Cooper Tire & Rubber Company
Q1 2009 Earnings Call Transcript

Published: 6 May 2009

[Operator:]

Good morning. My name Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2009 Conference Call. (Operator Instructions) Thank you. I will now turn the call over to Mr. Curtis Schneekloth. Please go ahead sir.

[Curtis Schneekloth:]

Good morning everyone and thank you for joining our call today. My name is Curtis Schneekloth and I serve as the company's Director of Investor Relations. To begin with, I would like to remind you that during our conversations 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 risks 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 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 first quarter 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 V. Armes:]

Thanks Curtis and good morning to all. The first quarter continued to present the tire industry and Cooper with a difficult demand scenario, but we're able to continue moving along the path outlined in our strategic plan. And this plan focused on establishing a sustainable and cost competitive supply of tires, profitably growing our business and enhancing our organizational capabilities. Liquidity is also a focus and we were successful in managing our costs, inventory and capital expenditures so that we finished the quarter with $233 million in cash and our parent company credit lines remain undrawn. While we're not satisfied with our returns, we did make very good progress within our operations. During the first quarter, we had a loss of $0.36 per share or $21 million. This includes restructuring charges related to the pending closure of the Albany, Georgia facility of $14 million and we also tentatively settled a case related to retiree medical benefits as well. We previously disclosed this existence of this case in our risk factors and there was a $7 million charge for this settlement during the quarter. Excluding restructuring charges and the tentative settlement costs, we roughly broke even during the first quarter. Global demand for replacement tires remained weak during the first quarter of 2009, a response to macroeconomic factors that are affecting consumers. We've made and will continue to make improvements in our business model during these brutal economic times. And with this in mind, we are proactively managing the business to best protect the company's liquidity in the short term and enhance longer term shareholder value. The intent is to reposition the company for future success while balancing and dealing with the realities of the current markets. We'll continue to balance the need to conserve resources with the need to invest in opportunities that will make Cooper a stronger company. Despite the negative results, we've begun to see some of the benefits from the actions we've already taken. Our results remain pressured, but we see the potential for a stronger company and improved results in the future. We continue to believe that the strategic plan is a solid foundation and although we've not... we've had to adapt our expectations to the current environment, we're committed to delivering better results with the actions we've put in place. The previously announced closure of our facility in Albany, Georgia continues on plan. Although this is a difficult situation, both the employees in Albany and the team involved in the closure have performed exceptionally well. And I remain proud of that organization for the progress that they've made. Thus far, we are actually ahead of schedule in the move of product from Albany to other plants. And as we updated you in February, the restructuring charges are estimated to be between $120 million to $145 million, of which 60% to 70% should be non-cash. This is lower than the initial estimates shared when the closure was first announced last year. And during the first quarter, we had related charges of about $14 million. To date, we have incurred $90 million of restructuring costs, the majority of which were non-cash. The annual savings of the closure will be in the range of $75 million to $80 million, primarily due to the better fixed cost structure and the operating leverage at our remaining facilities when compared to not closing a plant; in essence, better optimizing the three remaining facilities versus sub optimizing the four U.S. plants. With that said, let me present an overview of the operations. Globally, there was continued weakness in demand for replacement tires, which has placed significant pressure on our volumes. On a consolidated basis, sales for the first quarter decreased over the prior year first quarter by 16% to $571 million. Pricing and mix were positive during the quarter and, to a lesser extent, so were raw materials. We continue to curtail production to align inventories and address the weakening demand. And our sales during the quarter were particularly weak during the first two months of the quarter. Operating losses for the first quarter were $16 million compared to operating profits of $10 million for the same period last year. The largest drivers of this change were the impact of the volume decreases, restructuring costs and the tentative settlement of the retiree medical case, offset by improved pricing and mix and, to a lesser extent, raw materials and manufacturing. The North American segment for the first time in several quarters began to benefit from lower raw material costs on a year-over-year basis. On the demand side of the equation, the U.S. replacement tire market continued to be extremely soft. The Rubber Manufacturers Association estimate of industry tire shipments in the United States for light vehicles declined by 14% in the quarter on a year-over-year basis. The RMA estimated that total industry shipments including non-member companies declined a similar 14%. The North American segment was able to partially offset some of these issues with improved price and mix and our further expansion into the Mexico and Canadian markets. On a positive note, we saw improved underlying operations in North America as investments in automation, our Lean Six Sigma efforts and other projects continued to show improvement. These manufacturing efficiency improvements were approximately $7 million during the quarter when compared to the first quarter of 2008. As previously mentioned, we curtailed production to align inventory with demand and manage our cash and liquidity. These curtailments cost approximately $18 million during the quarter and primarily result from unabsorbed fixed overhead. During the quarter, we continued ramping up the facility in Mexico that we first invested in during 2008. We'll continue to increase those production levels in 2009 for sales into both Mexico as well as the U.S. markets. This investment provides an excellent opportunity for Cooper. And the team we have in place aggressively implementing improvements and the employees and labor force are proving to be great partners. The competitiveness of this facility will help us not just in the United States, but also on our expansion in the Mexican market. Our International segment was affected by the slowdowns of the Asian and European economies. The relationship between price, mix and raw material costs was slightly negative in comparing the current quarter to the first quarter of last year. In both the European and Chinese markets during March, there were also indications that demand may recover yet this year. This will be a welcome change and provide us the opportunity to fully utilize the operations we have in both Europe and Asia. Until that occurs, the International segment is focused on controlling costs and finding new opportunities for our products. Our two joint ventures in China and our facility in Europe are implementing programs that will further reduce costs while maintaining quality and helping to support growth in their respective markets. A continued positive for us during this period is the performance of the Cooper brand in China and Mexico, two markets where the Cooper brand continued to outpace market growth. Our balance sheet and liquidity levels continue to be positive as well. We've not had to draw on our available parent company credit lines, which remain as a source of liquidity and our cash balance was $233 million at the end of the first quarter. This is down $15 million from December 31, 2008. Traditionally, in first quarter of the year, we used cash to build inventory levels to meet demand in the second half of the year. The organization did an excellent job of managing our cash position this quarter. This was achieved by implementing additional cost controls, deferring or reducing capital expenditures and managing inventory among other items. This will continue as a priority going forward. Overall, from my view for the quarter, I believe we've performed well in spite of the markets. There is certainly room for improvement and we're addressing those issues that are negative and within our control. And the results we have begun to see from the actions that have already been implemented make us optimistic of success in the future. Now I'd like to turn it over to Phil and let him provide you with more detail of individual segments and some other financial matters as well.

