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Cooper Tire & Rubber Company (NYSE:CTB)

Q2 2012 Earnings Call

August 09, 2012 11:00 a.m. ET

Executives

Roy Armes – Chairman, Chief Executive Officer.

Brad Hughes – Chief Financial Officer

Analysts

Ravi Shanker – Morgan Stanley

John Murphy – BofA/Merrill Lynch

Brett Hoselton - KeyBanc Capital Markets

Saul Ludwig - NorthCoast Research

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Cooper Tire Second Quarter 2012 Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions]

I will now hand the floor to Jerry Long. Mr. Long, please go ahead.

Jerry Long

Thank you. Good morning everyone and thank you for joining our call today. My name is Jerry Long and I serve as the company's Assistant Treasurer, responsible for 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 differences 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 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 10-Q. These slides are intended to help investors and analysts quickly obtain information. They will not be used as the focus of today's call.

Following our prepared comments, we will open the call to participants for a question-and-answer session. Questions may also be directed to our email address, which is investorrelations@cooppertire.com.

Today's call will begin with Roy providing an overview of our results. He will then turn it to Brad for a discussion on some of the details by segment and comments on other matters. Roy will then summarize and provide comments on our outlook. Now, let me turn the call over to Roy Armes.

Roy Armes

Thanks Stewart and good morning to everyone. Our second quarter results were very strong with the top line exceeding $1 billion a 15% increase over the same period a year ago. This growth contributed to record operating profit for both segments of our business in North America and international which demonstrates the strengthening of our business model and as a result of disciplined execution of our strategic plan.

Our strong second quarter performance was driven by two key factors. The first is increased volumes. We experienced higher demand for our products across our portfolio during the second quarter. In fact growing demand resulted in U.S. light vehicle volumes increasing 16% over the second quarter a year ago, and the TBR volumes increased 5% for the quarter.

International volumes also exhibited strong growth increasing 19% over the prior year second quarter and establishing a new record for the segment. This growth was achieved in the phase of weaker overall industry trends illustrating that the market place is increasingly recognizing a performance in value of our products. A second factor that’s possibly influenced our results was the decline in raw materials and commodity prices. As you know these prices begin to drop after the first quarter with natural rubber and polybutadiene prices experiencing the most dramatic declines. Obviously this drop in prices provided a tailwind for the industry and Cooper creating an improved balance between pricing of raw materials. Brad will have a lot more to say on this a little bit later on the call this morning.

So moving on to the operations. During the second quarter we generated net income attributable to Cooper Tire Rubber Company a $52 million or $0.82 per share which compares to net income of $12 million or $0.18 per share for the same period a year ago. The results during the quarter include the impact of a onetime $7 million pre-tax pension gain related to the curtailment of a plan in the U.K. which is approximately $5 million after tax.

As I mentioned, consolidated net sales exceeded $1 billion which is up 15% from the same period a year ago, and this increase was driven by a 16% quarter-over-quarter rise in total company unit volume. Specifically, unit volumes were up 15% for the North American segment and 19% for our international segment.

Our volume growth in United States was very strong relative to the industry light vehicle tire shipments which were essentially flat. We outperformed the industry which compared to RMA reported figures in the passenger and light truck categories including the broad line and UHP segments. Additionally, commercial truck sales of Roadmaster brand tires continue to gain market share increasing 5% from the prior year second quarter.

Our international segment reported record unit volumes. Unit volume in Asia was driven by higher shipments and domestic and export PBR markets or a truck and bus radial tires, as well as continued successful efforts to expand distribution and supply of light vehicle tires in the Chinese market. Despite challenging economic conditions European volumes increased as we introduce production from our new Serbian plant which offset volume reductions in other European product lines.

We are pleased with the progress at this new facility as this operation has stepped up production and recently earned ISO 9001 quality certification in just a few short months. And now all eight of the tire manufacturing facility in the Cooper global family of companies are ISO 9001 certified. Driving sustain profitable growth is one of our key strategic goals and we are pleased with our second quarter results which included a record operating profit of $95 million or $9% of net sales. Compared with $24 million or 2.6% for the same period last year.

North American segment operating profit was $65 million or 8.4% of net sales. In the international segment operating profit was a record $43 million or 10.3% of net sales. Our higher operating profit was driven by a lower raw material cost of about $67 million, $19 million of higher unit volume, $8 million in manufacturing efficiencies, and $1 million of lower product liability cost. These positives were partially offset by higher SG&A cost of $90 million as well as $3 million attributable to unfavorable pricing and mix.

