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

Cooper Tire & Rubber Company (NYSE:CTB)

F4Q07 Earnings Call

February 28, 2008 11:00 am ET

Executives

Roy Armes - Chairman of the Board & CEO

Philip Weaver - CFO & Vice President

Curtis Schneekloth - Director of Investor Relations

Analysts

Chet Lou

Rod Lache - Deutsche Bank

Himanshu Patel - JP Morgan

John Murphy - Merrill Lynch

Jonathan Steinmetz - Morgan Stanley

Kurt Budeck

Saul Ludwig - KeyBanc Capital Markets

Operator

Good morning. My name is Kalea and I will be your conference operator today. At this time, I would like to welcome everyone to the Cooper Tire fourth quarter yearend 2007 results conference call. (Operator Instructions) Thank you. Mr. Schneekloth you may begin your conference.

Curtis Schneekloth

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

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

With me today are Roy Armes, Chairman and Chief Executive Officer, and Philip Weaver, who serves as 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 fourth quarter operations and results. Following our prepared comments, we will open the call to participants for a question and answer session. In addition to the call this morning, I want to invite you to an event we are hosting this afternoon where we will cover the strategic plan for the company. The presentation starts at 2:00 ET at the Millennium Broadway Hotel in New York and will be webcast. More details are available on our website at coopertires.com. Our 2007 annual report on form 10K will be filed later today.

Today’s call, we’ll begin with Roy providing an overview of our fourth quarter results, who will then turn it over to Phil for a discussion on some of the details by segment and comments on other matters. Roy will summarize and provide comment on our outlook.

Now let me introduce you to Roy Armes, Chairman and Chief Executive Officer.

Roy Armes

Thanks, Curtis, and good morning to everyone. It’s been another strong quarter and our financial results continue to show dramatic improvement over previous years. On a consolidated basis, sales for the fourth quarter increase 7% and reached a new fourth quarter record of $765 million dollars. This followed record sales in the first three quarters, allowing us to set sales records for the year of $2.9 billion dollars. Operating profit for the fourth quarter was $43 million dollars, compared to a loss of $19 million for the same period last year and excluding restructuring and impairment charges, the operating profit in 2006 was $31 million dollars. Operating profit was 5.6% of net sales for the fourth quarter and 4.6% for the full year 2007. For the fourth quarter, net income improved to $78.6 million dollars to $51 million or 82 cents per share on a fully diluted basis. For the year 2007, net income improved by $198 million dollars over 2006 to $120 million dollars. This resulted in full year earnings per share of $1.91.

In October, we completed the sale of Oliver Rubber Company. These operations are reflected in the discontinued operations line and we received proceed from the sale of $66 million dollars and recorded a gain on the sale, net of taxes, of $26.5 million dollars, which is included in the discontinued operations. Results from discontinued operations for the year included a tax benefit of $12 million dollars, relating to the partial release of a tax valuation allowance. Most of this allowance was recorded in the third quarter. Please note that we reclassified the goodwill write down of $48 million dollars in 2006, so it is now included above the operating profit line. In prior presentations, it was below operating profit. Net cash provided by operations also improved from $116 million dollars for the full year 2006 to $373 million dollars in 2007, an improvement of $257 million dollars.

Phil is now going to provide more detail on individual segments and other financial matters.

Phil Weaver

Thanks Roy, and good morning everyone. I’ll start with the North American tire operations. Sales during the fourth quarter were a record of $585 million dollars. This was an increase of four percent compared to the fourth quarter of 2006. The increase was driven by both improved pricing and product mix. Operating profit for our North American tire operations was $45 million in the quarter or 7.7% of net sales. This compares to an operating profit prior to restructuring and the impairment charge of $38 million or 6.8% in the fourth quarter of 2006.

In the fourth quarter of 2007, our total life vehicle tire shipments in the U.S. market were down from the prior year. As you may recall that in the fourth quarter of 2006, we had the benefit from a strike of a competitor. This resulted in extremely strong unit shipments during the fourth quarter in 2006. As we stated before, we’re not interested in growth for growth sake and are not overly concerned with the decrease in unit shipments. During the fourth quarter of 2007 our shipments were also somewhat constrained by low inventory levels. For the total year, our market share in North America remained stable.

Overall, industry tire shipment growth during the fourth quarter of 2007 did not change from levels in the previous quarters and were in line with our expectations. Miles driven during the quarter were comparable to prior periods. We believe there’s still some pent up demand in the market as drivers continue to delay the purchase of replacement tires.

Price and mix improvements exceeded the increased cost of raw materials during the quarter as compared to last year. This helped offset the historically high raw material pricing that is in the market. We have not yet recaptured all of those increases and raw materials continue at these high levels and appear to be going even higher. We’ve implemented another price increase in North America in February of 2008 that is intended to mitigate this effect. Mix is also improving and we expect this to continue. The mix improvement relates both to products and customers. Specifically, we saw a larger increase in SUV tires than sales of the Cooper brand. Sales of the Cooper CS4 premium touring tire, which we introduced in April, continued to be strong and had a positive impact.

Operations saw sequential improvement from the third quarter of 2007 to the fourth. The improvements are the result of the project that we’ve been implementing throughout the year and the way we manage the production environment. This is a result of changes that we’ve been successful in implementing and that are starting to deliver benefits.

As Roy mentioned in the third quarter call, the full recovery of some of these challenges we face will occur during the second or third quarter of 2008. We’re also happy to report that we were able to deliver successfully on the $100 million of global cost savings and profit improvement initiatives that we promised. The impact in 2007 was primarily from projects in the area of sales and marketing and logistics.