[Philip G. Weaver:]

Thanks Roy and good morning everyone. Our North American Tire segment sales were $439 million during the quarter. This was a decrease of 12% compared to the first quarter of 2008. The net sales decrease was a result of lower unit volumes, partially offset by improved pricing and mix. While overall volumes for the segment were down, the decline in the United States was partially offset by increased volumes in Mexico and Canada. Operating losses for North America's Tire operations were $4 million during the quarter compared to an operating profit of $8 million in the same quarter last year. This includes the restructuring charges for the closure of our Albany facility of $14 million. Excluding these charges, the segment would have operating profit of $10 million during the quarter. The net sales change during the quarter was a result of improved pricing and mix of $40 million, offset by lower unit volumes impacting about $98 million. The improved mix was primarily the result of increased sales volumes of the Cooper brand, which continues to perform well in the marketplace as it provides an excellent value to the consumer. The segment also increased sales of winter tires and shipments to Canada and Mexico. The product segments with the largest declines were economy and light truck. The decline was particularly acute in the private brand distributor channel. In the United States, our shipments of total light vehicle tires decreased 24% in the first quarter compared to the first quarter of 2008. This exceeded the 14% decrease in total light vehicle shipments reported by the Rubber Manufacturers Association or RMA and a similar decrease in total light vehicle shipments for the industry for the quarter. The total industry decline includes an estimate of imports by non-RMA member companies as well. The industry decrease in light vehicle tire units was due to the deteriorating macroeconomic conditions which are continuing to affect consumer confidence in the United States. Through January, government estimates of miles driven continued to show declines each month versus the prior year month. But more recent months were not down as much as in the middle of 2008. This decline and other factors contributed to reductions in the number of replacement tires purchased. Our private brand distributor and wholesale channel customers have been the most significantly impacted during this downturn. However, February miles driven data show an increase of about 2.5% roughly compared to 2008 or a total of 7.7 billion miles driven per day. And this indicates the need for more tires. Price and mix improvements contributed positively during the quarter, adding $21 million to operating profit compared to the same period in 2008. The mix improvement during the quarter is primarily a result of increased Cooper brand sales as a percent of our overall mix of sales. Because of the significant increases in raw material costs that started in 2007, we have implemented three price increases since February 2008 in North America. And these increases are driving the pricing improvement that I described. The underlying raw material index was down about 11% on a year-over-year basis and was down 30% from the fourth quarter of 2008. This added 8 million to profit, compared to the same quarter a year ago. As a reminder, the LIFO accounting method charges the most recent cost against sales in effect more quickly affecting our profits, compared to other inventory accounting methods. The quantity of raw material purchases during the quarter was lower than would be expected under a normal scenario, as higher raw material... we had high levels of raw material at the end of 2008, and those were worked through during the quarter. The deteriorating market conditions lead to a negative volume impact during the quarter of 21 million on operating profit. We continued to improve our underlying plant operations through the successful implementation of automation, LEAN and Six Sigma and complexity reduction efforts. The manufacturing improvement in the quarter was 7 million on a year-over-year basis. This amount is exclusive of the 18 million in unabsorbed overhead costs related to curtailing operations during the quarter. Product liability costs during the quarter were lower than last year when we had an unusually high charge during the first quarter. This resulted in a $7 million improvement, compared to last year. But the impact of this or the magnitude of this benefit is not likely to repeat in future quarters because of the balance of the three quarters in '08 were more normalized. Before turning to the international operation, let me express the changes during the quarter for North America in the form of an operating results block-forward. Now this compares the first quarter of 2009 with the first quarter of 2008. The total decreases in North American operating profit was 12 million. The key drivers of this were a 21 million improvement in price and mix, 7 million in favorable manufacturing performance, 8 million in lower raw material costs, 7 million in better product liability costs less 21 million impact of lower volumes, a negative impact, 18 million related to production curtailments and 14 million in restructuring charges. So, now let's turn to our international operations. Sales decreased to a 266 million, down 28% compared to last year's first quarter. This was a result of decreased volumes, slightly negative price mix and negative currency impacts at the net sales line. Unit shipments in Asia were down 29% for the quarter, driven partially by the weakness of demand in the United States and other markets which effects the units exported from our Cooper Kenda joint venture in China. Both the export and domestic sales at Cooper Chengshan were also affected by the global recession, while Europe sales were down about 14%. The operating loss in the international segment was 3 million, a decline of 10 million from last year's operating profit of $7 million during the quarter. Volume decreases and price adjustments net of improved mix negatively affected operating profit net of improved mix by 9 million. This reduction in demand also drove the segment to manage production levels to align inventory with market conditions. The net impact of the production curtailments and higher utility cost was a decline in profit of 8 million. Favorable currency impacts of 5 million and lower raw material cost of 2 million helped to offset the higher costs. Our Chinese joint ventures continued to perform well, but are suffering from the globally weak demand for tires. These operations are particularly reliant on other market since they export a large quantity of the tires produced. As mentioned earlier, the Cooper brand is continued to defy the negative trends and is doing very well in China. Our facility in Europe continues to manage very well in a difficult environment, and has taken significant steps to control costs. These operations benefited from currency fluctuations for the first time in many quarters. The leadership and employees at that facility continued to defend market share and look for appropriate opportunities to expand our presence. Operating profit for the International segment increased by $10 million during the quarter from a year ago. Let me provide you the key underlying factors in the form of an operating results walk forward from last year's first quarter to this quarter. $5 million benefit from currency exchange rates, $2 million from improved raw material costs offset by $7 million from lower volumes, $2 million lower price and mix and $8 million from higher manufacturing costs including shutdowns and higher utilities. The drivers of most of these changes were discussed earlier in our call notes. Our corporate charges include $7 million related to a tentative settlement agreement reached, which is intented to resolve all claims or matters in the Kate's case (ph) which we have previously discussed. The tentative settlement agreement, which is subject to various approvals, provides for specified payments to plaintiffs and attorney fees and two, modification of the company's approach and cost of providing future healthcare to specified current retiree groups which will result in amendment to the company's retiree medical plan. While this tentative agreement could be modified before it becomes effective and the related cases are concluded, the company believes it's probable that the related costs of resolving these cases will be close to the amounts in the tentative settlement and accordingly, has recorded $7.1 million of expense during the first quarter related to the specified payments and attorney fees. The estimated present value of the costs related to the plan amendment is expected to be approximately $7.7 million, which has been reflected as an increase in accrual for other post-employment benefits with an offset to accumulated other comprehensive income component of shareholders' equity. And this will amortized as a charge to earnings over the remaining life expectancy of the effective plan participants when this is approved. I'd now like to cover a few other items starting with income taxes. The income tax benefit recorded in the first quarter for continuing operations was $4 million. The effective tax rate for the three month period ended March 31, 2009 for continuing operations is 16.2% exclusive of discrete items using forecasted jurisdictional annual effective tax rates. For comparative periods, in 2008, the effective tax rate for continuing operations exclusive of discrete items was 32.4% using an aggregate worldwide forecasted rate. The change in the tax rate exclusive of discrete items relates primarily to the recording of evaluation allowance for