Additionally, profit was negatively impacted by $9 million categorized as other costs which includes expenses associated with the start up of our operation in Serbia, an increased pension expense and incentive compensation costs. And finally, as I mentioned earlier we also recorded a onetime $7 million pre-tax pension curtailment gain associated with our U.K. pension plan. Now, at this time I’d like to turn over to Brad who is going to provide a lot more detail on individual segments as well as the financial matters.

Bradley Hughes

Thanks Roy. I will start by providing detail on the North American tire operations results for the quarter. The segment sales were $771 million, a 16% increase compared with the second quarter of 2011. The top line improvement for the quarter was driven by an increase in unit shipments in addition to stronger price and mix. Unit sales for the North American segment increased 15% compared with the second quarter of 2011.

Cooper's total light vehicle tire shipments in the United States, increased by 16% which was significantly better than the RMA members and industry shipments which were essentially flat in the quarter compared with 2011. Year-to-date Cooper’s light vehicle shipments have increased 4% compared to a decrease of 3% for the industry. We are able to grow despite the broad line and light truck segment in relatively weaker performers for the industry because we were able to outperform the market in every segment as reported by the RMA members including broadline.

Cooper’s passenger segment growth was 15% and light truck segment growth was 19%. It is also worth noting that our UHP product line sales grew once again during the quarter in the rough 46% over the prior year.

Commercial truck tire sales of the Roadmaster brand continued to gain market share as shipments were up 5% within the quarter. By comparison total industry shipments within this category as reported by the RMA were down nearly 8% versus the second quarter of 2011. The segment’s operating profit was $65 million for the second quarter or 8.4% of net sales. It represent an increase of $61 million over the second quarter of 2011.

Allow me to summarize the key drivers in the form of an operating profit walk forward. $35 million from lower raw material costs, $18 million from higher price and mix, $12 million from higher volumes, $7 million from lower manufacturing costs, and $1 million from lower product liability cost was partially offset by $5 million due to higher selling general and administrative costs, and $6 million in higher other costs which include pension expense.

Our underlying raw material index of 262 was lower by approximately 2% on a year-over-year basis for the quarter as certain raw materials including natural rubber and polybutadiene decreased in price. However, the change in the index represented a 5% increase sequentially from the first quarter of 2012. The index is intended to be an indicator of changes in raw material costs given the rather unusual movements for some raw material prices that continued to escalate during April before turning lower in May and June. The index did not fully reflect the changing costs this quarter. Raw material cost impacts were actually better than indicated by the index. As a result our raw material cost may not decrease as much in the third quarter as the index may indicate.

We do expect that the raw material index will decrease sequentially by 5% to 10% during the third quarter compared with the second quarter. As raw material cost for maintenance currently volatile within our industry Cooper’s purchasing strategy continues to play priority and securing an adequate supply of raw materials and purchasing it close to or better than industry competitors.

As a reminder in the United States we used the Last In First Out or LIFO accounting method which charges the most recent cost against sales which in turn impacts profits more quickly than other inventory accounting methods. Favorable pricing and mix contributed $18 million on the increased profits within the second quarter. The last price increase we implemented in the United States on passenger car and light truck tires was in December 2011 and was up to 5%. In addition we announced the price increase on commercial truck tires of up to 4% effective March 2012.

Manufacturing cost decrease by $7 million due to a continued focus on implementing productivity projects that will drive cost savings to the bottom line while maintaining high levels of quality for our customers.

These efforts have been very successful and we believe they will continue to contribute incremental results over the next few years as we improve the efficiency of our operations.

Selling, general and administrative costs increased $5 million in the second quarter primarily as a result of a projected increase incentive base compensation year-over-year. Other operating costs which are comprised of pension costs and incentive compensation also increased $6 million compared to the second quarter in 2011.

Now, turning to our International Tire operations. Net sales in the international segment were $419 million up 6% from the second quarter of 2011. The higher sales were result of record unit sales volumes in 2012 and to a lesser extend favorable exchange rate partially offset by lower average selling prices.

The higher international unit volumes were largely in the Asian operations which were up 16% over the same quarter prior year. Impressive growth was achieved in the domestic TBR market despite softer market conditions in China for commercial truck drivers.