Throughout the year, we’ve also been able to position ourselves so that we can implement the changes in manufacturing that will deliver the 70 million pledged for 2007.

Our North American operations have continued to deliver improvements year over year. These are the result of focused efforts on continuous improvement in all areas of the business. For the total year, operating profit margins prior to restructuring and goodwill impairment improved to 5.6% from a profit of 1.5% in 2006. This is a stunning achievement, but as we see it, a beginning.

We will continue to be the easiest tire company to do business with. We will also continue to launch products that exceed our customers’ demands while we work on lowering our global cost structure without compromising quality.

Now, turning to our international operations. In our international operations, sales increased to $228 million, up 29% over last year for the fourth quarter. This was a new record and the result of increased volumes in Asia as well as improved pricing and mix in Europe. Sales in Asia were up 46% for the quarter, driven by a 33% increase in unit sales. Europe experienced a decrease in unit sales as they continue to focus on profitable business and margin improvement, rather than volume.

Operating profit for the international segment improved to $3.8 million from a loss of $4.8 in the previous year. This is an improvement of $8.6 million over the same quarter from 2006. In Asia, we continue to successfully wrap our Cooper Kenda joint venture. We started to receive tires from this operation in the second quarter of ’07 and received a total of about 400,000 tires during the year. They will continue to increase our production levels at that facility, which will help to support North American Sales.

In 2008, we expect to receive approximately 2.5 million tires from the Cooper Kenda facility. Cooper Chengshan continues to expand operations while implementing projects that will improve operational efficiency. We’re working on strengthening the presence of the Chengshan brand, while improving mix. This effort will play an important part in Cooper’s future and they are successfully executing a plan designed to improve their margins.

For the total year, international operations had an operating profit after restructuring charges of 3.2% in 2007, up from 1.4% in 2006. This improvement occurred while increasing net sales by $200.1 million and ramping up the Greenfield facility at Cooper Kenda. These are impressive accomplishments and something we will build on in 2008.

Now let me express the changes in the form of high level operating profit walk forwards, starting in North America. This compares the fourth quarter of ’07 with the fourth quarter of ’06. The total improvement was $7 million. The key drivers of this were a $35 million improvement in price and mix, offset by about $13 million from lower volumes, $7 million in higher raw material costs, and $8 million in all other costs, largely due to incentives.

We liquidated U.S. inventories during the quarter at the impact of which was roughly the same as the fourth quarter of 2006. In total, these changes led to an improvement from a 6.8% profit margin prior to restructuring impairments in the fourth quarter of 2006 to a 7.7% margin in 2007 for the North American segment.

International operations improved $8.6 million during the quarters I mentioned. The key factors leading to this $15 million from increased volume price in mix, about $5 million from lower raw materials than the unusually high amounts in ’06, offset by some startup costs, plant operations and other costs, including advertising in Asia. The drivers for most of these changes were discussed earlier in the call, but I’ll mention that the startup cost in the fourth quarter at Cooper Kenda were about $4 million and for the total year these costs were about $8 million.

Let me now discuss several other items, starting with our income tax accounting. We reported a tax benefit of approximately $2.5 million dollars in the fourth quarter on pre-tax income of $38 million from continuing operations. This tax benefit is principally due to the partial release of evaluation allowance against our net deferred tax assets as activities during the quarter reduced these deferred tax asset levels and in turn the valuation allowance required.

For the year, we recorded $16 million of tax expense on continuing operation earnings of $116 million. Our annual worldwide tax expense was favorably impacted by the partial release of the valuation allowance under U.S. deferred tax assets as well as the tax holidays in place for our Chinese operations.

Taking out the impact of valuation allowance accounting, our 2007 tax rate was around 27%. That income from continuing operations for the quarter includes a benefit of about $12 million dollars or 19 cents per share, relating to adjustments to tax valuation allowances established in 2006, which are no longer required due to the reduction in the company’s deferred tax position.

We will be closely monitoring the need for our remaining valuation allowances as we reassess the realizability of our net deferred tax assets. The valuation allowance that was originally established in 2006 associated, with that U.S. deferred tax asset position, was significantly increased at yearend 2006 upon changes in the U.S. gap accounting for pension liabilities. This additional allowance in 2006 was not charged against earnings, but was part of the adjustment through other comprehensive income when our pension liabilities were put on the balance sheet at the end of 2006.

I’d recommend that you refer to our tax footnote in our financial statements in the form 10K, that we’ll file later today, for a detailed description of the valuation allowance and reconciliation of our annual effective tax rate to the U.S. statutory rate for 2007.

Now a few words on cash flows. Net cash provided by continuing operations was $81 million in the fourth quarter. This resulted in net cash provided by continuing operations of $361 million for the total year, an improvement of $247 million compared to the prior year. This improvement was driven primarily by improved profitability and reduction of inventory in 2007.

Our current assets include $107 million investment in Korean-based Kumho Tire Company. We intend to exercise the put option on this investment in 2008. During the fourth quarter, the company was able to repurchase $32 million of its 7 and three quarter percent unsecured senior notes due in December 2009. The related charges to extinguish this debt were about one million, including the write-off of deferred financing fees. These repurchases were part of the $200 million debt repurchase authorized by the Board of Directors in August 2007. In total, the company repurchased $81 million of this debt in 2007, and so authority remains to repurchase another $119 million.

The Board of Directors also authorized share repurchases of up to $100 million dollars. During the fourth quarter, we purchased almost $3 million in shares at a cost of about $46 million dollars. This left about $59.7 million shares outstanding at yearend.