the anticipated U.S. net operating loss that exceeds the carryback capacity related to a specified liability loss, foreign net operating losses and a mix of earnings or loss by jurisdiction as compared to 2008. We have $47 million of tax refunds receivable, the majority of which we expect will be collected during 2009. During the first quarter, we received $3 million and recorded another $4 million of receivables that will be collected in 2010. These relate primarily to carryback of specified liability losses. A few words on cash flow. Net cash provided by continuing operations in operating activities was $33 million during the first quarter of 2009. This compares to net cash used by continuing operations of $48 million during the first quarter of 2008 for an improvement of $81 million. The net change in cash flow was driven primarily by changes in profitability, inventory levels and accounts receivable balances. Inventory was a source of cash in the first quarter of 2009 as both quantities and prices of raw materials were actively managed to lower levels. Our raw material levels are now closer to the level we believe appropriate to effectively manage the business. During the quarter, we increased the number of tires and finished goods so that we can manage our order fill rate expectations. Tire sales are seasonal, so we need to build these levels during the first half of the year to meet higher demand in the second half for the year. We've managed this increase in line with what we believe to be the future demand scenario. Accounts receivable was a use of cash during the quarter, primarily to the timing of collecting the stronger sales we experienced in March. We have a strong customer portfolio and keep a very close watch on the collection of these receivables. A few balance sheet highlights include cash of $233 million at the end of the quarter. Other current assets are down from the prior year, since we monetized the investment of Kumho Tire company last year. The remaining other current assets includes the 47 million receivable for tax refunds that I just mentioned. Net profit and equipment is down about 9% from the year ago first quarter, as capital spending was constrained to amounts less than depreciation, and due to the $46 million fourth quarter write-down of assets related to the plant closure of our Albany facility. Goodwill related to Asian operations was written-off during the fourth quarter of 2008 as well, and of course it is now zero. Other long-term assets include the investment in the manufacturing company in Mexico, which has not consolidated due to our minority ownership position. Our short-term notes payable relate to partially owned ventures in China, who's operations are included in our consolidated balance sheet. These will be refinanced during 2009 with the goal of converting a portion to long-term instruments. Financing these balances continues on plan and we've reduced the outstanding amount by $26 million during this quarter. The current portion of long-term debt includes about $97 million of parent company debt in December of this year and about $44 million of loans maturing in partially owned subsidiaries in China. And we will be expanding our disclosures of the credit facilities available to these operations in our quarterly report on 10-Q, which should be filed later today. Now lastly in terms of the balance sheet comments, shareholders equity reflects the new requirement to include non-controlling shareholders interest in the stockholders equity rather than in a mezzanine position between liabilities and equity. So, that's the reason for the change. Now a few comments on pension funding and expense. Our defined benefit pension plans were nearly fully funded on a projected benefit obligation measurement basis at the end of 2007. During 2008, given the market turmoil, the value of these related pension trusts declined significantly. Accounting rules require that the change in funding position or literally the unrecognized cost is reflected on the balance sheet as an increase in liabilities with the corresponding offset to stockholders equity through other comprehensive income. During 2008, unrecognized pension and other post-retirement costs increased by 250 million net of tax with the corresponding increase in cumulative, other comprehensive loss equity offset. Note that in the case of pension plans, the unrecognized pre-tax amount globally totals 524 million, while the unfunded amount with liabilities measured on a projection benefit obligation was 269 million at the end of 2008. This is an important distinction when liquidity is being so closely monitored. The difference is due to our past practice of funding more than amounts expense. During the first quarter of 2009, pension expense was 12 million, up from 4 million in the first quarter of 2008. This change as mentioned is primarily driven by the recognized actuarial loss and the change in the future expected returns on planned assets as the assets now have lower values. In 2009, we expect that global minimum pension funding requirements including the opening plant closure related funding will be in the 35 to 40 million range. We're evaluating how much to fund and several payment options including the use of stock rather than cash and we'll make these decisions at a later date. Pension expense related to the plant closure is estimated to be 15 to 20 million, and is included in the expected total restructuring charges. Total pension expense for 2009 is estimated to be between 55 and 60 million, including the opening closure amounts included by classification and restructuring charges on our income statement. This compares to 16 million of expense in 2008. In response to market conditions, we have frozen the pension plan for U.S. based salary employees effective June 30, 2009. This is not a termination of the plan, but it will reduce future liabilities since service accruals will be discontinued. The salaried employees defined contribution plan will be enhanced to provide company matching of employee contributions up to 3.5% of participant salaries, beginning effective July 1, 2009. Although, we have remaining about 40 million of authorization for share repurchases and a 104 million for debt repurchases, we've suspended these programs to provide... to protect our liquidity during this banking turmoil. Few words about credit facilities. We have two primary parent company credit lines to provide sources of liquidity. Now, first is a 200 million asset-backed revolving credit facility which expires November 2012. We also have an account receivables securitization program for up to an additional 125 million that expires in September of 2010. Both facilities remain undrawn, with approximately 24 million of the lines used to back letters of credit. The amount that can be borrowed is subject to available working capital that can be fledged. These two credit facilities do not contain any significant financial covenants until availability is reduced to specified levels. As mentioned earlier, we've not drawn on either facilities since they were put in place. Additionally, we have unsecured annually renewable credit lines in Asia that totaled 200 million, with approximately 77 million of these remaining available at the end of March. These credit lines do not contain financial covenants. All related borrowings in Asia are due within one year and are included in notes payable on the balance sheet. CapEx in the first quarter of 2009 was 17 million compared to 32 million in the first quarter of 2008. We've taken a hard line view of capital expenditures and focused on only spending amounts that are absolutely critical to the business, while that provide extremely fast paybacks. We continued to be conservative and cautious in our use of capital, while the economic and capital outlooks remain uncertain. We currently plan to continue this approach towards capital expenditures through 2009. These levels will probably keep our capital expenditures at or below depreciation levels. We currently believe capital expenditures for 2009 will range from 100 to 120 million. Our two Chinese manufacturing investments are consolidated but not 100% owned. So capital expenditures at Cooper Chengshan and the Kenda joint venture are funded from three resources; cash from operations, increased debt and contributions from owners. This has an impact on the amount of funding that Cooper is required to provide as we do not fully own these operations. But we do consolidate the capital expenditure reported. On a related note and in connection with our acquisition of Cooper Chengshan, beginning January 1, 2009 and continuing through December 31, 2011, our partner has the right to put to us the remaining 49% ownership share at a minimum price of 63 million. Now before turning it back over Roy, I'd like to summarize a few facts about our liquidity. As I mentioned earlier, we have 233 million of cash at March 31st, undrawn credit lines for up to 325 million subject to certain limitations, but relatively covenant free. These two totaled 558 million. Tax re-funds of 43 million additional should be received by the end of the third quarter of 2009. Capital expenditures will be held at or below depreciation. We continued to tightly control all expenditures of cash. In December 2009, we have a parent company debt payment due of about 97 million. We will also have additional cash outlays in 2009 for the closure of the Albany facility and pension related funding requirements. The lowest level of cash we need for operations is roughly 15 million. Given that and borrowing any significant un or seen changes, we believe we have sufficient liquidity to implement our plans for 2009. Now, I'll turn it back over to Roy