Efforts to expand distribution and supply of light vehicle tires in China continue and are reflected in favorable growth in the Cooper brands over prior year second quarter. In particular sales of Cooper branded tires in the higher positioning product segment experience the most significant growth over 2011. Sales for inter-company shipments can support both the European and North American operations were also stronger in the second quarter. The Asian sales volume gains were achieved in the phase of a slower China academy and the ongoing impact of existing bias and other lower value tires as we continue to focus on more premium products. We are pleased with our second quarter result as they confirm our direction and future opportunities in China.

European volumes increased 1% which was an impressive performance in the face of the continued weak industry conditions in the European markets. Despite challenging economic conditions in these markets, our European team achieved higher sales volumes compared to 2011, mainly due higher sales of a new product line being produced at Cooper’s new Serbia tire operations.

Sales revenue was down slightly due partially to a less favorable product mix. While the second quarter 2012 sales mix was slightly unfavorable, Cooper Tubes Europe continues to focus on growth in higher value product segments. The performance of our international division reflects the commitment to grow our presence in the global tire market. We are pleased that we were able to strengthening the sales growth into a significant growth in operating profit year-on-year.

In the second quarter of 2012 the international segment had an operating profit of $43 million or 10.3 % of net sales, which is $20 million improvement compared with the same period in 2011. The following were the underlying factors impacting operating profit for the international operations in the form of an operating profit walk forward.

$46 million from global raw material costs, particularly lower natural rubber costs, which comprises a higher content of truck and bus radial tires, $6 million from higher sales volumes, $1 million from improved manufacturing costs partially offset by $32 million from unfavorable pricing mix, $6 million in higher SG&A costs due mainly to higher advertising and sales support expenses in China and finally $2 million for the costs associated with the startup of our new plant in Serbia. In addition to the above, the quarter results were aided by a one-time $7 million pre-tax gain due to a pension plan curtailment in our U.K operations.

The higher operating profit in the international segment was achieved despite challenging macro-economic conditions in the both the China and Western European markets. Our international operations continue to improve the mix of tires sold, focusing on premium brand products. With the new plant in Serbia and with our CKT plant in China being able to sell into the domestic China market starting in 2013, we feel we are well positioned for the future.

In addition to the individual segment results, at the corporate level unallocated charges were $10 million during the second quarter, up from $2 million in the same quarter of 2011. This increase was primarily the result of higher incentive related costs and approvals for stock based liabilities.

I would now like to cover a few other items starting with income tax accounting. Our income tax expense recorded in the second quarter was approximately $29 million and is based upon forecasted earnings and annualized effective tax rates for various taxing jurisdictions. The effective tax rate excluding the street items was 33.3% for the quarter. We believe a full year effective tax rate will range from 29% to 34%. More details on our taxes is available in our Form 10-Q that will be filed with the SEC.

Consolidated for total company selling general and administrative costs were $63 million or 6of net sales, up from $45 million or 4.9 % of net sales in the same quarter of 2011. This change is a results of higher incentive based compensation costs, increased approvals for stock based compensation and increased selling profit to drive sales. Additionally, the company continues to invest in Okay. Distribution capability and to promote Cooper brand. We will continue to invest appropriately in these areas and expect that SG&A will range between 5 % and 7 % of net sales for 2012.

Cash and cash equivalents of $241 million at June 2012 were $7 million higher than December 31, 2011 and $103 million higher than June 30, 2011. Cash provided by operating activities improved $71 million during the second quarter. Compared to the prior years the company did not build inventory at historical rates due to strong second quarter sales.

Accounts receivables of $499 million increased from the December 31, 2011 balance of $428 million. The increase is related primarily to the growth in sales. Net property plant and equipment was slightly over $1 billion at June 30 compared with $969 million at year end. This includes the assets purchased in Serbia.

The notes payable balance of $118 million relates to our operations in Mexico and the People’s Republic of China. These are typically refinanced as they become due with an ongoing goal to convert a portion to long term instruments.

A few words about our Credit facilities. We have two primary current company credit facilities to provide sources of liquidity. The first is $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 run drawn at June 30 with approximately $81 million of the lines used to back letters of credit. The amounts 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 $249 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 expenditure, CapEx in the second quarter of 2012 was $41 million. 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. Well, this is higher than recent years. We believe it is in appropriate amount relative to our appreciation levels of approximately $130 million, the strength of our balance sheet and our business goals.

I’ll now turn it back over to Roy.

