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

Cooper Tire & Rubber Company (NYSE:CTB)

Q2 2008 Earnings Call

August 4, 2008 11:00 am ET

Executives

Curtis Schneekloth – Director of Investor Relations

Roy Armes – Chairman, President and CEO

Philip Weaver – VP and CFO

Analysts

Anthony Cristello – BB&T Capital Markets

Himanshu Patel – JPMorgan

Kirk Ludtke – CRT Capital Holdings

Saul Ludwig – Keybanc Capital Markets

Operator

Welcome everyone to the Cooper Tire and Rubber Company quarter two results conference call with Curtis Schneekloth, Director of Investor Relations; Roy Armes, Chairman and CEO; and Phil Weaver, CFO. (Operator Instructions)

Curtis Schneekloth

To begin with, I would like to remind you that during our conversation today you may hear forward-looking statements related to future financial results and 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 press release and the company’s reports on file the Securities and Exchange Commission.

With me today are Roy Armes, Chairman, Chief Executive Officer, and President; and Phil 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 second quarter and year to date operations and results. Following our prepared comments, we will open the call to participants for a question-and-answer session. Today’s call will begin with Roy providing an overview of our results, he will then turn it over to Phil 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

As you might imagine, Cooper faced intense challenges in the first half of 2008 that adversely affected our bottom line and offset some of the improvements we’re making within our operation. During the second quarter, we had lost $0.38 per share on pre-tax losses of $23 million. Macroeconomic factors had a major impact on our results and include raw material prices rising to historic highs, shortages of certain raw materials, and decreases in replacement tire demand. With these factors in mind, we’re proactively managing the business to best protect shareholder value. This includes increasing our level of conservatism and investing while moving forward in ways that improve our cost competitive position. We’ll continue to balance these needs in all the decisions that we make.

Now with that said, let me present an overview of the operation. On a consolidated basis, sales for the second quarter increased over the prior year second quarter by 6% and reached a new record of $773 million. Positives during the quarter included strong pricing around the global and increased volumes in Asia. These were partially offset by volume decreases in North America as consumers reduced purchases in response to the high price of gas and recessionary concerns. Also on a positive note, during the quarter, recently launched products continue to receive favorable reviews from customers as well as increased sales that we had in Mexico and Canada. These products include the Cooper CTS for crossover and SUV vehicles, the Dean brand commercial truck tries in Asia, and the [Zed B5] high-performance passenger tire line that we introduced in Europe.

Operating losses for the second quarter were $15 million compared to operating profits of $30 million for the same period last year. For the six months ended June 30, 2008, we had operating losses of $6 million. Operating profit for the comparable six months ended June 30, 2007, was $59 million.

The North American segment faced higher raw material costs as rubber, oil, and steel prices continued to climb. The U.S. replacement market also exhibited weakened industry demand as total industry shipments declined by 2% in the quarter on a year-over-year basis. The North American segment was able to partially offset some of these issues with improved price of mix. During the quarter, we curtailed production as a result of shortages in certain raw materials and these shortages affected results by $13 million, primarily due to the cost of unabsorbed overhead. We also experienced higher utility and plant maintenance costs during the quarter, and excluding those factors, the underlying operations performed at levels comparable to the second quarter in 2007.

We saw continued growth in our International segment. This was a result of increased unit sales in Europe and Asia, as well as strong pricing. In total, the segment increased unit shipments year-to-date by 24% over the prior year. Operating profit margins for the segment were positive during the quarter but were under pressure from some of the same factors as in North America.

Our balance sheet continues to be a bright spot for us as we left the quarter with $252 million in cash. Kumho has represented they will pay us the $107 billion from the sale of our shares in their company during the third quarter. We also left untouched our $325 million in available credit lines, which remain as a source of liquidity.

Now Phil’s going to provide you with more detail on individual segments and the financial matters.

Philip Weaver

I’d like to start with our North American operations where sales were $548 million. This was an increase of 2.7% compared to the second of 2007. The increase was driven by improved product mix, pricing, and these partially offset by lower unit volumes. Operating losses for our North American Tire operations were $22 million for the quarter and $14 million year-to-date. This includes the $13 million of cost related to production curtailments that Roy just mentioned and compares to an operating profit of $47 million in the first six months of 2007.