[Roy V. Armes:]

Yeah, thanks Phil. Before taking your questions, let me give you some thoughts about the first quarter and our outlook for 2009. We are excited about the progress that our actions are beginning to show, but realize that there is still a lot of work that needs to be done. Our existing operations have been able to lower our underlying production cost and this is a result of multiple efforts, including the implementation of a Six Sigma and LEAN practices, management of complexity, our automation projects and implementation of those projects and the efforts made by our employees to continuously improve how we build, sell and deliver tires. We think these costs will continue to improve in 2009 as we move from having excess capacity of four plants in the U.S. to a line capacity at three plants. Our investments and facilities in lower cost countries continued to position us for improved operating cost, greater geographic flexibility and the ability to penetrate markets outside the United States. The continuous improvement mindset is beginning to enhance our capabilities and enablers. We have excellent dedicated employees and this culture will help us to achieve greater levels of success going forward. To that extent, we continue training black and green belts as well as making internal changes to the organizational structure to improve operating efficiency and make the changes sustainable. To address the top line in the past, we launched new premium products that position us very well for growth in that segment of the market. And in 2009, we're launching products aimed at the value segment of the markets. And the introduction of these products is ongoing and we've received some very positive feedback from the market and our customers about these products. In 2009, we'll launch around 400 new tires. The revenues from new products, defined as those that were launched in the last 24 months, comprised of about 30% of our revenues. The velocity of introduction of these products will increase throughout the year and it's unlikely that we'll close the gap between our performance and the industry during the second quarter, but believe that we... as we continue to gain traction, this shortfall to the industry should disappear later this year. This will also partially... will be partially a result of our improving competitiveness. We've begun to expand our presence in channels where we've been underrepresented. And this includes signing a deal with a customer who has a large presence in the replacement tire market and who we are not currently doing business with. We will continue to launch products and increase presence where it makes the most sense in both channels and geographies. Profitably growing our top line is one of our strategic imperatives and this will get more attention in 2009 as we proceed throughout the year. Market improvements would certainly be welcome. But we're not sitting idly by just waiting for a rebound. Times have been difficult recently, but we strongly believe that we're headed in the right direction, focused on the right actions and have the right strength, skills and ability to implement what it will take for us to deliver better results and capitalize on future opportunities. As was mentioned earlier, we still have cash and untapped credit lines and we've suspended the repurchase of shares and debt, limited our expenses where possible and are investing only in the items that are critical to our success. In addition to the actions that Phil mentioned, we've taken steps that have not been as publicly discussed, but represent the types of actions we are taking to address the macroeconomic environment. Among these is the freeze in our salary employee pension plans and adjusted executive compensation. Our executives earned no bonuses in 2008 and in 2009, grants have been exclusively made as options to even more closely align with shareholder returns. We've also not given executive salary increases. And salary increases of all other employees will be delayed for this year as well. We have several rings of defense that we can still rely on if the environment were to weaken even further. And for 2009, we continue to expect full year industry volumes to be down in North America and Europe compared to 2008. There have been several signals recently that demand is possibly stabilizing. These include a change in the pattern of miles driven. Although very early, this could be a sign of better second half for 2009. The length that weakness in the replacement market has persisted is now beginning to reach a historic level, and typically, downturns have not lasted this long. But any recovery will probably hinge on consumers regaining confidence in the economy. China has recently experienced double-digit growth in replacement tires. This is unlikely to occur in 2009, but we do believe it could grow in the mid to high single-digit range we feel is possible for this year. European markets are likely to experience declines as well in 2009. And around the globe in nearly every market, the month January and February were very weak for the tire industry. March improved somewhat, but was still a decrease from prior years. Raw material costs were extremely volatile in 2008 and hit historic highs and these prices are difficult to forecast. But we do not see a return to the extreme high prices of last year. Commodity prices are likely to stabilize during 2009 and then begin to increase in the second half as demand for raw materials increases. Raw material costs during the second quarter will be further down from the first quarter of 2009. This is a continuation of the trend we saw beginning at the end of 2008 and we expect the year-over-year difference as a percentage to peak in the third quarter. We remain committed to the strategic plan and have already had to make very difficult decisions to continue our progress towards the goals that we outlined. And the actions we've taken and are taking will continue to move us along this path. We are cautious in our expectations of future profitability because of the uncontrollable factors which impact this industry such as consumer confidence, gasoline prices, raw material cost volatility, intense competition and currency fluctuation. But I am proud of the way our employees have stayed focused and are doing an excellent job of executing during a difficult time. The actions we take will continue to reposition Cooper as a stronger company and competitor going forward. With that, I thank all of you for attending the conference call and your interest in Cooper Tire. That concludes our prepared remarks. And now operator, I'd like to open it up for a question and answer period.