Roy Armes

Thanks Brad. I think you can see from our second quarter results that Cooper continues on the right track and is achieving the key goals that we outlined in our strategic plan. It is also notable that for the first six months of this year unit volume for Cooper have improved year-over-year in both are North American and international segments. We are outperforming the industry in many of the key markets which the reflects the strength of our product portfolio. And this has been achieved despite challenging industry conditions on a global basis as we continue to distinguish our company in the market place with quality performance and value.

Looking ahead, the tire industry is facing uncertainty for the remainder of the year and we expect that the challenging economic conditions in Europe will continue and the markets in the United States and China will remain soft. And while these factors may put pressure on the entire industry we are confident about our ability to compete and perform at or above industry levels as demonstrated in the second quarter.

As Brad noted we project further declines of raw material costs in the third quarter which should contribute towards a more appropriate relationship to current tire prices. On the horizon is the expected expiration of the ITC 421 tariff and the uncertain impact this will have on the industry and we believe the flexibility of Cooper’s cost competitive manufacturing footprint, its product portfolio and customer relationships position us to deal effectively with the expiration. Importantly, our balance sheet remains strong and our priorities will continue to focus on maintaining adequate liquidity while investing in projects that have the greatest return for a stakeholders.

A recent example in our investment in new technologies and innovation, this last month the United States department of agriculture awarded Cooper and our partners $6.9 million grant and this full year grant focuses on utilizing the domestic guayule plant as a strategic and more stable source of raw material for tires.

Despite the challenging global economic climate, which is uncertain and causes us to be cautious about the near term future, overall we are very pleased with the results so far this year as we continue to execute the initiatives we defined in our strategic plan a few years ago and move the business forward. Now, with that said that concludes our prepared remarks and now it’s time to take a few questions. So operator if we could have the first question please.

Question-and-Answer Session

Operator

[Operator Instructions]. First question comes from Ravi Shanker.

Ravi Shanker – Morgan Stanley

Thanks. Good morning everyone. Roy, if I can start with how you ended your remarks. Just a question on the U.S. Your share trends in recent quarters have been most impressive. So can you just help us understand what's driving that? Are you seeing outperformance in broadline versus other segments? What's causing the share pick up in your branded segment and what’s the pricing in [inaudible]?

Roy Armes

Roy, I think there is probably two or three things describing that. First of all I think we got a pretty impressive product portfolio that we have been developing over the last few years and we started introducing this year. And particularly if you look at the UHP category and more of the premium tires we have had some pretty good growth in that area. So I think that would be the first thing.

I think the second thing is we do have a pretty loyal customer base that is very interested in our products because I think that feel that we deliver the quality and the performance and the value that they are looking for. So that loyalty is really helping us as well. And if you look at the overall industry, while the premium segment has performed pretty well in this economic environment we see now the broadline category starting to perform – or the demand starting to increase a little better than what it’s been over the last couple of years.

If you recall there was some concern about our company because broadline was – we had lot of exposure there that you know in some months that was down double digits. The broadline category in the value segment was down double digits. And it’s starting to come back a little bit now which I think some of this pent up demand is starting to flow through. And when it does, from a volume stand point that’s still the sweet spot of it. We said we are not walking away from this segment and we are going to provide some very good value in that segment. I think all of those items have really helped us.

Ravi Shanker – Morgan Stanley

Understood. I'm sorry if I miss this and you said during the call, but did you say what broadline was versus the industry?

Roy Armes

Ravi, we outperformed the industry in all of the reported segments including broadline.

Ravi Shanker – Morgan Stanley

Okay and finally the international pricing is probably a little bit of the reversal what's happening in the U.S. Can you help us understanding of how much of this is structural versus some kind of temporary thing? And also how can – is there any reads between what's going on pricing ways in China and what we might see in the U.S. post the expiry of the tariff?

Roy Armes

Well, I think first of all I am going to let Brad answer part of this, but I would start off saying that pricing has been a challenge in Asia specifically China because of the slowdown in their economy. There is still growth there, but not as much growth as we have seen in past. I think the government has implemented some stimulus program. They have done some things with the interest rates. I think they are doing things to try to heat up the economic given where we have been over this past year. But I think that’s going to be a little bit of a lag. It’s going to be more later this year, or into 2013 and as a result of that I think we will see that economy starting to pick back up which we are in a very good position to take advantage of.