In the second quarter of 2008, our total light vehicle tire shipments in the North American were down about 13% from the same period in the prior year. A decrease has occurred in almost product segments with the most significant reductions being in the area of broadline and light truck tires. The decreases in unit volumes were partially due to the execution of strategic decisions by the Company to drop an associate brand line and exit unprofitable lines in the house and private brand areas of our business. These decisions were made so that we can attack complexity in our operations and decrease exposure to unprofitable business.

Our Cooper brand continued to perform well and increased market penetration. Overall, Rubber Manufacturers Association member industry tire shipments decreased during the second quarter of 2008 by 5%. This is worse than the overall industry shipment declines of 2% which includes the impact of non-RMA member imports. This follows the decrease in miles driven that first began in late 2007. It appears that customers that have delayed the purchase of tires as they face higher gas prices and the concern of a slowing economy. We believe there’s some pent up demand but cannot accurately forecast when this demand will surface. Industry data on shipments has shown that the largest declines are in the areas of broadline and light trucks. Premium and SUV tires have shown resiliency to the factors manufactured.

Price and mix improvements contributed positively during the quarter and added about $42 million compared to the same period in 2007. This is still not enough to offset the $51 million in unfavorable raw material impacts during the quarter. Our underlying raw material index was up approximately 23% on a year-over-year basis. These increases occurred in natural rubber, oil derived materials, and steel.

Factors in the global commodity markets are driving record high raw material prices specifically in natural and synthetic rubber as well as other petroleum-based materials. These high prices coupled with the use of the last-in/first-out cost flow assumptions for inventory accounting in North America have contributed to our decreased earnings. The LIFO accounting method the most recent costs against sales and in periods of rising raw material costs results in lower profits compared to other inventory accounting methods. During the quarter, the LIFO reserve increased by $33 million with the corresponding charge to operations.

As the cost cycle reverses, the North American operations will experience lower charges to cost of goods sold than would be reported under the first-in/first-out accounting method. We’ve implemented a price increase in February of up to 5%. On July 1st, we had another price increase of up to 8%; and at the current raw material pricing levels, despite what we do to contain costs, we need to implement another price increase. This will occur in October and will be up to 10% to help recover some of these additional costs.

Mix has continued to improve with both products and customers. Specifically, our Cooper brand continued to improve versus the industry. Sales of the Cooper CS4 Premium Touring line, which we introduced in 2007, have continued to be strong and have had a positive impact. This new line has been received very well with our customers. During the quarter, we launched additional higher value products such as the Cooper Discoverer CTS, a premium SUV tire that is also being well received by customers.

Year-over-year plant operations, excluding the affects of production curtailments, increased utility costs, and unusual maintenance costs were similar to 2007 second quarter. We also continued the trend of sequential improvement in operations after the slip we saw during the third quarter of 2007 and will be looking to accelerate these improvements going forward.

On another note, product liability costs during the quarter were higher than the previous year’s quarter by $3 million, but down $10 million from the first quarter of 2008.

Now turning to our International operations: Sales increased to $283 million, up 21% over last year for the second quarter. This was a new record in the result of increased volumes and price in both Asia and Europe. Sales in Asia were up 32% for the quarter, driven by 41% increase in unit sales. Europe experienced a moderate increase in unit sales even as they continue to focus on profitable business and margin improvement rather than volume growth.

Operating profit for the International segment was $6 million compared to $12 million last year. Year-to-date, this segment has operating profit of $13 million which compares to $18 million during the same sixth month period of 2007. This segment has been impacted by many of the same factors as North America, including raw material increases and weaker demand in Western Europe.

We continue the successful ramp-up of our Cooper Kenda joint venture in China. Increased production levels at that facility which will help support North American sales. In 2008, we expect to receive approximately 2.5 million tires from the Cooper Kenda facility. During the second quarter, we received about 600,000 units from them.

Our other joint venture, Cooper Chengshan, continues to launch products that will improve our position in the Asian market. They also have implemented several products improving throughput. These efforts will play an important part in Cooper’s future and CCT is successfully executing a plan design to improve margins.

Now let me express the changes that I’ve mentioned here during the quarter in the form of an operating profit walk-forward starting with the North American segment. This compares the second quarter of 2008 with the second quarter of 2007. The total decrease in North American operating profit was $43 million. The key drivers of this were a $42 million improvement in price and product mix, offset by $10 million from lower volumes, $51 million in higher raw material costs, $13 million in costs related to production curtailments, $3 million in higher product liability costs, and about $8 million in higher utilities, maintenance, and other costs.