[Operator:]

Yes sir. (Operator Instructions). Your first question comes from the line of John Murphy.

[John Murphy:]

Good morning.

[Roy Armes:]

Good morning John.

[Philip Weaver:]

Hey John.

[John Murphy:]

I wanted to touch on the market share shifts that appear to be happening in North America, at least based on your comments. I mean, you said your unit shipments were down 24% while the industry was down 14%. I'm just wondering what the driver is, or do you guys see competitors being much more aggressive on pricing? Are there market... sort of just mix shifts that are going on that you're not playing on? I'm just trying to really understand what happened with that discrepancy.

[Roy Armes:]

John, this is Roy. The biggest driver of this is really the influx or flooding of some of the Asian imports that are coming in and using the... in most cases, the private label channel to distribute their products. And it's very, very price competitive and we're also seeing at the same time consumers shifting down. And what we're doing is we've introduced some products in that value segment that really is going to be attacking or going after being a strong player in that segment. Where we spend a lot of time in the last year or so year, a year and a half, updating our premium products, we've seen a very good mix with our premium products. That shows in our numbers as well as our Cooper brand have outperformed the market. And we're now in attacking and addressing the value segment. So that's really been one of the drivers there.

[John Murphy:]

So, Roy, just maybe sort of a strategic question as we step forward here. Clearly, you've usually had strength at the bottom end... the lower, I shouldn't say the bottom; the lower end of the market. Sounds like there is tires flooding in there and you've been shifting up market. So I mean you've kind of been getting whipsawed here. I mean, as we look forward really strategically, where do you see Cooper really best positioned in the market as far as the stratification in mid-tier, low HBA? Really, where do you see the sweet spot for you guys going forward? Or is it going to be a shifting market and you're going to try to spread the entire spectrum?

[Roy Armes:]

John, we are going to try to cover... our sweet spot in the past and we're certainly not walking away from that has been in that broad line, mid tier category. And what we've done in this past year is had more upscale premium products that we've introduced like the CS4 and the CTS. All of those have been very, very successful products for us. So we need to have that mix to balance in our portfolio. At the same time, we know that where a lot of our strength is in that mid-tier range that we're going to be addressing here over the next 12, 15 months. So I don't know if you can say there is one spot that fits all. But we're staying within that tier two category. We've just got products on the upper end of that tier two and some products that are mid to lower end of that tier two.

[John Murphy:]

Okay. Where do you see inventory levels in the channel right now? I mean, clearly, you've done a good job, a lot of your competitors have done a good job in house inventories. But what are you seeing in the channel specifically?

[Roy Armes:]

Well, John, we think that the channel has really been doing a lot of same things that the manufacturers have been doing, and that's managing their inventories very tightly. And what we're seeing is inventories in the channel are for the most part getting very, very slim, which, a combination of that along with some other things could really kick the demand in the right direction. But right now, I think with the cash that most companies are trying to manage, it's kept the inventories at a very low level.

[John Murphy:]

And if we think about pricing going forward, just wondering what you're seeing specifically in the market. And also from what you're seeing, it sounds like you are expecting at least the stabilization to maybe an increase in demand later this year at the same time as inventories are in pretty good shape. So it sounds like the pricing environment is pretty good. What are you seeing out there?

[Roy Armes:]

John, what we're seeing is there's been some very good discipline in pricing. We've seen that in the first quarter here. There has been some opportunistic selling that's going on out there. But it's been more targeted, whether it's unloading some inventory or targeting specific sizes, that there is a lot of that going on. But certainly not the overall decline in pricing. So, it's held some pretty good discipline and that's been encouraging.

[John Murphy:]

And lastly, Phil, I apologize. You went through the tax rate for the quarter. I was just wondering what you are thinking going forward. I know it's a little bit complicated, but what's the tax, effective tax rate you think we should be modeling in for the rest of the year?

[Philip Weaver:]

That's a very tough line, because really the refunds and this is primarily in North America where the issue arises. Results from these specific, primarily product liability costs that are able to be carried back in extra long period. So, given the situation we're in, I would say it will be, the effective rate will still be zero because we don't have the tax yield other than these refunds.

[John Murphy:]

Okay. Thank you very much guys.

[Roy Armes:]

Thanks.

[Operator:]

Your next question comes from the line of Tony Cristello.

[Anthony Cristello:]

Thanks. Good morning, gentlemen.

[Roy Armes:]

Good morning.

[Philip Weaver:]

Good morning, Tony.

[Curtis Schneekloth:]

Good morning, Tony.

[Anthony Cristello:]

I guess one of the questions I had was, we talked about the raw materials and we talked about the index being down I guess 11% year-over-year, which was even better than, I think indications were at the end of the last quarter. And when you look at now this quarter a 1,000 points improvement sequentially in the gross margin, how much and at least in your opinion, do you think is that of that is a sustainable trend? I mean, are we positioned now to continue to see gross margins in this 8 to 9% level or better. And then at some point you get some savings from Albany. Or are there some upcoming quarters or things in upcoming quarters that could work against that margin improvement?

[Philip Weaver:]

Well, we don't really want to forecast margins, but what we do and what I guess you guys will have to do as while I will assess the projected raw material levels against the primarily, the second issue would be the pricing. And Roy just commented on that, and then with an overlay of expected volume. So, you've got three variables there that make it tough to forecast, and that's why we don't put our forecast. But with the pricing being relatively disciplined, and we see the direction of raw materials, probably the bigger issue is more of the industry volumes going forward. So, we'd rather not forecast, but let each of you do your own assessment of that.

[Roy Armes:]

But, I would say Tony that a lot of the industry and the manufacturers have been working off in some of this raw material here in the first quarter, and some may have it worked off in the first quarter, some may even get into the second quarter. But we certainly anticipate a little more stabilization of this pricing in the second quarter with raw material pricing beginning to increase in the second half as more demand and more of the companies grew up by.

[Anthony Cristello:]

Okay. But, was there any thing that worked because I think going back to last quarter, you did talk about sort of being in that sort of 170. I mean I don't know, so you didn't give your actual index number for the quarter, but I'm assuming that number somewhere around the 155 range. And I think --

[Philip Weaver:]

Curtis has that right at hand. I will let him respond.

[Curtis Schneekloth:]

Let me give you a little bit of the historic return it also so that everybody is on the same page about this. We start with the first quarter of 2008. We had a raw material index, 174, second quarter was 195, third quarter 232, fourth quarter 222,. And then the first quarter of this year you are right, it was about 155. And we expect the second quarter will probably be in that 140 to 145 range as Roy accounted on it. As people come back and surf by more the commodities, we expect there to be some support there on the raw material side of it. So, you'll have to go through own top process, a lot of goes beyond that. But that's where we are at for the raw material index. So, during the first quarter, we had a little bit of high price raw materials still plunged through from those high levels of quantity at the end of the year. So, that wasn't going to our financials, but that trying to get what the raw material index will give. I think it gives you a pretty good picture on that side of it.

[Anthony Cristello:]

Okay. One last question. Roy, you talked about the 75 million annual savings from Albany. But I'm just wondering, do you have any change in terms of the trajectory or when you start to realize that now that you've kind of been involved in that process. I mean obviously some of it starts to hit sometime in the second half. Do you think you capture more of that or less of that, or are you on track to be about the same as you thought before you started the conversion?

[Roy Armes:]

We are on track. I would say, Tony, we're on track to deliver what we originally said. I would tell you, though, that there are some things that are going better than we had anticipated. We'll be out of 90% of that volume in the first half of this year and the rest of the volume will be relocating in the second half. So we have confidence in what we originally said was going to be the savings and the timing of those savings. And actually right now, we're slightly ahead of that schedule. Now we've still got a lot of work to do to get all this relocated. So hopefully that gives you some idea.

[Anthony Cristello:]

Very helpful, thanks guys.

[Philip Weaver:]

Tony, on that point about the Albany restructuring, one point of clarification from when we talked through our prepared comments. The fourth quarter write down was $76 million, not $46 million as was stated today. $76 million is what we reported and what is was then.

[Anthony Cristello:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Kirk Ludtke.

[Kirk Ludtke:]

Good morning.

[Roy Armes:]

Hey Kirk.

[Philip Weaver:]

Hi Kirk. Good morning.

[Kirk Ludtke:]

I guess I just wanted to make sure I understood the outlook for pricing. And it sounds like the industry is on an apples-to-apples basis, as you said, remaining disciplined. But what are you... what realistically do you think will happen here given that demand is, it sounds like, it's stabilizing, but still pretty weak. And it sounded like you thought imports were trending higher. So I am just curious what you see on the horizon for pricing.

[Roy Armes:]

Yes, I don't know that we said that imports were trending higher Kirk. What we would say is that right now, there has been some good discipline in pricing. I think there is a couple of factors to consider here. One is the demand has not been robust, certainly not in the first quarter, and the industry is... RMA numbers are still anticipating being down about 5% this year. So demand is not robust, so that's puts a little pressure on it. We still have an overcapacity situation, which is we'll continue to put pressure on the pricing. So it's really difficult to predict what's going to happen here going forward. I think just the fact that right now, discounting a lot of products doesn't necessarily mean that you're going to get more volume as a result of it. So I think that in itself has been helping with the discipline.

[Kirk Ludtke:]

So by cutting price, I guess people don't expect to pick up any incremental share? Typically, that would be the response, right, people would... but I guess you are saying that that's not... there is no sign of that?

[Roy Armes:]

Well you don't have an industry demand that's really supportive of that. So that's my best guess at this point in time is that just by lowering prices doesn't necessarily mean that you're going to get additional volume. Now there are some targeted things that's going on in the marketplace, so. But I think overall, the discipline is remaining for a lot of factors; that's just one of them.

[Kirk Ludtke:]

Okay. So the targeted things are kind of off... I mean people aren't announcing price reductions, but they're in the market and closing out product lines and discounting kind of on a one-off basis, is that what you mean by...

[Roy Armes:]

Yes. And they are using it to adjust inventories in some cases because the demand is not coming back fast enough, and they are adjusting inventories as a result of that. And there have been several announcements that's out there, or I shouldn't say several, but certainly a few announcements that's out there on adjusting capacity to meet demand. Ours being one of the first ones and then other ones that came from some of the other major manufacturers are doing similar things to try to balance that appropriately.

[Kirk Ludtke:]

Okay. And then with respect to liquidity, I think, Phil, how much could you have drawn at March 31st on the credit facility, subject to all the covenants and the borrowing base limitations and all the other limitations?

[Philip Weaver:]

Yes, net of all of that, we think it could have been in the 240 range.

[Kirk Ludtke:]

Okay. And...

[Philip Weaver:]

That's just on the parent company lines you are referring to, right?

[Kirk Ludtke:]

Yes. And then, when would... with respect to the put, is that... does your partner have a finite period which they have to put the minority interest or if is it an open ended thing?

[Roy Armes:]

No, it's still... at the end of 2011, but Kirk, I would just tell you that right now with our relationship with the partner, we're certainly not anticipating that in the short or medium term. That's not a guarantee obviously, but we're not expecting that. But they have until the end of 2011 with this current put option.

[Kirk Ludtke:]

Okay. And then is it something that they tell you they want to exercise their put, and then you guys have to decide on a price and it goes to arbitration, and it gets put out even further or is it something that's pretty easily quantified?

[Roy Armes:]

No, it is one of the things. Right now, it's a minimum of 63 million that came in, certainly want to put their put there. But there would be sometime to negotiate this. I'm not sure arbitration and those things may or may not be necessary. It does take a little bit of the process to come to agreement resolution on what the price is going to be though, but there is a minimum.