So the pricing has been a little bit of a challenge in China. If you look at the U.S., I think what we are seeing is pricing has still maintained some pretty good discipline. There are promotions and some isolated cases where it looks like there is some incentive to try to drive more volume in the industry. But I think overall it still has remained fairly disciplined and we will have to see going forward how that maintains itself.

Now, if you look at the ITC as you mentioned, we have a couple of factors there. One, we are anticipating some pricing pressure from - when the ITC expire, the tariffs expire in the same token we have a few million tires that we bring into the U.S from China that would also benefit from that tariff expiring and would help us on that side. So net effect, we are believing that we can still manage this.

Will there be some pricing pressure? We believe so. Will there be some volume pressure? Yes. I think from our standpoint if we lose some volume it’s going to be more in a lower end category than it will be in the higher end and it gives us an opportunity to shift some of our mix as a result of that expiration.

Brad Hughes

The only thing that I would add to Roy’s comments is that in Asia, China specifically, and I think we have noted this before as raw material prices were increasing and it’s a similar situation when they are decreasing. That market reacts a lot more quickly with price adjustments to what’s happening in the raw material market both upwards and downwards and to a degree that’s what we are experiencing – what the industry is experiencing over there right now is there is a more rapid response to some of the changes in the raw material costs.

Ravi Shanker – Morgan Stanley

Great. And if I can sneak a quick one in Roy, any thoughts on the new tire labeling standard that’s going to effect in Europe in November? You have seen some other tire makers show us double aerated tires at least on a concept or a prototype basis. Where do you guys think you will stack up?

Roy Armes

Well we are not going to talk about the grading or what our grading is but we feel very confident about us being in a competitive position with tire legally.

Ravi Shanker – Morgan Stanley

Fair enough. Thank you so much.

Operator

Your next question comes from the line of John Murphy.

John Murphy – BofA/Merrill Lynch

Good morning guys. First question, as we look at your volume gains versus the industry there have been, I'm just curious are you seeing the same kind sell through to the end consumer? I'm just trying to figure out if there is any inventory build up at your distributors or your dealers.

Roy Armes

You know John we think that what we see right now, our customers are certainly being conservative with their buying. But we don’t see the inventories being out of line. Obviously there has been a slow demand this year as you can see in the industry numbers. But we haven't seen a big build up of inventory. We haven't seen a big build up of inventory coming out of the manufacturers as well. I think our customers are managing their cash flow and I think it’s probably just about right. I think there is some hesitancy on building inventories because of the raw material prices coming down and the value of that inventory and our dealers and also the anticipation what might happen with ITC.

Brad Hughes

John I don’t think there is anything unique about our inventory position in the channels relative to the industry in general. I think we are about similar and so I don’t think that’s any part of it. So I do think that what you are seeing in terms of our performance versus the market is similar to what’s happening on the Celpher [ph].

John Murphy – BofA/Merrill Lynch

Got you. That’s very helpful. Second question on the distribution network, you guys highlighted that as a region for the SG&A increasing and Cooper has sort of historically had a very strong and arguably better relationship with their distributions than a lot of other tire manufacturers. Is there a renewed emphasis to really rebuilding that very type relationship and could we expect continued costs and hopefully benefits that would come with that in the future?

Roy Armes

Yeah I think what I would say John is that we have a brand investment in our house brands, Cooper specifically and some Mastercraft where we are stepping up the investment to build the awareness. Certainly we are underrepresented in certain regions of the U.S specifically and it gives us opportunities to grow in those areas. So we are investing there. We are also investing in distribution particularly on our passenger car tires and SUV like truck tires in China to build distribution there. That’s two of the bigger investments that we have had and is it a renewed interest? I would say we probably put a little more emphasis on it now with or product portfolio being as strong as it is and really helping our dealers and our customers to succeed even more if we can build the house brands to different level that works.

John Murphy – BofA/Merrill Lynch

Okay that’s helpful. And then on the ERP system as you guys are implementing this, I'm just curious what kind of cost saves you would expect in the future and how far along you are in an implementation? You have been talking about it for a while. Just trying to understand what inning you are in there.

Brad Hughes

Yeah we are in the very early stages of the implementation. We have done a couple of smaller deployments and it will take a few years before we complete it fully, the deployment process globally. At that point is when you are going to start to see meaningful implication. This is going to make us a lot more effective and efficient company the way we operate globally. But it’s going to be – we are doing this in what we think is the right way to make sure that we protect our business and gain the long term benefits of ERP by implementing it over a period of years.