In the International operations, operating profit decreased to $6 million from last year’s $12; and the key factors relating to this were a positive impact of $4 million from increased volume, improved pricing and mix of $20 million, positive of course, offset by $22 million from higher raw material costs and about $8 million in changes to our manufacturing SG&A and all other costs offset to some degree by favorable currency. The drivers of most of these changes were discussed earlier in the call, but I’ll mention one that’s often subject of questions. Our start-up costs in the second quarter at CPT just facility were approximately $2.4 million.

Now let me discuss a few other items starting with our income tax accounting. The income tax benefit recorded in the second quarter for continuing operations was $677,000, which included tax expense related to discreet items of about $110,000. Discreet items relate to changes to audit contingencies for interest and state taxes. The resulting effective tax rate for the quarter and six month period ended June 30th of ’08 for continuing operations was 3.5% and 1.4.% respectively, exclusive of these discreet items. For comparable periods in 2007, the effective tax rate for continuing operations, exclusive of discreet items, was 19.8% and 24.3% respectively. The change in the tax rate, exclusive of discreet items, relates primarily to the impact of an accounting rule which limits the recording of a tax benefit on a loss in an interim period, an increase in net U.S. deferred tax assets and the mix of earnings or a loss by a jurisdiction as compared to 2007.

We recognize the tax situation of Cooper is a complicated one in 2008. But in considering our position, it would be worthwhile to remember that the accounting effects of these changes do not impact our cash flow and that we would be able to utilize the tax benefits of actual tax return losses, if any, regardless of these accounting rules. Our marginal tax rates by region have not changed and would still apply to applicable future earnings.

Few words on cash flows: Net cash used by continuing operations was $111 million in the first six months of 2008. This compares to net cash provided by continuing operations of $158 million during the first half of 2007. The change in cash flow was driven primarily by the Company’s intentional building of inventory to meet seasonal demands. Optimizing inventory levels allows us the Company to operate more efficiently and to continue with its tradition of providing customers with industry-leading fill rates. The other significant factor effecting cash flows, of course, was the lower level of profitability. Lastly, accounts receivable increased due in part to the increase in sales and was a larger use in cash in 2008 than 2007. Our accounts receivable is acceptable and we do not anticipate significant issues on collecting these balances.

A few words on the balance sheet: Cash of $252 million at the end of June is down from $331 million a year ago. A significant portion of this cash usage was for seasonal and strategic rebuilding of inventory that I mentioned. Other current assets includes $107 million roughly, our stake in Kendo Tire, which they’ve represented will be paid to us during the third quarter and could possibly be much sooner than that. During the second quarter, the Company did not repurchase any debt or shares outstanding. We have a little over $40 million of authorizing remaining on share repurchases and about $105 million on debt authority to purchase in advance of maturity dates. As a reference point, the next scheduled maturity of long-term debt in the parent company is $97 million due in December of 2009.

We also have two primary credit lines that are sources of liquidity if needed. The first is $200 million asset-backed revolving credit agreement which expires in November of 2012. It is used to support letters of credit and could be used for short-term borrowings if needed. We also have an accounts receivable securitization program for up to an additional $125 million, and this expires currently in 2010. Both facilities are undrawn with a small portion of the lines are currently backing letters of credit. These two credit facilities do not contain any significant financial covenants. With existing cash in credit facilities, we believe our liquidity levels are adequate and obviously with the ongoing macroeconomic pressures, we’ll be even more conservative in the use of these resources.

A couple of words on pension funding: Our typical contributions to the U.S. plans exceed the minimum ERISA requirements in order to take advantage of tax benefits and maintain prudent funding levels. Under our number funding policy, contributions to domestic and foreign plans in 2008 would be in the range of about $30 to $35 million, although final decisions are usually made right near year-end. Capex in the second quarter of 2008 was $34 million compared to $35 million in 2007.

We currently estimate that expenditures in 2008 would be in the range of $160 to $170 million. This is below the previous estimate that we provided as we are taking a more conservative or even cautious view in approach to the use of capital given the economic outlook that exists today. Our two Chinese manufacturing investments are consolidated but not 100% owned. Capital expenditures at the Cooper Chengshan and CKT venture, which are included in our consolidated results, are funded from three sources: Cash from their operations, increased debt, and of course contributions from the shareholders. This has an impact on the amount of funding that we’re actually required to provide since we do not fully own these operations.