Dividends paid in the fourth quarter were at the same rate and totaled about $4.6 million. Note that in total cash and cash equivalents in short-term investments were $396 million at December 31, 07, up $174 million from the end of ’06. The Kumho investment I mentioned earlier is not included in these totals, since it’s classified elsewhere.

Total gross debt to total capitalization was 41% at the end of 2007, compared to 49.6% at the end of 2006.

Now a few words about our credit facilities. We have two primary credit facilities that are potential sources for liquidity. The first is a $200 million asset revolving credit facility, which we put in place in the fourth quarter and it expires November 2012. It’s used to support letters of credit and short-term borrowings. We also have an accounts receivable securitization program for up to an additional $125 million that expires in 2010. Both facilities remain undrawn. A small portion of these lines are used to back letters of credit. Our new credit facilities are not currently subject to any governance. Now as a reference point, the next scheduled maturity of long-term debt in the parent company is $111 million due in December 2009. We believe that we have adequate sources of liquidity available to continue to operate and grow our business. With existing cash and credit facilities, improved cash generation and the proceeds for monetizing the Kumho investment, we believe that our liquidity levels are strong.

Now a few comments on pension funding. Our typical contributions to U.S. pension plans exceed the minimum risk or requirements in order to take advantage of certain tax benefits and maintain prudent funding. Under our normal funding policy, contributions to domestic and foreign pension plans in 2007 would be in the range of $30-$35 million. During 2007 though, we contributed a total of $66 million globally. We have dramatically improved the funding status of these plans as of December 31, 2007 compared to 2006. At the end of 2007, the net shortfall globally was $42.6 million, whereas at December 31, 2006, we reported a shortfall of $140 million globally, about half in the U.S. and half in Europe. There are many moving parts to these calculations, but the biggest factors closing the funding gap by nearly $100 million during 2007 were these—higher contributions and investment earnings for the plans in the U.S. and assumption changes including an increase in the discount rate used to present value the liabilities, which is about $35 million and details of this will be set forth in our annual report in that pension footnote.

For 2007, CapEx was 141 million. This is less than originally expected and the result of delaying certain projects until 2008, due to the extremely high number of projects underway in our plants. Capital expenditures at the Cooper Chengshan and Cooper Kenda joint ventures are funded from three sources. These are cash from operations, increased debt, and contributions from the owners. This has an impact on the amount of funding that Cooper is required to provide as we do not wholly own these operations, but they are consolidated in our financial statements. Capital infusions from our partners during 2007 totally $16 million.

Now let me return to the results from discontinued operations for a moment. Due to the sale of Oliver operations, we restated the prior quarters to remove Oliver’s operating results from continuing operations reporting. We also had activity in 2007 related to post divestiture indemnities regarding our former automotive business. Income from discontinued operations net of taxes totaled $2 million dollars in 2007. Comparable discontinued operations in 2006 represented a loss of $4 million dollars net of tax. The sale of Oliver operations also generated a $26.5 million dollar gain, net of income taxes during the year, as Roy mentioned.

I think these are the highlights. So I’d like to turn it back over to Roy.

Roy Armes

Thanks, Phil. Before taking your questions, let me just take a couple minutes to give you some thoughts about 2008. Our outlook for 2008 is cautiously optimistic. There are always concerns of risk or risk regarding raw material cost, which are at high levels and trending upward as well as availability. We can also be effected by the overall economy and industry, so in 2007 we built momentum by successfully implementing several initiatives that stabilized our operations and improved both the top and bottom line. Cooper’s employees have been focused. They’re staying focused and committed to continuous improvement. So we’re excited about the impact of the actions that we’ve put in place over this past year and will intend to keep the momentum going.

Internationally, our European operations continue their strong performance. Asia has continued to grow in scope and they are focused on delivering continued improvements. North America continues to set sales records and our operations continue to improve. As we move into the next phase of our plans, the progress they’ve made will be an important building block for our future success. Even though we’ve dealt with several obstacles in 2007, we’re able to deliver on the $100 million dollars of global cost savings and profit improvement initiatives. This has built momentum that we can continue to improve on in 2008 as we deliver the next $70 million dollars of cost savings and profit improvements. Our people are focused on the continuous improvement that we need in our business. They’re energized by the changes that’s taken place in the company and they’re also energized by the company’s prospects.

For 2008, we expect industry volumes in North America to be slightly higher than in 2007. China is likely to experience strong growth in replacement tires, while Europe we’re expecting to be flat.

As we focus on product offering and improve operationally, we believe we can outpace the industry and gain modest market share, but our priority will be on profitable growth, not just for volume sake.

Both natural rubber and oil prices remain at historic highs today. So we expect raw materials to increase during 2007 and we continue to monitor the situation and we’ll take actions that are necessary to address the higher raw material pricing.

As I recently reviewed the 10K’s information, there was a particular table that really caught my attention. It’s over the last five years’ income from continuing operations starting in 2003 was $24 million dollars in income in 2004, a $16 million dollar loss in 2005, and a $74 million dollar loss in 2006, and in 2007 we report an income of $91 million dollars. This is a staggering improvement and we believe we will continue to improve going forward. The people at Cooper have worked hard to achieve these wins and I’m proud of what we’ve been able to accomplish at this point in time. We’re staying energized and focused on the right things or the things that matter and we’re excited about what we can do in the future.

So thanks to everyone for their attendance on this call today and what I’d like to do now, that concludes our remarks, I’d like to open it up for questions.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone in order to ask a question, please press *1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question on the line is Chet Lou.