John Murphy – BofA/Merrill Lynch

And then just two housekeeping issues the raw mat index you guys mentioned was going to be down 5%to 10 % I think sequentially. Do you have a year-over-year number for that?

Brad Hughes

We didn’t communicate that. That’s – we can pull it from the chart and we will let you know what that is.

John Murphy – BofA/Merrill Lynch

Okay, I can get that from the chart. And then the second thing is how many tires are you importing from China really sort of on a LTN basis or run rate basis annually?

Roy Armes

John, it’s been in the neighborhood of 2.5 to 3.5 million tires.

John Murphy – BofA/Merrill Lynch

Okay. That’s very helpful. Thank you very much guys.

Brad Hughes

Thanks.

Operator

Your next question comes from the line of Rod Lache.

Rod Lache – Deutsche Bank Securities

Good morning everybody. So I had a couple of questions. First of all, just optically, it looks like your price and mix impact on the top line is somewhat less as a percentage of revenue in North America than some of the other companies that have reported. And I know you guys have disadvantages because of your LIFO accounting having the benefit of raw material declines sooner. Wondering whether you feel like that may just a relative pricing dynamic in the industry. Has that played any role in the market share performance in the quarter?

Roy Armes

I don’t think so Rod. I mean I think that we continue to position our product where we believe it needs to be positioned relative to the competitive lineup and have not changed anything there in terms of what we are targeting for the revenue and the pricing from our products. So we continue to look at that market facing. And obviously we are conscious of margins and frankly are quite pleased with the margin performance this quarter in all of our markets.

Rod Lache – Deutsche Bank Securities

Okay.

Brad Hughes

[Inaudible] price increase rather went out in – I think it was March of this year that we held on to pretty well through this process.

Rod Lache – Deutsche Bank Securities

On the GPR?

Brad Hughes

GPR.

Rod Lache – Deutsche Bank Securities

The December but similar…

Brad Hughes

The December one was on the rest of the product, but we held on to some pretty good pricing there. So I'm not sure if that relationship that you are referencing, but we can talk about that more offline.

Rod Lache – Deutsche Bank Securities

Okay. And can you just help us understand how to think about the volume impact of just from a P&L perspective? If we look at the $90 million of year-over-year earnings growth that you had from the volume it looks like that’s on maybe $1.7 million units which is about may be $11 a unit and it looks like that actually is lower historically just based on the way you guys have reported it. It typically is 16, 17, 18, 20 and even sometimes more per unit. If there is some kind of an unusual effect within your manufacturing base that’s causing that incremental earnings per tire to optically look a little bit lower.

Roy Armes

Rod. Let me – well, first let me start at the highest level and again the 9% operating margin that we achieved globally and strong margin in North America, strong margin in the international operations. We feel really good about what the business is generating right now in terms of overall profitability. In thinking about anything that might be unique in this quarter we did out perform in the U.S. market in all segments including broadline. Broadline came back reasonably well for us and that might had some implication on the way people look at things. In Europe we did mention through the commentary that the increased volume in Europe was lower in the traditional product lines that we have offered in Europe and was more than offset by the increase in the new brand that we are producing out of our Serbia operation which would be a little bit unfavorable to mix there.

In China we had you know strong growth across the board, but there is very strong growth in the PCR business there relative to TBR. And I don’t know if some of those factors might be getting at what you are looking at. But overall we take a step back and look at the overall margin performance of the company and doing that with the kind of volume growth that we experience we feel quite good about it.

Rod Lache – Deutsche Bank Securities

Yeah. I understand. I just – it was just more of a modeling question. In terms of this raw material cost decline I would imagine that that has some pretty significant impact on inventory and just the amount of capital you are consuming there. It did look like inventory is up sequentially, but can you just talk about prospectively whether that that's likely been meaningful and is there any way to bracket how much of a benefit that might be based on where stock prices are now?

Roy Armes

Well, you are right. I mean the fact that the raw material prices are lower than they were a year ago or even the year end. And we are projecting that they will reduce sequentially in the third quarter from evaluation standpoint. That will be beneficial to the amount of working capital that we need to carry. We traditionally haven’t quantified that but you are correct that that won’t be favorable in isolation. Our inventory levels we feel quite good about where we are at right now. We think we are at the right balance of having enough supply to meet our customer’s demands, but yet not consuming more than inappropriate level of working capital. So – and we think that we are going to be able to manage that quite well in the second half of the year given our outlook for volume. So there would be on a relative basis some benefit from that. The lower valuation will improve.