[Kirk Ludtke:]

Okay. But probably it sounds like it could get pushed. I mean once they decide... if they do decide to put it, you've got a process that could take sometime.

[Roy Armes:]

Yeah, yeah. I think that's a reasonable assumption. I don't know what the probability of it taking a long time is, but it could happen.

[Kirk Ludtke:]

Okay. And then last question, is there... is any of the cash restricted in anyway? I can change these where you need your partner's consent or any of that?

[Philip Weaver:]

Well, some of it definitively has been the joint venture. So it's not available for total use around the globe, but most of it is in the parent company or its wholly-owned subsidiaries.

[Kirk Ludtke:]

Do you know how much is in the JVs?

[Philip Weaver:]

Not the exact amount, but generally its ranges in the 30 to 50 million range from time-to-time. I'd say closer to the 30.

[Kirk Ludtke:]

Okay. Great. I appreciate it. Thank you.

[Roy Armes:]

Yeah thanks, Kirk.

[Operator:]

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

[Saul Ludwig:]

Good morning.

[Philip Weaver:]

Hey Saul.

[Roy Armes:]

Hi Saul.

[Saul Ludwig:]

Phil, the $8 million increase in pension expense, was that in North America primarily?

[Philip Weaver:]

Yes.

[Saul Ludwig:]

So when you were giving us the walk through and when we think about pension having a minus 8 million effect, you didn't talk about that. What was the offset that... where would that 8 million be in the lock?

[Philip Weaver:]

Well, we were talking there about the North American operating segment, some of that is in the corporate numbers. So, it is spread.

[Saul Ludwig:]

Well, how much would have been in the North American operating segment?

[Philip Weaver:]

Saul, I don't know, but we'll have Curtis get back to you on that, since it's a small item.

[Saul Ludwig:]

Okay. But that would be a negative that would have to be an offset by something you didn't... that you netted against something?

[Philip Weaver:]

You're right. We'll have Curtis look that up and --

[Saul Ludwig:]

Thank you. You also mentioned that there was some high cost inventory that flow through which muted the raw material, the full effect of the raw material cost savings. How much of that... how much was your earnings negatively impacted by high cost inventory, and then what were the raw material savings have been other than the $8 million if you didn't have the negative raw material costs coming through?

[Philip Weaver:]

We didn't measure that, which would be of course require us to say what we have purchased versus what did we purchase.

[Saul Ludwig:]

No, if you just purchase those quantities at market prices during the first quarter. That would be the --

[Philip Weaver:]

Yeah. We did not do that measurements Saul, but seeing it in the other way, I would say we used up the majority of that during the quarter. There is just a small amount left rolling into the second quarter.

[Saul Ludwig:]

Would you pointed in the 5 to $10 million bucket or --

[Philip Weaver:]

Possibly Curtis is seeing, but we really didn't even attempt to quantify that.

[Saul Ludwig:]

Okay. The unabsorbed overhead that you had in the first quarter, would you expect a similar amount in the second or is that number going to get successively less?

[Philip Weaver:]

Obviously depends on volume, but absent any big changes, it should be in that neighborhood I would think.

[Saul Ludwig:]

In the second quarter similar?

[Philip Weaver:]

Yeah.

[Roy Armes:]

Yeah.

[Saul Ludwig:]

Okay. And then the... what's your take on this steel workers actions to try to limit the input/ I guess you're sort of a working both edges of that because you import tires from China. But what's your take on that initiative?

[Roy Armes:]

Yeah, I guess Saul we haven't answer that is, we've really just maintained a neutral position for a lot of reasons here. One is that we do import tires from China; two, our customers buy tires from China. But, we intend to cooperate fully with the government's investigation, providing them with information or whatever they need to take whatever appropriate action. And that's the kind of the way we'd left that at this point in time.

[Saul Ludwig:]

But when you look at the logic that they are using and the regulations that they point to, are you starting those regulations, and is that... are they got legitimate legal case there?

[Roy Armes:]

So, I'm not qualified even to common on that. We have looked at the petition and lot of detail with our folks just to make sure we understand it, and what the government's going to be asking for in terms of information. But I don't know that I would want to go out there and step into an area where I have no expertise in.

[Saul Ludwig:]

Next question, and very quickly, you had the big decrease in raw materials from the fourth quarter to the first quarter. Do you think, if you have a price index, do you think there would be any degradation in your average unit selling prices as you went from the fourth quarter to the first quarter, albeit even if it's modest, would you think there was any?

[Roy Armes:]

If to run on it on the total company basis, it would be next to nothing, it would be less than a percent.

[Saul Ludwig:]

Okay. And then finally Roy, given that you sort of broke even in the first quarter, again, this question is ex-special items. And it kind of sounds like with a savings coming from Albany, again lower raw material cost in the second quarter, would there be any reason to think that you wouldn't have a black number for the full year without quantifying how big, but the next side of the of other of the equation?

[Roy Armes:]

Saul, right now, with the volatility that I've experienced in my short time at Cooper, I'm not sure that something like that is even predictable.

[Saul Ludwig:]

With all the uncertainties that and caveats to go with, and answer to that question, now we understand that.

[Roy Armes:]

Yeah, I just think I would say that we feel pretty good about the things that we put in place and want to continue to implement these things. And I think there was a lot of things that could be possible if we continue to execute at the level that we're executing. And that's probably where I want to leave that without misleading you one way or the other.

[Saul Ludwig:]

Okay, great. Thank you very much guys.

[Roy Armes:]

Thank you.

[Curtis Schneekloth:]

Operator, we'll take one more call; one more question.

[Operator:]

Yes, sir. Your final question comes from the line of Ryan Rickman (ph).

[Unidentified Analyst:]

Hi. Can you hear me?

[Roy Armes:]

Yeah, yes, go ahead.

[Himanshu Patel:]

Hi. It's Himanshu Patel at JPMorgan.

[Philip Weaver:]

Hey Himanshu

[Himanshu Patel:]

Couple of questions. Is there any way to give a rough estimate on the spread between the rate of sell-in and sell-out?

[Philip Weaver:]

In quantities, Himanshu?

[Himanshu Patel:]

Yeah, just in percentage. I mean, I know you guys get to see the selling date obviously. But just any sense from your dealers on what the rate of the sell-out is right now to the consumer?