I think I’ve covered the highlights, and I’ll now turn back it over to Roy.

Roy Ames

Before taking your questions, let me give you some thoughts about 2008. We’re facing increasing difficulties in two specific areas that are not completely in our control; it’s raw material costs and soft demand in the North American replacement market. We’re proactively managing our business to weather the current economic downtime. While this period this lasts, we still need to invest in projects that will propel us forwards toward the goals that we set in the strategic planning process. We recognize that achieving these goals will be more difficult in this environment, while at the same time we have confidence that we’re executing on the right initiatives to improve our profitability long-term.

Our confidence is based on a strong balance sheet, excellent levels of liquidity, and most importantly a belief in the ability of our people to execute. The decision we make will be consistent with our strategic plan and direction. Cooper’s employees recognize that factors outside of our control are requiring us to act with more urgency. As we proceed, we constantly monitor the factors that will protect us or impact us and we’ll take action necessary to protect our business.

The execution of our plan calls for multiple steps rather than one large step. As a reference point, we announced this plan six months ago in February 2008. The next level goals outlined in that plan were intended for a three- to five-year time horizon. We’re in a position of flexibility with the deployment of our capital should economic circumstances require additional adjustments.

Our International segment is delivering progress consistent with our plans. The markets and products were developing hold great promise for the future. North America continues implementing six sigma, lean, and automation projects. The progress that we’ve made with these initiatives will be an important building block of our future success. We’re now positioning the business so that we move forward with a continuous improvement culture. For 2008, we expect industry volumes in North America to be down compared to 2007, and we had previously believed that that would be flat. China is likely to continue strong growth in replacement tires, while Europe is holding steady to slightly declining.

Raw materials continue to surge in price during the first quarter of 2008. Into the second quarter, prices were up over 20%. These increases are continuing, and the third and fourth quarters could be up even more on a year-over-year basis. It might be reasonable to expect average raw material costs in 2008 could be in the range of 25% to 30% higher than 2007. This is significantly higher than estimates we made earlier in the year due to higher oil, rubber, and steel prices. In considering these increases, remember that we use a last-in/first-out cash flow method, meaning we see these increases in our income statement quicker than if we were on another method.

We remain committed to the next level goals we established in our strategic plan and this includes establishing a sustainable and cost competitive supply of tires, profitably growing our business and enhancing our organizational capabilities for the future. Developments in the macroeconomic environment have caused us to be guarded in our expectations of profitability for 2008 and to reduce our capital expenditure plans for the year. Our balance sheet remains strong, but we believe it is prudent to increase our level of caution in executing our plan.

The first half of the year was difficult for Cooper and we’re not satisfied with current results and are working projects that will improve our bottom line. We’re responsible for driving the Company’s performance and will make the tough decisions when necessary and ultimately believe we can reach goals we had laid out in our strategic plan, certainly improve the macroeconomic environment would be a plus towards our recovery.

So thanks for attending our conference call. That concludes our prepared comments. So what we’d like to do now is open up for a Q&A session.

Question-and-Answer Session

Operator

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

Anthony Cristello – BB&T Capital Markets

I guess one of the questions I wanted to ask about is going forward in a lot of what’s going on with raw materials is masking I think some of the benefits or some of the changes you’ve made in terms of just production costs and costs to product that tire. Is there anyway you can sort of, if you were to back out some of the noise with raw materials, how should we look at what it’s costing you today versus a year ago to produce that tire? I understand you maybe can’t give us numbers, but is there some way you can say, “Hey, on a percentage basis or on a relative basis, we’re seeing improvement of X”?

Curtis Schneekloth

First, step back for just a second. You’ll remember that during the quarter of last year we had some pretty terrible operation numbers to share with you guys, and we certainly don’t expect that performance to repeat itself this year. So if you take a look at the second quarter this year, we performed about where we were in the second quarter of last year and sequentially it was actually very close to the first quarter this year.

During the third quarter this year, we think we’ll continue to improve, so you definitely see a significant improvement on a year-over-year basis and you should see some additional sequential improvement there. In terms of dollars or percent, you’re right, I don’t know that we’d want to share that with you right now. But as we get closer, we should be able to talk to that with you a little bit.