Rod Lache – Deutsche Bank Securities

Okay. All right, thank you.

Operator

Your next question comes from the line of Brett Hoselton.

Brett Hoselton - KeyBanc Capital Markets

Hi, good morning gentlemen.

Roy Armes

Hey Brett.

Brett Hoselton - KeyBanc Capital Markets

First question. Price and mix, obviously a disparity between North America and the international, my question is if the international operations pricing is just more quickly than may be it does here in North America. Why would the international operations maybe not be a leading indicator as to what might take place here in North America? How do you see the markets as being different from one another such that you may not see the same kind of price mix degradation in North America as you are currently experiencing in the international operations?

Bradley Hughes

It think, Brett it’s Brad, that the biggest factor there is that the only now given some of the lag in pricing and its effectiveness as of a catching up with what's happened with raw material, even with the very recent declines we are just now getting a point where it’s more balanced as we referred to in the commentary that even with the June reductions that we saw in the raw material index we are just now kind of coming into line with where the pricing had been. Obviously we are going to need to continue to monitor what happens on a number of fronts including raw materials, what happens related to the ITC credit or duty going away and how volumes hold up. But we feel like it’s not in an unreasonable place right now in North America given the time lagging for the catch-up for the raw material increase that had happened starting back in 2010.

Brett Hoselton - KeyBanc Capital Markets

And then with regards to the tariff itself do you have any – I guess what are your latest thoughts on the expiration of the tariff versus possible extension or replacement or something along those lines?

Roy Armes

Brett, this is Roy. I think the tariffs as we know on the 421 are going to expire and that’s the way we are planning this. I think there is always a wild card in a election year that there has been some talk about possible tariffs on automotive parts. I don’t know whether that’s real or perceived at this point in time. But if we do something like that and they include tires in that that could be of a risk to the expiration. We are not anticipating that at this point in time and our expectation is that it’s going to expire and we are managing the business accordingly.

Brett Hoselton - KeyBanc Capital Markets

And then as you look at the North American volumes what is your sense of, what do you anticipate happening in the reminder of the year both from an industry stand point and then secondly from a market share standpoint you clearly performed very well in the second quarter, 15% versus the flat industry. First quarter a little bit tighter, kind of a 3% differential. How do you anticipate you are going to perform relative to the industry in the back half of the year?

Unidentified Company Representative

First of all let me start with the industry. You know the industry in this first half was down about 3% to 4% and secondly we anticipate overall, you know, the industry could be flat to slightly down. Now, if you add that up that would say that the industry would have to be up somewhat in the second half to go from a down 3% to 4% to being flatter even down 1% it will have to be up in the second half. As a result of that I think for the momentum that we have going right now barring any other significant event in the economy and globally we think that we can still perform at or better than the industry in the second half.

Brett Hoselton - KeyBanc Capital Markets

And then over on the Asian side quite a swing from the first quarter to the second quarter again up 8% and then to up 16% in Asia in the second quarter. So very nice improvement going for the first quarter and second quarter. Your expectation is going in the back half of the year. It sounds like you are hoping that you will see a little bit of improvement in the economy due to some of the government actions which would bode well for volumes it seems in the back half of the year.

Unidentified Company Representative

Yeah, but I think Brett it’s going to be probably later because it takes time for these things to set in, but what we have experienced there particularly in China as the government makes these changes, it takes a few quarters for to really to set in and see some impact. And that’s why we say later this year and into 2013 we might be able to see some of that impact. I think right now on the passenger tire side there is some pretty good growth there. I think the bigger concern we would have would be on TBRs because that’s been fairly slow both in the industry and although we have been performing little better not so much in the domestic market has it been at the exports have helped us a lot in that balance. We think the passenger tire is still going to continue to grow in the second half with a continuing slowness in the TBRs.

Brett Hoselton - KeyBanc Capital Markets

Very good. Thank you very much gentlemen.

Unidentified Company Representative

We have time for one more question.

Operator

Your next question comes from the line of Saul Ludwig.

Saul Ludwig - NorthCoast Research

Hey. Good morning guys. A nice quarter. Are you running the plants full out and with shipping so many tires in the quarter does that limit your ability to have not so much your sales ability to sell more, but are you in a way physically limited into the number of tires that you might be able to sell in the second half of the year?