Chet Lou

Hi. Good morning, everyone. Congrats on a good quarter. A few questions here. First, can you talk a little bit about your strategy to improve your margins in China, particularly after the impact of wrap-ups. You’ve made some progress in the quarter in international margins, but it looks like there’s more potential here.

Roy Armes

How I would answer that is we’ve got two or three things that are going on. First of all, we’ve got a lot of operational improvement activities that are going on inside particularly our Chengshan operation. That’s one. At the same time, we have two expansions going on there at the same time. So we’ve got some cost associated with that as well. The other one is CKT, that we continue to have startup costs there and will over the next year or so as we ramp that up. We’ve been real pleased about where they’re going and where they’re tracking. Secondly, we are also investing right now in expanding our distribution of the Cooper brand throughout China. So we’re spending money there as well as we speak to try to not get overly aggressive with the expansion, but we do need to expand the brand there. Then lastly, it’s really around the TBR, or the truck and bus tire business. We have a respectable share there that we’re looking at how we can introduce the different products to be able to grow our margins, change our mix there. So those are two or three items that’s really impacting our margins there.

Chet Lou

And how do you envision to improve that going forward? What strategy?

Roy Armes

Well two things. One is to focus on the truck and bus tire business. That’s where we have a very strong position in China. So we’re going to continue to leverage that and improve the mix there. Secondly, on our passenger tires, we’re exporting a several number of tires into third party markets. Let me explain it that way. We’re going to be looking at diverting more of those into the U.S. and into Europe. So a combination of that, as well as expanding the Cooper brand, which is a higher mix for us, is our strategy for improving the margins.

Chet Lou

Thanks. Can you talk a little bit about how you plan to deploy the over $400 million dollars of cash in short-term investments in your balance sheet? What cash levels will you be comparable with and also did you repurchase more of the 7 and 3/4ths of ’09 notes in the first quarter?

Phil Weaver

We have not yet, because obviously we’ve been under a self-imposed blackout here in repurchasing shares and debt in the first quarter so far, but with those remaining authorizations, that would be part of what we would look at to deploy some of this cash. On the other side, Roy mentioned the expansions that are underway in China, including filling out equipment in the plant that we started up in April of 2007 within our joint venture called Cooper Kenda. We also will be making other investments as we move forward and we’ll probably outline some of those later today.

Chet Lou

Are you limited to just a 7 and 3/4ths of ’09 as far as the $200 million dollar authorization or will you consider the other senior notes, particularly the ones that expire in 2019 and 2027?

Phil Weaver

I would say that the resolution does not bind us only to 2009, but with the maturity horizon that we have, obviously we are focused on those.

Chet Lou

Based on historical data, how has the recession impacted low end tire demand? What is Cooper Tire looking to do to offset the impact of recession and results?

Roy Armes

There have been some studies done taking a look at the movement in tire demand versus recessionary periods and you can go out there and find some of that research, but there is not a direct correlation between the year a recession occurs and what is occurring with replacement tire demand. Now a lengthy recession would of course have some impact on demand, but we believe we are very well positioned to deal with that type of scenario if we need to. At this time though, we are not forecasting a recession, so.

Phil Weaver

In the industry itself, we’re still optimistic that you’ll see a 2 to 3% growth in the industry this year.

Chet Lou

Great. That’s all I have. Thank you.

Operator

Your next question comes from the line of John Murphy.

John Murphy - Merrill Lynch

Good morning, guys.

Phil/Roy

Hi John.

John Murphy - Merrill Lynch

Just wondering on Project Sunrise. If you can parse that out a little bit more for us in what you’ve actually achieved there, because I mean it’s difficult because some of your operations are new, some of it sounds like it’s better planning. I just wonder if you could parse it out between three main buckets—what’s happened in the market, better planning or rational planning on volumes, and hard rationalization or restructuring actions.

Phil Weaver

What we do there is the $100 million that we’re talking about is independent of movement in the market. In other words, if market raises prices and we go along with that, that’s certainly not counted as a savings, or if raw materials go up or down, that’s separated too. So what we’re really talking about are direct activities that we’ve initiated in terms of sales and marketing programs. In some cases, direct pricing or volume discount program changes, early payment discount changes, product mix changes. So a great deal of what we’ve accomplished so far has been in the area of sales and marketing and some on the finance side, you might say. Another piece would be in terms of advertising. We’ve modified our advertising approach. And the third larger piece to date has been in the distribution area, where we’ve consolidated some of our warehousing. We’ve gotten a lot more efficient in terms of how we distribute tires and I would say those are the principle areas that we’ve impacted so far. In terms of the plans, because a lot of the savings relates to automation projects and we’ve delayed some of those, just because of all the activity going on and in the interest of keeping our unit production volumes up, some of that will not occur until 2008.

John Murphy - Merrill Lynch

So it’s fair to say the $100 million that you’ve achieved so far is more on the softer side of planning and logistics and softer costs like advertising right now and then the additional $70 million will probably come from more plant actions. Is that correct? Is that a fair characterization?

Roy Armes

I’m not sure softer savings. Those are pretty hard savings. Now there’s some of them that you might fall under that softer category with the advertising, but there’s some pretty hard savings there. We would say that the bulk of the next $70 million we get is out of the manufacturing operations itself over 2008 and we had committed to having a run rate coming out of 2008 of the $170 million, which is what we had identified in the Sunrise.

John Murphy - Merrill Lynch

Great. Then second, if you could just clarify what you mean by incentives. Are these incentives that are going directly to the viewers as part of the improved distribution network or sort of the relationship that you were talking about earlier?