Anthony Cristello – BB&T Capital Markets

Are most of, I mean as we enter Q3 of ’08 versus Q3 of ’07, obviously last year you had a lot of disruptions in that move in that facility. Can we go into Q3 ’08? Are all those problems now behind your; and if inventories are where you think they should be, the productivity then should be a lot higher? Is that a fair statement?

Curtis Schneekloth

We may still need to build a little bit of inventory. We still may be light in terms of units there. In terms of that third quarter last year that hit, I believe it was an $8/$9/$10 million hit that won’t repeat itself this year.

Anthony Cristello – BB&T Capital Markets

Should we expect any more curtailment days due to just volume softness, or do you think that for the most part it was all shortage that was related and so that you really won’t see any as we enter Q3?

Roy Armes

We’re not anticipating that now, but I just want to remind people that there are some raw materials out there, particularly some of the feeder stock that’s still very tight. Now we’re not anticipating that or planning for that in the third quarter, but it’ll be a tight management through the whole quarter.

Anthony Cristello – BB&T Capital Markets

When you look at the raw materials, I think it increased 22% year-over-year. If you look at what it did sequentially, and then as we go into Q3, should we assume, unless oil is at $150/$200 a barrel, sort of a flat? I mean is that what you’re kind of budgeting right now, flat from today’s levels on a sequential basis?

Roy Armes

On a sequential basis, you could see the third quarter up over the second quarter as much 20%. On a year-over-year basis, you’re looking over a 40% increase, Q3 ’08 to Q3 ’07.

Operator

Your next question comes from Himanshu Patel.

Himanshu Patel – JPMorgan

I think you mentioned industry volumes in Q2 were down 2%. Cooper. I think you mentioned was down on volumes in the U.S. 13%. Does that mean that the low end of the market was down sort of 20%/25% in the quarter just industry-wide?

Philip Weaver

Roughly it’s got some materials here, but I think that’s about right. Curtis will look up the details.

Himanshu Patel – JPMorgan

Are you seeing any, I know the year-over-year numbers are still pretty nasty, but are you seeing any stabilization at least on a sequential basis in that segment?

Curtis Schneekloth

Himanshu, before they answer that question around the stabilization, the industry numbers, and this is the RMA industry, were down more in the 13% range for broadline tires.

Himanshu Patel – JPMorgan

Industry was down 13% for RMA in the broadline segment.

Curtis Schneekloth

In the broadline, yes.

Himanshu Patel – JPMorgan

Aside from the year-over-year comparisons, any initial signs of stabilization on a sequential basis or is it still weakening on a sequential basis knowing what you know about seasonal trends month-to-month?

Philip Weaver

Yes, I would say there’s some continuing decline, but I think it’s closer to being stable now, Himanshu, than what we’ve seen over the last couple of quarters. That says that we’ll probably end the year as an industry still down, and I think the last numbers we were sharing were somewhere in the 3% to 5% range for the year. I think that’s probably where our head still is.

Himanshu Patel – JPMorgan

Any early read you guys could help us on July? Does it feel a lot like June in terms of shipments?

Roy Armes

Yeah, it’s a little bit like June. We are seeing a little bit of uptick in our business. That doesn’t mean that the industry is the same there, but it does seem a little bit better as we’re going into August. There’s one thing I probably ought to point out there so you’re not mislead by this. Our winter tire business is pretty strong, so that has some impact on that, which we see normally in this third and fourth quarter. We also have strong business in Canada and Mexico that impact on which not necessarily they don’t show up in the RMA numbers so much.

Himanshu Patel – JPMorgan

The $13 million production curtailment hit, can I just get into that a little bit more? So does that mean if you had not had the raw material shortage, you would’ve produced more volume and that would’ve actually expanding your inventory level for the quarter?

Roy Armes

Exactly.

Philip Weaver

Exactly.

Himanshu Patel – JPMorgan

Phil, is it a fair statement that you still consider yourself short on inventories right now?

Philip Weaver

In a normal industry that was growing at 3% or so, we might be a little bit light, but we think we can probably handle what appears to be ahead at these levels of the industry being down a bit and maintain good fill rates.