Unidentified Company Representative

You know Saul we are running pretty much full out, but I would say running full out there are – we do have room for some additional production if we needed that in some of our location, not in all of our location, but in some of our locations. A lot has to do with the mix and that sort of thing but if there was a significant spike I think we would have a little bit trouble supplying. And that’s the thing we are trying to watch right now. So our combination between getting a right kind of at inventory level and the production levels that we are at we are trying to maintain that balance going into third quarter and fourth quarter.

Saul Ludwig - NorthCoast Research

All right. You know I remember when you had the labor situation and when you finally settled that, one of the key or the key element was not so much wage cuts or benefit changes, but was changes that allowed for greater productivity and so it was really good to see you say that manufacturing efficiencies of $7 million here in North America came about. Was that – am I linking the $7 million in manufacturing saving to the elements of the labor contract that we are going to leave to productivity enhancement and is this $7 million sort of the front end of the curve and should that number be a greater number as you progress further down the productivity curve?

Unidentified Company Representative

Well, I would first say that all of our facilities have been running very well. It’s not just the contract that we negotiated, but I would also say that I think our people in the factories are very focused on making sure that we are successful and making sure that they are successful as in operations. So I think overall all of our plants are performing well. I think also I would say with the agreements that we have with the unions is that there are – as times goes on there should be opportunities for improvements in the facilities. But they are also making – they are continuing on a continuous improvement mode of reducing cost, reducing waste, doing those things in the back and spread out across all of our operations. So I think you are seeing some of that as well. Now, I would preface this by saying we can stay at the volume levels that we are at or increase volume levels I think we could see continued improvement in our efficiencies in the factories

Saul Ludwig - NorthCoast Research

And the quarter they are just trying to focusing in North America the price mix was favorable together was $53 million and that was excellent and now you are going to see rows go lower in the third quarter and there is going to be some specials and marketing specials I would assume your average price would trend downward certainly not upward from second to third quarter. But do you think that that spread of $53 million that you have can be increased in the third quarter of the year. I mean it may be less from price and more from rows but I am talking about just the combination there, do you think that never gets to be a bigger number in the coming quarter.

Brad Hughes

It’s Brad, I think when we look at it on there is a lot of factors moving around in that right now and it will be difficult to call that at this point in time and we do think that raw material cost are going to go down further next quarter based on our projection for the raw material index on which is very difficult to determine is how to market price is going to react over the next several months given on what’s happening with both raw materials and with the ITC coming off. So, I think it’s a little bit difficult to project that right now on what we do like what happen this quarter and we are planned to try and take to manage this very closely as get into the next quarter. But I think it’s a little bit too difficult to call up down or sideways exactly from that number.

Saul Ludwig - NorthCoast Research

One of the thinking that was, when I thought of it was that your raw material index is going to go from let’s say 262 to 250 or down as you say 5% to 10%, last year your index went from 267 up to 276 so if we are looking at this year at sort of a two 50 number and compare it with an increasing number that you have last year, that’s how I was thinking that this impact on rows could be a significantly bigger number than the year-over-year number that you are experience in the second quarter.

Roy Armes

From that base I can see where you are going with its all from that base I think you could draw that observation.

Saul Ludwig - NorthCoast Research

Okay, and just finally the Serbia start up cost is that a onetime deal or do we have that lingering for each of the next couple of quarters.

Unidentified Company Representative

That Serbia can starting to ship then the impact is decline first quarter and we would expect the cost to diminish overtime.

Saul Ludwig - NorthCoast Research

Great, thank you very much guys keep up the good work.

Brad Hughes

Thank you operator that was the last question.

Roy Armes

Let me just, let me just close here by saying here we are very pleased we had a very strong second quarter and its really coming off a very solid first quarter, record profit is about the business segments over north America and international we continue which I think is a continued testament to our business model and our strategic direction, I think we’ve build a very good foundation going forward gives us a flexibility to operate effectively in almost any kind of environment. We have a strong leadership team and organization here at Cooper and that continues to drive improvements in our business. I think all of our Cooper people globally are contributing the successes for our business and we think in all of that leads us to having the confidence our ability to continue driving value for a stake holders even in difficult economic times so, with that we thank you for your time and attention today and we will talk to you next quarter.

Operator

This concludes today’s conference you may now disconnect.

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