Phil Weaver

If you meant incentives in terms of the increases in cost, we were talking more about the compensation-related incentives. The other point, I may have used the word incentives was program incentives for our dealers, which we had reduced to some extent in 2006 and early 2007.

John Murphy - Merrill Lynch

So there’s no incentives going to the dealers directly, program incentives as you mentioned that would offset pricing?

Phil Weaver

Well of course there are, but what we’re measuring here is the net savings.

John Murphy - Merrill Lynch

Okay. Thanks a lot.

Operator

Your next question comes from the line of Himanshu Patel.

Himanshu Patel - JP Morgan

Good morning. Did you guys provide raw materials guidance for 2008?

Phil Weaver

I think we do not specifically. What Roy had said there I think when he read the words that we expect them to increase in 2007, he really meant 2008. We don’t give specific guidance, but having said that the natural rubber and oil were at historic highs and we expect them to increase in ’08, and that we would monitor the situation and take action on the pricing side if needed, but I don’t think we could accurately predict where that might go in 2008 other than up.

Roy Armes

The volatility over the last year or so, you could sure help us if you got any better insight than we do.

Himanshu Patel - JP Morgan

Some of your competitors have talked about 7 to 11% type of ranges on inflation and I’m presuming everyone is kind of looking at the spot prices and extrapolating that. Just directionally, would you guys feel comfortable with that sort of forecast?

Phil Weaver

As we see it today, yes, but of course we don’t have a lot of comfort as we go out towards the latter half of the year.

Roy Armes

And you used the word inflation, Himanshu. Are you speaking strictly of raw materials, right?

Himanshu Patel - JP Morgan

Correct.

Roy Armes

Just clarifying. Thank you.

Himanshu Patel - JP Morgan

Second question. What’s been the development in your sense of the Asian tire importers into the North American market over the past year? I mean you’ve seen FX moves become quite unfavorable for them. You had the Chinese VAT tax refund issue. I mean are you seeing them starting to maybe moderate their rate of market share gain or maybe are they even losing some share or are you seeing them taking different pricing action. Any color you could provide on that?

Roy Armes

Right now, Himanshu, the U.S. basically is a net importer of tires. Most of those coming out of Canada and China. There’s about 60% coming into the mark. We have seen a slowing of that and there’s two or three factors that are driving that. It’s the VAT tax, the first eight points that came off of that. We do anticipate and expect that probably the other 5% would come off, but that’s speculation at this point in time. You saw the ocean freight costs rise as other costs have in the supply chain and we’ve got a weaker U.S. dollar. So all of those factors is probably impacting, or at least from our viewpoint, is impacting a little bit of a slowdown in the imports, but it’s still going to stay at a high level.

Himanshu Patel - JP Morgan

Can I just ask, just anecdotally, where do the imports have their most success? Is it more with the sort of big box retailers or sort of independents? Any sort of generalizations you could make on that?

Phil Weaver

I don’t think we have data that would enable us to answer that with clarity.

Himanshu Patel - JP Morgan

Two housekeeping questions. On your walk that you provided for international profits, I think you said 15 million positive swaying from price mix and volumes. Can you give us the price mix component?

Phil Weaver

I don’t know that I have that broken down. I know there was a significant volume increase. So the price and product mix was a smaller piece of that. I don’t have the exact number.

Himanshu Patel - JP Morgan

The guidance for interest expense and tax rate—any directions you can give us on that for ’08?

Phil Weaver

Well interest expense, the majority of our debt, of course, is in the parent company and they’re at fixed rates. The shorter term notes and the expansion-related debt that we have in China, there is I think 80-some million of current notes. That disclosure is in our form 10K. I don’t happen to have that right at my fingertips, but I think it’s in the 6.5% range, I will guess. Maybe I could find that here before the call is over.

Himanshu Patel - JP Morgan

And taxes?

Phil Weaver

Taxes, we have this valuation allowance thing that carries on with us, obviously, and that could move up or down in 2008, but absent that we would expect to be somewhere in the high 20’s or low 30’s in terms of a rate for 2008, but the valuation allowance moving up or down could have a significant impact on that depending upon its movement.

Himanshu Patel - JP Morgan

That’s all I have. Thank you very much.

Roy Armes

Thanks, Himanshu.

Operator

Your next question comes from the line of Rod Lache.

Rod Lache - Deutsche Bank

Good morning.

Roy/Phil

Hi Rod.

Rod Lache - Deutsche Bank

Can you just elaborate on international margins relative to the 1.7% in the quarter, in the 3% for the year, what does Europe look like and what does China look like?

Phil Weaver

Well we prefer to keep their numbers kind of at the segment level, but broadly speaking Europe was kind of in the mid single digits I would say, a little bit above that, and China obviously less, but that in part because of the issues that Roy covered. To start up the expansion-related disruptions, the change in some of our branding there, advertising as we break into that market, and other costs.

Rod Lache - Deutsche Bank

Do you have a long-term objective for what you would expect China margins to be?

Roy Armes

We’ve said before, Rod, that we think we can still get into the high single digits with the margins there and that’s really what we’re targeting.

Rod Lache - Deutsche Bank

Okay, and can you give us the unit volume, either the absolute units or the percentage increase and decrease in North America and international?

Phil Weaver

Do you have that, Curtis?

Curtis Schneekloth

Yes I do.

Curtis Schneekloth

The unit sales for North America were down for the quarter you talking? About 3.8%, and for international, they were up around 18.5%.

Rod Lache - Deutsche Bank

Then you commented on getting to this $170 million of runway cost savings by the end of this year. Do you have like a year-over-year calibrated cost improvement that you’re expecting for 2008? It’s just unclear what the ramp up is going to look like.

Curtis Schneekloth

The $70 million dollars that we’re talking about in 2008 is probably going to mirror the pattern in 2007, but it’s safe to assume that most of that will be incremental over 2007.

Rod Lache - Deutsche Bank

Okay, so you’ll actually get a benefit in that order of magnitude in ’08 versus ’07, you’re saying?

Curtis Schneekloth

I would believe so. Yes.

Rod Lache - Deutsche Bank

Okay. Lastly, just net that [inaudible] half a percent, you were talking about obviously you still have some ability to buy back some stock and you’ve got more cash coming in with this Kumho sale, but you were implying that there’s some capital spending programs that you’re looking at. Should we be thinking that your spending from here is going to be more geared towards buying back stock or more geared towards some expansions that you guys are contemplating?

Phil Weaver

Rod, we will be doing both. Obviously we’ve got expansions underway—two at the Cooper Chengshan facility and we’re continuing to build out the Cooper Kenda plant. On the other side, part of our strategy is to reduce our average costs by expanding our global footprint to low cost countries. So we would probably be doing something there.

Rod Lache - Deutsche Bank

Okay. Thank you.

Operator

Your next question comes from the line of Eric Sales.

Eric Sales

Good morning, guys. I look forward to seeing you later today. Question on the Kumho put. What is the timing on that? I thought that was suppose to be February of this year?

Phil Weaver

It first became available in February 8th I think it was, but we’ve not yet pulled the trigger on that and we’ll be studying that carefully.

Eric Sales

Is there any update on the market value? I think it was $132 million in Q3 ’07.

Phil Weaver

Yeah, it has dropped since then and just as a refresher, the put is at the greater of what we paid or the market value and I think with the declines we’ve seen globally in ’08, it has been and the last I checked, at a little bit below what we had invested, which is about $107 to $108 million.

Eric Sales

Okay, and then looking at the 2009, are you going to continue to utilize open market purchases or would you ever consider a tender and then what was the average price you guys bought those on in the fourth quarter?

Phil Weaver

We would consider a tender if we thought it made sense. We have periodically consulted with some of the people that we work with outside, but obviously that’s primarily a function of market conditions. We did pay a bit of a premium, which I mentioned earlier and that’s going to disclosed in our report. So we paid, I don’t know, the average 2 to 3% maybe. Of course, we’re getting closer and closer to maturity too.

Eric Sales

Just finally, what were the LCs outstanding and I guess what is your availability under your two facilities? I know they’re undrawn, but what scale of LCs did you have outstanding?

Phil Weaver

The facilities which total 325 million, the availability is a function of course the work and capital that supports them in the first instance and that’s seasonal. So at year end, I don’t have a good measure of that. As it relates to the letters of credit that these facilities back up, those are generally in the 25 to 30 million range in any point in time.

Eric Sales

Okay. Thanks a lot.

Roy Armes

Thank you, Eric.

Operator

Your next question comes from the line of Kurt Budeck.

Kurt Budeck

Good morning, guys. I was looking through your third quarter transcript and I think, Phil, you mentioned that you would be penetrating additional life-o-layers in the fourth quarter, something like $5 to $7 million, but it looks like inventory came in quite a bit below your forecast. So I’m just curious and I know you mentioned something about inventory on your bridge for North America and I missed it. Can you give us some insight into what happened with inventory in the fourth quarter and is there any benefits from the life-o-layers?

Phil Weaver

I don’t know that we gave a forecast, so it really came in only slightly below the forecast that I included in giving you that $5 to $7 million range. In fact, in the fourth quarter, it was about $7.8 million impact, which was less than the impact in the fourth quarter of 2006, which was nearly $9 million.

Kurt Budeck

Okay, so it was $9 million in the fourth quarter of ’06 and about $8 million in the fourth quarter of ’07?

Phil Weaver

Right, just a little under $8 million

Kurt Budeck

Okay, and what was it for the year then?

Phil Weaver

22. Basically 14 plus 8, you might say.

Kurt Budeck

Inventory did come in, it looks like about $60 million dollars below your forecast and I’m just curious, did that suggest that you weren’t keeping up with demand in the fourth quarter again or anything we should be thinking about there?

Phil Weaver

When you say forecast, I think you’re referring to the $100 million dollar inventory reduction that we set forth in September of ’06 for the end of ’07.

Kurt Budeck

Well I’m looking at the January 16th slides and on slide 15 you’ve got a 12-31-07 target of $365.

Phil Weaver

Right, but that’s the target. Remember, this was part of our cost savings and balance sheet improvement exercise we started in September of ’06. That was not our target in January of this year, rather it was the target we set back in September of ’06 to achieve by the end of ’07 and obviously we were at or below that target by the end of ’06 and took it down even further each quarter in ’07. So it’s not like we missed our estimate, $60 million in one quarter. This has been kind of a function of what we’ve been doing all through 2007.

Kurt Budeck

So even though it says 12-31-07 target, that really wasn’t your target.

Phil Weaver

It was the target set within that cost reduction program, but that was not the number that we expected when we got to the end of ’07 as a result of all the things that had happened up to that time.

Kurt Budeck

Okay, because that makes more sense, because this presentation is actually dated January 16th of ’08. So it was after the close, so we were kind of kind of confused by that.

Phil Weaver

That issue is gone now, but we could have perhaps been clearer.

Kurt Budeck

Okay, well that’s fine. How did fill rates go in the fourth quarter? I know you like the target of fill rates in the low 90’s. How did that turn out?

Curtis Schneekloth

Let me answer that one, Kurt. If you recall, back from the third quarter conference call, there was a lot of questions around the life-o, as well as our plant inefficiencies at that point in time and I kind of laid out the decisions that we had made to try to improve that situation. One of the decisions we made was to cut back the number of molds and the changeovers we have in the plant and to do that, we actually sacrificed the fill rates for a short period of time. By November, we dropped down into the low to mid 80’s at best and by November those started coming back based on the decisions that we made and we ended up the year closer to 90%, around 88-90% in that range, and we’ve continued to improve.

Kurt Budeck

Okay, at the worst of it, I guess you were saying, it was in 80 to 90?

Curtis Schneekloth

80 to 85 at the worst case and that was getting into the third quarter of last year.

Kurt Budeck

Okay, and it came back and you got to almost…?

Curtis Schneekloth

If I recall right, I don’t have the numbers right in front of me, if I recall right, it was closer to 87 to 88%

Kurt Budeck

By year end?

Curtis Schneekloth

By the end of the year.

Kurt Budeck

And the target is like 92? Something like that?

Curtis Schneekloth

We still try to maintain 90-plus.

Kurt Budeck

90-plus. So you’re getting pretty close.

Curtis Schneekloth

We’ve been real pleased with the performance improvement that we saw through the fourth quarter.

Kurt Budeck

Okay, is the plan changing? Do you still thinks Texarkana can be responsible for all of that or is the plan kind of evolving as you implement it?

Curtis Schneekloth

In what perspective, Kurt, to make sure I understand your question?

Kurt Budeck

The way I understood it was Texarkana was going to do all the short run, so it was going to be the flex plant and I’m just curious if that’s still the case.

Curtis Schneekloth

That’s exactly the way we set it up. That’s what we’ve been doing. Because of demand, it’s actually been working a lot more overtime there to try to supply the product to build the inventories back that we need, but it still operating under a flex plant type of scenario.

Kurt Budeck

Okay, and then last question. You mentioned one of your competitors had a strike in the fourth quarter and it impacted the competitive dynamic and I suspect in the first quarter as well of ’07 and then that same competitor got out of wholesale private label. How do you view the comps going forward? Just in terms of all that stuff that was going on between you and that one competitor. I suspect that they get…do they get tougher or do they get easier because of the wholesale. It’s hard to keep track of the phasing here.

Phil Weaver

Well I think in the first instance, the important point for us is that even with that surge in ’06 and given the soft position in 2007, we maintained market share for the year. So the comp in the quarter really doesn’t cause us any concern at all. We looked at over the year we were right at the same market share, which really means we had an improvement relative to ’06 in the sense that we didn’t have that opportunity as we had late in ’06. Quarter to quarter, other than the seasonality of our business, which I think you’re familiar with, it can be driven by the timing of price increases. So it’s really difficult to give you a measure of the comp without studying when the price increases went into effect in ’07 versus what the timing of them are in ’08. So I just don’t think we’re prepared to do that right now.

Kurt Budeck

Okay, but you’re saying your share in ’07 was similar to your share in ’06?

Phil Weaver

Yes.

Kurt Budeck

Even though with the shift of the private label?

Curtis Schneekloth

Market share was still the same.

Kurt Budeck

Great. Thank you very much, guys.

Operator

Your next question comes from the line of Jonathan Steinmetz.

Jonathan Steinmetz - Morgan Stanley

Thanks. Good morning, everyone. I think you gave a $35 million dollar price mix number in the North American walk. I know you don’t intend to quantify each isolation, but can you talk about which one was the driver there out of the two?

Phil Weaver

I don’t have the breakdown there and I guess we prefer not to get into it, but certainly we had two price increases in ’06, in ’07 rather, and we had had an October price increase in 2006, so without actually looking it up, I would say price is the bigger of the two, but we’re certainly pleased that we also had improvement.

Jonathan Steinmetz - Morgan Stanley

Okay. Do you think even what’s gone on with raw materials, you have a February increase, but it seems like that was the catch-up with some of what happened last year. Do you think you need another increase later on in the year to catch up with what happened in the last few months?

Roy Armes

We don’t want to speculate on that, Jonathan. I would tell you that as we watch the raw material prices, we’re constantly considering our options going forward here, but wouldn’t want to speculate this point in time. We’re really concentrating on getting the February 1 price increase seated.

Jonathan Steinmetz - Morgan Stanley

Okay, and regarding the life-o benefit, I guess it was about $8 million dollars in the quarter, do you think we’re likely to see more of that in the first half of this year or is the inventory in such a position that you’re unlikely to dip into layers going forward?

Phil Weaver

I would say the latter is the case and particularly given the seasonality, we build inventory typically in the first two quarters and I just can’t imagine that we could run it much lower by the time we get to the yearend of ’08.

Jonathan Steinmetz - Morgan Stanley

Okay. Last question. I don’t want to steal your thunder from later today, but you talked about, sort of alluded to it anyway, higher cap X to go into some lower cost production. Should we be thinking about this as sort of an addition to the existing footprint or instead of some of the existing footprint?

Phil Weaver

I would say what we’re talking about is in addition to.

Jonathan Steinmetz - Morgan Stanley

Okay, so this has effectively helped capture some growth.

Phil Weaver

Yes.

Jonathan Steinmetz - Morgan Stanley

Okay, Thank you very much.