Himanshu Patel – JPMorgan

Then I guess in North America, I think, Curtis, you had mentioned a 40% increase in raw materials for the third quarter. You’ve got another price increase implemented for October, and I guess you’ll still have the benefits of the more recent one coming through in the third quarter. But when we just think about that spread between price mix and raw materials on the operating profit line, it was sort of I think $9 million favorable in Q1. It looked it was $11 million unfavorable in Q2. Should we think about that as becoming significantly less favorable in the third quarter and then perhaps sort of moving back closer to breakeven by the fourth quarter as the October price hike gets implemented, assuming raw materials come in with guidance?

Philip Weaver

That’s where we would like to see it, but it really does depend mostly on the raw material movement between now and then.

Himanshu Patel – JPMorgan

Then last question: Cash taxes for the full year, any guidance on that?

Philip Weaver

No, our tax situation is very screwy. We may actually have taxable income; we expect to in all regions, but we don’t think it will be a dramatic amount here of cash tax payments.

Operator

Your next question comes from Kirk Ludtke.

Kirk Ludtke – CRT Capital Holdings

I guess I wanted to just touch on the material shortage issue again. As I remember, it’s butadiene, is that the…

Philip Weaver

We don’t buy butadiene, but butadiene is a feed stock used in producing synthetic rubbers, so that’s really the primary area where there’s a shortage in the industry.

Kirk Ludtke – CRT Capital Holdings

So there’s an overall shortage of synthetic rubber?

Philip Weaver

Yes.

Kirk Ludtke – CRT Capital Holdings

Could you give us a sense of how that developed? It seems like the shortage impacted some manufacturers more than others. Are you uniquely situated such that you’d be more vulnerable to this type of thing or maybe you could give us a little color on that?

Curtis Schneekloth

Kirk, we were affected more heavily than some of our competitors by the shortage, and the reason is that one of our key suppliers was put on a more stringent allocation which then affected our ability to purchase the synthetic rubber. When we went out to buy it from other suppliers, which is normally a possibility out there in this material, the entire industry was so tight that we could not get our hands on it where in the past we have been able to get our hands on it.

Now we’ve done several things since this occurred to position ourselves so that we will not have to shut down in the future due to it. Things could happen and everything could tighten up really tight again and the we’d have some issues with it, but we think right now we’ll be okay getting through the third quarter and we won’t have to shut down for it.

Kirk Ludtke – CRT Capital Holdings

So you bought for or you have contracts or how did you protect yourself in the third quarter?

Philip Weaver

Yes, we have commitments from suppliers that we think will get us, it may be a little tight, but we think we can make it through. Certainly this month and into September here, we’ll have to see how it looks right at the very end of the quarter.

Curtis Schneekloth

We did not shut down in July due to it.

Kirk Ludtke – CRT Capital Holdings

Is it the kind of thing where demand is weak enough that these are tries that… I mean you needed to correct inventory. I guess you’re increasing inventory, so that probably wouldn’t be… I’m just trying to think, is there any [inaudible] to what’s happening here given the demand situation overall?

Philip Weaver

I think you hit on the primary one for us is that we entered the year with inventory that was too low, so we were happy to build inventory which has tended to offset this decline in the overall industry shipments. But they continue to be lower than kind of normal patterns also takes the pressure off on the demand side of the raw materials, and we certainly believe it’s going to come back in line. The other factor though is the weaker dollar and some of the people are selling butadiene overseas.

Kirk Ludtke – CRT Capital Holdings

If material costs didn’t change, I know it’s early to talk about ’09, but given that you’re on the LIFO method, how would you think about material cost increase in ‘09 versus ’08?

Philip Weaver

Well, we don’t have enough visibility right now and that would largely be based on a view of what oil would do.

Kirk Ludtke – CRT Capital Holdings

Right, let’s assume oil stays the same, everything stays the same.

Philip Weaver

Well if oil stays the same, then you would think that you wouldn’t have any sort of aberrant behavior in things like steel, for example; and natural rubber can be independent of oil but is pretty high priced right now, so we don’t see that going up. Absent any of those changes, we might expect 2009 to be abruptly equal to how we will exit ’08. I mean if oil is stable, that defines two-thirds of it right there.

Kirk Ludtke – CRT Capital Holdings

So in other words, you could be through the most dramatic of the material cost increases than by the end of ’08?