[Roy Armes:]

Himanshu, I don't know. We don't have that information at hand.

[Himanshu Patel:]

It's fair to say that there is still a gap though between the two data series?

[Philip Weaver:]

Because we believe that there is squeezing inventory, I'd say, yes.

[Roy Armes:]

Yeah. That is some of it's --

[Himanshu Patel:]

And still, I mean as a regard towards to the end of Q1, did the two sort of converge meaning is there inventory destocking cycle sort of completed for the most part, any of you has re-exited the quarter?

[Philip Weaver:]

We don't have any kind of clearing house for industry data there. So, it's all just of sort of customer-by-customer. I guess, we'd like to believe that's true, but we really don't have data to support that conclusion.

[Himanshu Patel:]

Okay. And then Roy, I think several quarters or maybe even a year or so ago, you had referred to an 8% operating margin sort of attainable longer-term. And maybe my percent is wrong, maybe 6 to 8% or somewhere in that ballpark. How do you feel about that now just given the scope of restructuring that the business has done, given that we're entering into a period of normalized raw materials costs? And your assessment on whatever pricing maybe going forward, when you stir all that together, is that still sort of a reasonable long-term profitability target for Cooper Tire?

[Roy Armes:]

Yeah, I'm not willing to back off of at this point in time. We said 6 to 8% Himanshu. And I think on a longer-term basis, it's certainly stretched out a lot further than I would have expected at this point in time with all the things that we have to get in place to get to that level. But I think it's the growth rate. If you think about what we said in our CAGR growth rate across the globe is much more difficult now than what we originally anticipated. But I think we're not backing off with those targets. It's just the timeframe which we could accomplish those is going to be stretched out. But I still think that's a possibility.

[Unidentified Analyst:]

And what is the constraint to get there from where we are here? Is it the full benefit of normalized raw mats, or is it that industry volumes are just at a point where there is no way you could reach those types of margins at current volumes?

[Philip Weaver:]

I think the volume does have a big impact on it, but raw materials obviously is certainly a big impact and that relationship between our raw material costs and the market pricing.

[Unidentified Analyst:]

Lastly, I know there is a lot of questions about pricing, so apologize if this is a little bit redundant. But is it unreasonable to think that just given the magnitude of the raw materials decline that's coming in the second and third quarter that price mix at a gross level turns negative in the second half? Not net of raw materials, just at a price mix standalone.

[Roy Armes:]

Boy, that one's a tough one to call at this stage right now, Himanshu. I'm not sure I'd want to go out on a limb with that one. I think right now with the discipline we are seeing in pricing in the marketplace, I do think that the raw materials are going to stabilize at lower levels here begin to creep up as we start to buy, as the industry starts to buy raw material. We already are seeing some increases going in Asia. Is it reasonable to think that, that ratio could change a little bit in second half, its possible but right now with what we're looking at I would want to go out on and a make prediction there?

[Unidentified Analyst:]

And you mentioned industry being fairly disciplined and how do we reconcile that comment with the increase in Asian importers, is it, you look at the Western and business tire makers are been disciplined than the Asians are not or I just trying to figure out sort of who is being disciplined and who is not.

[Roy Armes:]

Well, what I would say about the imports that are coming in, they are basically using a specific channel to go through and it's usually through the private labels and a lot of... private label and the wholesale channel to run products through. So you'd have to go back and look at who is all playing in those channels to make any kind of assumption. But that's basically where it's getting attacked.

[Unidentified Analyst:]

And last question, we've heard a lot of tire makers talk about a downshift in mix to sort of mid tier brands. But it's all been in reference to folks still buying branded tires, but just not the top tier branded tires. Are you seeing any broad shift away from branded into private label?

[Roy Armes:]

No, we're not seeing that. I think at the same time I would say that private label is still a significant part of the market, but I wouldn't say that we see them shifting there as much we just see them shifting at lower price points, because the consumers are shifting to lower price point products during this economic time. And I'm not expecting a huge change in that, Himanshu, over the next 12, 18 months at this stage anyway.

[Unidentified Analyst:]

Okay. That's all I had. Thank you.

[Roy Armes:]

Hey, let me just close by giving a quick summary here with some closing comments, if you would. The demand clearly continues to be a challenge for us in this economic environment. We did see a little bit of an uptick in March, but it's not significantly rebounded. And I wouldn't want to mislead anybody there. We are expecting though that there is some bottoming out and there is a stabilization between this quarter and the next quarter with a slow recovery coming at the latter part of this year. And one of the positive signs that we've seen and most of you can have access to this data, it's the improvement or increase in miles driven that was up for the first time in 13, 14 months in February when you look at year-over-year comparison. You couple that with increase in consumer confidence and an industry that's been down two out of the last three years and currently down for this year and expected to be down for the... as a total year, our May numbers indicate it will be done about 5%. We think there still continues to be some pent-up demand up there that exists in this market. I think forecasting the timing is always a difficult thing, not only for us, but for anybody to try to predict. Raw material prices have declined significantly in the first quarter, over 10% year-over-year when you're making that comparison first quarter '08 to '09. And we see material prices gaining some support throughout the year where it comes back to stable as well as starting to increase. And it will get... as soon as companies get back to what we would call a normal purchasing level. Overall, pricing discipline, we've mentioned the market has been good with some opportunistic buying that's taken place out there, but it's more targeted. But we think that the actions that we have in place, the new product introductions, the Starfire brand which is targeting that value segment, the expansion that we've got going on in Mexico and Canada, supplying our new business that we've got with national retailers combined with signing some new customers. We're going to continue to solicit new customers. Better serving our existing customers during these times, completing the Albany closure and fully optimizing our manufacturing footprint. And we'll continue on with our Lean Six Sigma initiative, the reduction of our operational complexity and automation efforts. We think all of those actions are things that's really going to help us continue to address this existing market. And we have a lot of confidence in these actions and know that we've put in place, but we feel like that they'll deliver the kind of value our stakeholders are expecting. And that conference is going to continue throughout the year. I think we're doing a lot of the right things, we've got our people very well focused on delivering to the results that we expect in this business. So with that, again, I appreciate the attendance today and thank you very much for your interest in Copper Tire & Rubber Company.

[Operator:]

This concludes today's conference call. Thank you for your participation. You may now disconnect.