Operator

Your next question comes from the line of Sal Ludwig

Curtis Schneekloth

Okay, this will be the last question.

Saul Ludwig - KeyBanc Capital Markets

Phil, accounts receivable fell pretty sharply year over year. Was there some disaster in the month of December?

Phil Weaver

Disaster?

Saul Ludwig - KeyBanc Capital Markets

Well I mean did revenues fall off at end of year compared to end of last year, because of the sharp drop in your receivables?

Phil Weaver

No I would say there’s a little bit based on volume, but more importantly there were some healthy collections.

Saul Ludwig - KeyBanc Capital Markets

Okay, so we shouldn’t read anything into that relative to pulse of business?

Phil Weaver

No, I don’t think so.

Saul Ludwig - KeyBanc Capital Markets

On the international earnings where you made $3.8 million dollars in the fourth quarter, that was less than, significantly less than what you made in the first, second, and third quarters of the year and you explained that some of the new initiatives that maybe ate into your expenses. How should we think about 2008 internationally? You’ve got much stronger numbers that you reported in the first, second, and third quarters of ’07. Are we looking at fairly negative comps as we move through ’08 because of some of the initiatives that you outlined before continuing?

Roy Armes

I think, Saul, probably the way I would frame that is that we are investing in these and will have start-up with some of the expansions that we have going on in CCT. We’re feeling much better about CKT, because they came off strong in the latter part of the year in terms of their production and shipment. So we’ll be investing there as well. We are going to continue to invest in our distribution. The other thing that’s here is we’re continuing to see the material cost increases there as well. So those are all the factors I think that should be considered when we’re looking at our first few quarters of this year.

Saul Ludwig - KeyBanc Capital Markets

But we should look for a lower earnings from international in the first half of the year?

Roy Armes

I think that’s possible. I wouldn’t want to go as far as speculating and that sort of thing, but on the international side, we have some things that we’re investing back in the business, so it’s conceivable that we would have a little bit lower earnings.

Saul Ludwig - KeyBanc Capital Markets

Okay, but that’s fine. Just want to make sure we don’t have any surprises. In terms of the cap spending, what is the total cap spending you’re looking at in ’08 and how much is going to be paid for by the partners?

Phil Weaver

Somewhere in the range of $200 million. Obviously the timing of some of these major expansions could drive that up or down a bit. We’re working with them in terms of how much will be funded by debt versus direct capital contributions, Saul. So we don’t have a firm number yet for 2008.

Saul Ludwig - KeyBanc Capital Markets

What are you putting into your own planning for this $200 being paid for by the partners. It may turn out to be wrong, but what are you starting with?

Phil Weaver

I don’t recall exactly, but I’ll just throw out something probably in the range of $15 to $20 million as my guess.

Saul Ludwig - KeyBanc Capital Markets

Corporate expenses shot up in the fourth quarter to close to $5 million bucks, much higher than what we’ve seen in other quarters. What do you think we should be thinking about there as a run rate?

Phil Weaver

I think it’s probably going to be comparable to that as we move into 2008, depending upon obviously whether we hit our earnings targets or not and some of the incentives kick in or don’t kick in.

Saul Ludwig - KeyBanc Capital Markets

Annual number was flat, but the fourth quarter was up $3 million dollars is a lot of money.

Phil Weaver

Most of that was driven I think by accruals for incentives and a little bit of higher advertising cost.

Saul Ludwig - KeyBanc Capital Markets

Is advertising charged to corporate or is advertising charged to North American…?

Phil Weaver

I was responding to SG&A. No, within corporate, I think it was largely incentives.

Saul Ludwig - KeyBanc Capital Markets

Roy, where do you think from a North American standpoint, you had great margins there in the fourth quarter. Where do you see the margins go in ’08 given the cost reduction initiative, the plan that you have in $70 million dollars, what do you think we should be looking for in terms of ’08 in North American margin. Do you think we should be…under 7%, but where is your head on this one?

Roy Armes

Saul, we’re not going to answer that. We’re not going to provide guidance on that, but we’re focused on continuous improvement. We’re focused on controlling things we can and we’re going to go out there and deliver the best margin we possibly can for you.

Saul Ludwig - KeyBanc Capital Markets

Just to clarify, did you say that North American volume in the fourth quarter was down 3.8%?

Roy Armes

Yes.

Saul Ludwig - KeyBanc Capital Markets

So that’s the correct number. Okay. Lastly, Phil, on the balance sheets, the non-controlling interest went up from $70 to $89 million dollars….

Phil Weaver

I’m sorry, your call fell off here, could you repeat the end of it?

Saul Ludwig - KeyBanc Capital Markets

What is the nature of the increase and the non-controlling interest in the balance sheet?

Phil Weaver

Part of it would be their capital contributions and then their percentage of their proportion of the earnings for those joint ventures.

Saul Ludwig - KeyBanc Capital Markets

And how many tires did you get from Cooper Kenda in ’07? You said you went through a half million in….

Phil Weaver

Yeah, we received in the U.S. about 400,000 tires in ’07.

Saul Ludwig - KeyBanc Capital Markets

400,000. So that’s going to be a big increase. As that occurs, do you think their start-up cost get worse, get better? What happens there?

Phil Weaver

Well, as they ramp up, they get higher for a period of time and then they obviously reverse more quickly.

Saul Ludwig - KeyBanc Capital Markets

Great. Very good. Thank you very much.

Roy Armes

Thanks for your participation in the call today.

Phil Weaver

Thank you, everyone.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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

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

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

Source: Cooper Tire & Rubber F4Q07 (Qtr End 12/29/07) Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts