not going to have lot more comments on that but we do feel pretty comfortable that the tires that we are selling – the additional or incremental tires that we are selling are more profitable right now.

Operator

Thank you. Your next question comes from the line of Himanshu Patel.

Amy Carroll - JP Morgan

Hi, this is Amy Carroll in for Himanshu. Sorry if I missed this earlier but I think based on recent decline in rubber, why is your first quarter guidance, I guess, still calling for sequentially flat on the raw materials line?

Bradley Hughes

The natural rubber has stabilized but with still historically high levels on – but it has stabilized recently. But in addition to that, when you look at carbon black, particularly in North America and you look at butadiene globally, the cost of those commodities has risen fairly sharply compared with the fourth quarter.

Amy Carroll - JP Morgan

What percentage of your raws are carbon black and butadiene?

Bradley Hughes

Amy, just to not tie up to this call, if you go to our investor relations presentation out there, there is a very good breakdown of our raw material costs and each of those components.

Amy Carroll - JP Morgan

Okay, great. And then I guess one last housekeeping item is, how much of the international volume is Europe?

Bradley Hughes

We typically – we talked about our international business unit being about 30% of our revenue. And then we talked about it being two-thirds China and one-third Europe within that. So it ends up being about 10% of the global.

Roy Armes

Operator, we have time for one more question.

Operator

Thank you. That would be from the line of Elizabeth Lane.

Elizabeth Lane – Bank of America/Merrill Lynch

Just a quick question on Findlay, you mentioned that in 4Q there were about $3 million in costs associated with the lock-out, and in 1Q there could be as much as $30 million. Should we consider those costs as one-time items and back them out, or should we think of them as continuing ops?

Bradley Hughes

Elizabeth, just one clarification as part of the response, in the fourth quarter we’d indicated that it was $11 million in total. $3 million was the cost to bring people in and to train them, and then there was $8 million related to lower volume, the effect of lower volume and unabsorbed costs that went along with that, along with some of the premium costs. And that’s more in line with what’s happening with the $30 million that we talked about for the first quarter.

Clearly if the situation continues as it is today, we would expect those costs to decline, firstly, because we’ll produce more units and there will be more of the cost absorbed over more units and reduce the cost per unit. Secondly, we continue to take other actions that will reduce the premium costs as we go forward. So $30 million is what we had indicated for the first quarter, if this ends, then we would get quickly get out of that. If it continues, those numbers will come down as we produce more units and as we take actions to reduce the premium costs.

Elizabeth Lane – Bank of America/Merrill Lynch

Okay, but we shouldn’t back out those items necessarily?

Bradley Hughes

I will let you decide on how you want to handle those.

Elizabeth Lane – Bank of America/Merrill Lynch

Just another quick one, which is that, it looks like you are gaining market share in North America and I was wondering if that’s also the case in Europe and Asia for the premium tire segments where you’re shifting the focus?

Roy Armes

I would say, first of all, you are right about the U.S. In Europe, some of the segments that we are really penetrating and maybe not overall but in some of the segments that we are in, we feel very good about how we are doing there. And in Asia, as you can tell that we made some good headways there. Now the truck and bus tire categories have been a little sluggish due to the economic changes that they were making in China. But our passenger tire product, the Cooper brand specifically is doing very, very well in Asia.

Yeah, I think that concludes our comments and Q&A today. Again, appreciate everybody’s attention, and just by ending, by saying that we felt very good about the performance of our company in this quarter and feel very good about the opportunities that are ahead of us going forward.

Thanks again.

Operator

Thank you for your participation in today’s Cooper Tire fourth quarter 2011 results conference call. You may now disconnect.

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