Philip Weaver

Well, we believe so but obviously unless there’s some major global event here.

Kirk Ludtke – CRT Capital Holdings

Maybe the other way to ask this: If material costs are going to be up 40% in the third quarter, what do you think it means for the fourth quarter?

Philip Weaver

About the same, slightly more, it could be up 44% or so increase year-over-year compared to 2007.

Curtis Schneekloth

Actually that’s what’s driving the 25%/30% increase year-over-year total.

Kirk Ludtke – CRT Capital Holdings

So I mean it doesn’t appear to be moderating in the fourth quarter so…

Curtis Schneekloth

It’s moderating sequentially from the third quarter, we think. In the second quarter of this year and the third quarter this year, we saw significant step changes in the raw material prices coming through because we’re on the LIFO. That tracks back to what you saw with the price of oil, so once those have moderated, you’ll see it moderate for the future quarters.

Kirk Ludtke – CRT Capital Holdings

You mentioned that you were scaling back your capex for ’08, do you have any sense for what this all means for your overall plans that you rolled out a couple months ago?

Philip Weaver

We think there will be some delays in time, but probably certainly the key elements of it we still believe in. The steps that it will take to get there we believe it, so I think it’s probably the net effect is that it just has delayed us for a period of time.

Roy Armes

Because certainly, Kirk, we didn’t anticipate any of the macroeconomics taking a turn like they did even back in February when we talked about our plan. But basically the way I communicate this at this stage is our destination and where we’re trying to get to isn’t changing. We will alter some tactics and we’ll alter some timing on our way to get there, but I think we’re being prudent and making sure we’re investing in the right things that’s going to help give us a competitive supply of tires. It’s going help us with the profitable growth, particularly in investing in new products and building the organization capabilities that we need. So our destination hasn’t changed.

Kirk Ludtke – CRT Capital Holdings

But the market is weak enough so there’s not as much of I guess need to do it, you can slow it down?

Roy Armes

I think that’s a good way to summarize it, yes. Our timing is going to be based on what we think we could bite off at one time.

Curtis Schneekloth

I would say we’re slowing down parts of the capital expenditure so we’re getting more urgent impacting costs in other parts of our operation.

Operator

(Operator Instructions) Your next question comes from Saul Ludwig.

Saul Ludwig – Keybanc Capital Markets

Phil, you mentioned in North America that your revenues were up 3%, your units were down 13% so that would imply price mix was 16% up. How much was price and how much was mix? Those numbers sound pretty heady.

Philip Weaver

Yes, that number, actually I want to clarify this. This may be slightly misleading. That 13% is in the U.S. only. Roy mentioned also Canada and Mexico. So when we look at it, as we said in our press release, we said that the impact of price was about $32 million.

Saul Ludwig – Keybanc Capital Markets

On revenues or on profits?

Philip Weaver

All on profit.

Saul Ludwig – Keybanc Capital Markets

We’re talking about revenues.

Philip Weaver

Oh on the revenue side, let’s see, I can probably get that here for you in a second. Do you have another question?

Saul Ludwig – Keybanc Capital Markets

The next question related to the cost savings program. You go back to the beginning of the year, Roy, the goal was to save I guess it was $100 million in cost improvement and when you give the walk for North American, I’m trying to think which bucket is some element of that cost improvement in there? Are circumstances such that achieving those cost reduction goals this year are probably not attainable?

Roy Armes

What we talked about, Saul, at the beginning of the year is that we wanted to come out of this year at $170 million rate that we had initially committed to. We talk about $100 million last year and another $70 million run rate coming out of this year. If you look at the projects and things that we’re putting in place, Saul, we still believe that we’re going to be able to achieve that run rate coming out of this year. Obviously a lot of this gets camouflaged because of the raw material costs and some other industry things that are out there, but the projects that we committed and put in place, we are in fact putting in place. So there’s no reason to believe that we couldn’t reach those savings run rate by the end of the year.

Saul Ludwig – Keybanc Capital Markets

Phil, did you have clarification on the other?

Philip Weaver

Yes, I mean basically the piece I didn’t give you was the next phase which is about $36 million.

Saul Ludwig – Keybanc Capital Markets

Which one is that?

Philip Weaver

Mix was about $36 million.

Saul Ludwig – Keybanc Capital Markets

Oh Mexico?

Philip Weaver

No mix.

Saul Ludwig – Keybanc Capital Markets

Oh mix.

Philip Weaver.

That’s customer and product mix.

Saul Ludwig – Keybanc Capital Markets

Was $32 million?

Philip Weaver

$36.

Saul Ludwig – Keybanc Capital Markets

$36, okay, and price?

Philip Weaver

Price was about $34 million.

Saul Ludwig – Keybanc Capital Markets

Then the volume, so I guess in your press release where you said 13% lower volume embedded under the North American Tire sector, that really 13% was U.S., what was North American volume? Was that down something like 8%?

Philip Weaver

Yes, you’re right that that was, the 13% is really a reference to the U.S. numbers. In relation to the quarter, the total North America was down about 7% in units.

Saul Ludwig – Keybanc Capital Markets

Oh, so volume down 7%.

Curtis Schneekloth

The difference between those two is the strong sales we had in Canada; the strong sales we had in Mexico on a year-over-year basis and the exports.

Saul Ludwig – Keybanc Capital Markets

That’s a good clarification.

Curtis Schneekloth

The reason we share the 13% with you is that is done on the same basis as what the Rubber Manufacturers Association does.

Saul Ludwig – Keybanc Capital Markets

Thank you for that clarification. In International, Phil, you said that the start-up costs at Cooper Kenda were $2.4 million. Does that mean Cooper Kenda, even though you shipped you 600,000 tires, they lost $2.4 million; or is that $2.4 million start-up separate from their core profitability or operating results?

Philip Weaver

Well, in the arrangement we have obviously, there’s a markup on these tires, so it’s separate in that extent. But what we are seeing is when we hit the targeted cost, the cost should be about $2.4 million lower than what we achieve during the second quarter. If you want to look at the net impact, you’d have to also understand the operating profit within that entity.

Saul Ludwig – Keybanc Capital Markets

Well the fact that you’re minority interest was such a low number would imply that there really wasn’t a lot of profit in the, was only $0.5 million compared with almost $3 million a year ago so that the two entities, the non-owned portion of Cooper Kenda and Cooper Chengshan I mean was only $0.5 million, which would imply that the total earnings were only about $1 million of the whole two entities.

Philip Weaver

On a net basis, but you’ve also got the start-up costs here.

Saul Ludwig – Keybanc Capital Markets

Now do you also have start-up costs in Asia, other than Cooper Kenda, this would be the start-up of your R&D center in Shanghai and other marketing initiatives with Cooper Chengshan?

Roy Armes

Saul, if you step back and look at it, we started that distribution expansion for the Cooper brand specifically to try to, not only expand our distribution but to grow the volume in the business there. Secondly, we had he R&D center that it costs us money to get up and going there. The third one is we had this expansion, also we had two expansions, one for the truck and bus tire, as well as the passenger tires for CCT that has some costs associated it with it as well.

Saul Ludwig – Keybanc Capital Markets

So what was striking me is that from first quarter to second quarter your revenues in International went up, I don’t know, $50 million and your operating profit fell by $1 million. How should we think about this going into the back end of the year? In other words, your revenues were increasing by $50 million, it’s a big number, and your operating profit fell by $1 million, it’s again first to second quarter. How should we think about this as we move second to third and fourth quarters?

Philip Weaver

What you should think about is that we continue to raise prices. What you’ve got there is the same issue we have elsewhere where raw materials are going up, we’re raising prices as fast as we think the market allows, but obviously we didn’t recover that to the full extent we needed during the quarter.

Saul Ludwig – Keybanc Capital Markets

Then just finally, what are your thoughts on utilizing the remaining share buyback authorization given that you’re going to get hopefully the Kumho cash soon? What are your thoughts on utilizing the monies for share buyback in the back end of the year?

Philip Weaver

Obviously we’ve got about $40 million of authority remaining. We had the liquidity. We have a number of, and it’s very tempting certainly at these prices. We also have various strategic moves that are underway to achieve the results that we’ve had in our strategic plan. So we at this point aren’t committed to exhausting that, but it’s there; it’s available, and we could make a decision to proceed at a later date.

Operator

At this time, you have no further questions.

Curtis Schneekloth

Thank you. That will be the end of it then.

Roy Armes

Thanks a lot and appreciate the attendance on the conference call and looking forward to talking to you again next quarter.

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 Company Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts