Cooper Tire & Rubber Company
Q1 2012 Earnings Call Transcript

Published: 2 May 2012

[Operator:]

Good morning, my name is LaTonya, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cooper Tire First Quarter 2012 Results Conference Call. All lines have been placed on mute to prevent any background noise. (Operator instructions) I will now hand the floor to Curtis Schneekloth, Director of Investor Relations. Thank you. Please, go ahead.

[Curtis Schneekloth:]

Good morning everyone. Thank you for joining our call today. My name is Curtis Schneekloth, and I serve as the company's Director of Investor Relations. To begin with, I would like to remind you that during our conversation today, you may hear forward looking statements related to the future financial results and business operations of Cooper Tire & Rubber Company. Actual results may differ materially from current management forecast and projections. Such differences may be a result of factors over which the company has limited or no control. Information on these risk factors and additional information on forward looking statements are included in the press release and in the company's reports on file with the Securities and Exchange Commission. With me today are Roy Armes, Chairman, Chief Executive Officer and President, and Brad Hughes, who serves as Chief Financial Officer. In association with the press release, which was sent out earlier this morning, we will provide an overview of the company's quarterly operations and results. The press release contains a link to a set of slides that are a summary of information included in the press release and 10-Q. These slides are intended to help investors and analysts quickly obtain information. They will not be used as the focus of today's call. Following our prepared comments, we will open the call to participants for a question-and-answer session. We've also established a new email address that you can send questions to, it is [e-mail]. Today's call will begin with Roy providing the overview of our results. He will then turn it to Brad for 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:]

Yes, thanks Curtis, and good morning. During the first quarter, we continue progress toward our strategic goals despite a challenging business environment. We now have achieved 11 consecutive quarters of profitability, which was a tribute to the resiliency of our business model and to our entire organization who are dedicated and committed to the success of our company. Before I provide an overview of the specific results for the quarter, I want to recognize that shortly after our last earnings call, the labor situation in Findlay, was resolved and we're very pleased to have our employees back to work. And to the credit of the management team and the workers at the Findlay facility, we had a smooth ramp up with limited issues. Brad will provide some more information of the impacts of that situation later in his comments. Also, in the first quarter we closed a deal to purchase the tire manufacturing assets in Krusevac, Serbia. We're excited about the potential that this plant has to expand our international business, and also to strengthen our global manufacturing net worth. During the first quarter we had net income attributable to Cooper Tire and Rubber Company of $22 million or $0.34 a share including the impact to the work stoppage. This compares to net income of $16 million or $0.25 a share in the first quarter of 2011. The consolidated net sales were $984 million for the first quarter up 9% versus the first quarter of 2011. This increase was primarily driven by higher prices, and volumes were down slightly for the total company. Where unit volumes were down 3% for the North American segment and up 8% for the international segment. Our shipment volumes declined 6.1% in the United States for light vehicle tires which is in line with the industry shipments which were down 5.8% for the quarter. And for the industry and Cooper, Broadline and Value Tire shipments continue to be weak. We were able to offset this by outperforming the industry in most other segments including light truck and UHP. We believe that pinup demand continues to exist for Broadline and Value Tires however, it's extremely difficult to predict when and how that demand will manifest. Now within the international segment Asian volumes increased while European volumes decreased. The increase in volume in Asia was a combination of moderate growth in the domestic TBR market as well as continued successful efforts to expand distribution and supply of light vehicle tires in the Chinese market. The decrease in European demand reflects continued weak industry conditions in several key European markets. Operating profit for the first quarter was $48 million or 4.8% of net sales compared with $32 million or 3.6% for the same period last year. The North American segment operating profit was $23 million or 3.3% of net sales, and international segment operating profit was $33 million or 8.1% of net sales. Improved price and mix of $71 million during the quarter was partially offset by $31 million of higher manufacturing costs due largely to the labor situation in Finland. $9 million of higher selling general administrative costs and $8 million of higher raw material costs along with $2 million of higher products liability costs and $1 million of reduced unit volume. Also reducing profit were $5 million of higher other costs which includes costs associated with the start-up of our operations in Serbia. With that I'm going to turn it over to Brad, and let him provide some more detail on the individual segments and other financial matters.

[Bradley Hughes:]

Thank you, Roy. I will start by providing detail on the North American tire operation results for the quarter. The segment sales were $698 million and 8% increase compared with the first quarter of 2011. The top line increase for the quarter was driven by stronger price and mix, partially offset by lower unit shipments. Unit sales for the North American segment declined 3% compared with the first quarter 2011. For Cooper, prior year shipments for the quarter were strong and included the impact of purchases made in advance of the March 15th 2011 announced average price increase of 8% to 9%. Cooper's total light vehicle tire shipments in the United States, decreased by 6.1% which was better than the RMA member shipments which declined 8.6% in the quarter. Total industry shipments for light vehicle tires were down 5.8% for the quarter. The broadline and value segments continued to be the weakest performers for the industry within the quarter but we were able to offset this by outperforming in other segments including the light truck segment. It is also worth noting that our UHP product line sales during the quarter were up more than 43% over the prior year. Commercial truck tire sales of the Roadmaster brand continued to display strong performance as shipments were up 14% during the quarter. This compares to a reported 13% decline in the total industry shipments within this category as reported by the RMA. The segment operating profit was $23 million for the first quarter or 3.3% of net sales. This represents an increase of $1 million or 4.5% over the first quarter 2011. Allow me to summarize the key drivers in the form of an operating profit walk forward

[Roy Armes:]

I've been very pleased with the progress that Cooper has recently made and achieved against our goals. What's even more exciting is the continued opportunity that I see for improvement as we move forward. These opportunities include

[Pat Nolan:]

Good morning, everyone. It's actually Pat Nolan on for Rob.

[Roy Armes:]

Hi, Pat.

[Bradley Hughes:]

Hi, Pat.

[Pat Nolan:]

A couple of questions for you. First on the Serbia costs. Can you frame what you think the costs are going to be for the next couple of quarters for that as far as the ramp-up?

[Roy Armes:]

In terms of the continual ramp-up? Is that what you're talking about, Pat?

[Pat Nolan:]

Yes, yes.

[Bradley Hughes:]

I think, Pat, the best description of what we expect for Serbia is that the operating profit results for the full year will not be material. In the first quarter we just were ramping up production. We had not yet begun to ship tires to customers, so we had only the cost part of that equation. As we get further into the year, while we will continue to see the cost of operating the facility, we will also begin to see the revenues generated from the shipments that we start this quarter. From an overall profit perspective the results from that operation won't be material.

[Roy Armes:]

I would add there, Pat, we're looking at still producing over a million units out of that facility this year. And while in the first quarter we produced very, very limited amounts. That's where you see a higher cost there, but we are anticipating rest of year it will not be material.

[Pat Nolan:]

That makes sense. On the ERP system implementation can you update us on the timing of when that changeover is actually going to occur? And what is the impact on the cost side in the SG&A?

[Roy Armes:]

Well, first of all on the timing I'll let Brad think about the cost here. On the timing here, Pat, we implemented two pieces of this so far. One is in our Mickey Thompson subsidiary and the other one is in our HR payroll system here. So we're now working passed those, and we plan to start the implementation in our North American operation which starts out more in one of the smaller operations in January of next year. So, it will be limited amount this year as we stay in the preparation stage.

[Curtis Schneekloth:]

Pat, Curtis here. We're not planning on doing one big bang implementation. We're going to roll it out at different sites as we go through 2013 and even in 2014.

[Bradley Hughes:]

Then with regard to the cost implications, we don't break those out specifically within what we talk about within SG&A. But those were included in the first quarter SG&A expenses, and we continue to estimate they will be somewhere between 5% and 7% of net sales for the balance of the year and for the full year as a percent of net revenue. Most of those costs are capitalized. You start to see very limited and immaterial amount depreciated as we start to see certain pieces of it. But a lot of it is capitalized, and you'll see it in future periods.

[Pat Nolan:]

If I can just sneak in one last one. It looked like your P&L raw material costs actually declined more sequentially from the fourth quarter than the index did. Going forward, when you think about the P&L impact of raw material costs, is it going to be more than a 5% to 7% increase your expecting in the index?

[Curtis Schneekloth:]

We don't provide a link necessarily between there. It's almost impossible to take the raw material index and penny for penny put it into the P&L. We provide that so you can do some work on it, but it's going to depend upon when we end up buying raw materials and in what quantities, so I would tend to tell you to go back and look at the raw material index as something that is worthwhile to use.

[Pat Nolan:]

Okay, I'll get back in the queue.

[Operator:]

Thank you. Your next question comes from the line of John Murphy.

[Unidentified Analyst:]

Good morning, guys. We just curious if you can comment generally on the market weakness in the replacement tire segment in North America, not just for you guys, but for the industry? At some point, it's kind of perplexing that we're still seeing these big declines given, miles driven, hanging in there reasonably well, and the declines we've seen in the past couple of years. Just curious what your thinking forward is and maybe what you’re hearing from your distributors and dealers out there?

[Roy Armes:]

John, I think that's a good observation and I'm a little perplexed by it myself. After 2011, we've had an industry that's been down, four out of the last six years. Previously, there were never two years in a row that the industry was down. The trend that we're on this year is we are expecting that it's going to be, at best flat, but probably down for the year. If that's the case, it's going to be five of the last eight years that it's going to be down. It is perplexing but, also gets us to believe that there is some pent up demand there. What we're are hearing from our distributors and our retailers is customers or consumers are wearing the tires longer, and when they're coming in, basically, they don't have as much tread on them as they had in the past. They are also replacing, not necessarily four tires, but one, two, three, whatever is actually needed. I think a lot of that really impacts the broadline category and the value segment. I wish I had a better answer than that, we just believe that there's pent up demand there that's waiting for a stronger recovery so that part of the industry can come back. In the meantime, we've had very good success on the products that we've launched and introduced more on the tier two premium segments for us, that's been performing very well, and it's helped us offset some of our exposure on the broadline category. We're not walking away from the broadline category. We're getting ourselves prepared for when it comes back. I may not have answered all your questions. We're a little perplexed by it ourselves. If just seems like this thing ought to be changing a lot more significantly in the industry than we're seeing.

[Unidentified Analyst:]

I guess we should all be careful when we're driving in the rain, right, with all those bald tires out there?

[Bradley Hughes:]

John, just one point to add on, this is Brad. The other consideration here is on, as you'll recall the first quarter last year, there was pretty strong underlying demand that was then increased in terms buying and shipment activity by a number of significant pricing actions. We took several, our competitors took several. And we do think that drew some volume into the first quarter a year ago that more naturally we would have been for the second quarter and then you saw it, the second quarter, a pretty low level. So when you look at the comparables, the first quarter would have been affected by that as will the second quarter, particularly for Cooper. So as you are looking at it on a full-year basis as Roy was describing, you also might want to take that into consideration for the first two quarters.

[Curtis Schneekloth:]

I think last year, John, the light vehicle shipments for the industry were up somewhere in the range of 7% in the first quarter and then by the second quarter they were down around 5%. So the optics are in play a little bit here.

[Unidentified Analyst:]

That's very helpful. Then just a second question as we look at the raw math being a headwind in North America but being tailwind in international ops and if, Brad, maybe you could just remind us what happened there and how the accounting is different between the two segments? Because I think that might be part of the explanation. Just curious what the delta is between those two.

[Bradley Hughes:]

I think you're commenting on the fact that we actually had an increase in material cost in the North American market and a decrease in the international markets, coincidentally about the same amount. One of the contributing factors is the fact that in North America we are on LIFO, and that can affect the timing of when we see the impact of increases and decreases in cost relative to our other markets that either on FIFO or weighted-average accounting method. In addition to that, in our international markets and specifically Asia, we buy a much higher percentage of natural rubber than we do given the amount of natural rubber that goes into the truck and bus radial tires that we've produced in China. And as you are probably aware, natural rubber actually was coming down and stabilizing at lower prices in the first quarter relative to the fourth quarter, where some other commodities, like butadiene, were actually increasing and affecting SBR costs. So both of those contributed, and then frankly, we ended up with the timing of some purchases in the international business segment relative to the [inaudible], the North American based. They do buy differently, a little bit in Europe, in the international market. They buy much closer to when they are going to use some in the production given the proximity of some of those key commodities to the manufacturing facility. And that the timing difference there also contributed to the difference between the two business segments.

[Unidentified Analyst:]

Okay, that's helpful. And maybe just a last question, for you Roy. As we look at this, your execution is starting to come through and now that you are through the labor issues in North America. That's becoming a little bit clearer and you keep marching forward on execution. Product seems like its very competitive, pricing is pretty good, but one of the key differentiators for Cooper historically, has been your relationship with your distributors in North America. It's kind of hard for us to really understand whether that's really getting better or worse, or it's repaired, or really what direction that relationship is. I'm just curious if you could comment on that, how things have changed over the past couple of years, and how you are seeing them more recently. That has been a key differentiators, I'm just trying to understand what state that is in and the trajectory of it as well.

[Roy Armes:]

I would probably start out by answering that John, by the quantifiable answers in our results. The qualitative answer is that I was out with the customers here in the last month, month and a half there were several different venues or events and some individual visits. My assessment is the relationship is strong, if not stronger than it's ever been, and there's a couple of factors driving there. One, our new products have been very well received by our customers and that's because I think they were very well received by our consumers. Secondly, they see the changes in the business being favorable to them in their business longer term. They are able to make money with our products. We've got some great value products and I think those two factors are really important. I think that there is a lot more confidence out there about selling the products that we're introducing today that maybe there have been in the past. I've always felt that there's been good confidence there but I think today with what we are sharing and what we're developing and introducing, our customers have much more confidence today than before. All of those factors add up to, I think, the quantifiable results that we're seeing. Whether it's on the radio medium truck tires or it's on the UHP for the light truck tires. All the indicators are that we've got a lot of confident, smart consumers out there, consumers and dealers.

[Unidentified Analyst:]

Great, thank you very much guys.

[Operator:]

Thank you, your next question comes from the line of Ravi Shanker.

[Ravi Shanker:]

Thanks, good morning guys. You out perform the RMA in 1Q and in fact even the non members seem to have outperformed the RMA members in 1Q, as well. Can talk about what's driving your share increase there, and are you picking up $1.00 share from the big three brands and overall, are you seeing any signs of people trading down now that tires are getting more expensive and people are probably cutting back a little bit?

[Roy Armes:]

I think there are probably two or three things that have helped us be successful. One, we're not intentionally going out looking to take market share from anybody. What we're trying to do is make sure that we're profitable in what we sell. As a result of that, we've been able to become more efficient in our operations and be able to deliver more value to our customers. So our cost initiatives have been paying off for us. The second thing is the new product introductions that we put out there that have been very well received and you can tell by some of the ratings we got from independent companies and magazines, the UHP and the AT3 light truck tire are a couple of great examples where we've got some top billing in those products. And that's given our customers a lot of confidence in what they're doing. I think the third thing is, that we continue to find ways to be much, much easier to do business with and deliver value to our customers, and I think if we start looking at that, that's some critical factors for us. Now, as far as the consumers, what they're doing in buying down, you know the broadline category in the value tires are still a weak part of the industry. Now as we provide more and more value on the premium segment, I think it's more attractive to our customers and the consumers are looking at not only our tires but our competitor's tires. I think as a result of seeing the performance of our tires, the quality of our tires and the cost of our tires I think that combination has been the real driving factor for us, so we've just got to make sure that we continue to focus on our growth being profitable. That's our focus.

[Ravi Shanker:]

Understood, thanks for that. I think on the previous call you'd said that with the new labor agreements you planned to get some productivity benefits but not major outright cost savings, can you give us an update on some of the details there and how that might flow through numbers in the next couple of years?

[Bradley Hughes:]

Ravi that's an accurate depiction of what we were able to accomplish with the contracts we have in place at Texarkana and Findlay now. The productivity is going to happen over a period of time, and frankly is built in to our overall cost initiatives, I mean that's just one area that we're looking to become more efficient on and we're working across all costs within the production process in order to do things more efficiently and effectively. Rather than breaking that out as a specific piece, I think as we move through time you'll see the cost initiatives start to move to the bottom line.

[Roy Armes:]

I think we've got to look at that Ravi, in combination with our black belt lean-six segment program here which has really helped us become more and more efficient. And frankly the shutdown of our Albany facility a few years ago and leveraging that volume in our current facilities has helped the efficiency, as well as the productivity. As a result of this agreement we've got with our union, not only here at Findlay but at Texarkana and others, it's only going to continue to make us better as a company, and I think that's the kind of security that our folks are really looking for. So it's a combination of many things that's helping drive this efficiency improvement.

[Ravi Shanker:]

Got it. So putting all that together, can you give us a number for manufacturing or productivity savings in 2013, 2014, mid to high single-digits something?

[Bradley Hughes:]

Ravi, that's something that we typically don't provide and aren't prepared to provide at this point in time. We do continue to believe that there are opportunities not only for the balance of this year, but as we move forward to continue to be a more efficient producer from a cost perspective. I think we'll leave it at that for right now.

[Ravi Shanker:]

Got it. Just one last question. Brad, you said earlier that international benefited from natural rubber going down versus more of butadiene impact in North America. Can you give us an update again on what level of substitution currently goes on between natural rubber and synthetic rubber and whether that can get any better. And also butadiene prices have increased a lot lately but have also come off in recent weeks. Can you just talk about some of the warranty there and what's driving there, and whether you're seeing a permanent shift up in the price of butadiene?

[Bradley Hughes:]

Yes, there's a few questions there. Let me start with the natural rubber versus the synthetic rubber. You're right. There are opportunities to move on the content which in general for an indicative tire I'll say because it can vary dramatically whether you're talking about a UHP tire that's going to have a higher content of synthetic versus a TBR tire, a truck, bus, radial tire that's going to have a much higher content of natural rubber. But a typical tire when we talk about our cost makeup is about 50/50 between those two components. And that can move marginally maybe 10% to 15% at the extreme from one end to the other. So it's not unlimited. We need to make sure that we're still achieving the appropriate performance characteristics and durability characteristics for the tire. So there isn't unlimited but we do have some ability, and we do continue to shift that on when the economics makes sense to do so. With regard to where natural rubber and butadiene are right now, both actually seem to have moderated to some extent. You're right. Butadiene prices have been increasing into the first quarter but seemed to have leveled off if not moderated a bit, and we'll see where it goes from here. But for the time being it looks like in the commodity markets at least in the near term here, we see some stability and leveling off of pricing.

[Ravi Shanker:]

You're not seeing anything structural in terms of changes in either long term supplier demand that's causing a permanent shift up or down [inaudible]?

[Bradley Hughes:]

Well, you know, butadiene a lot of people will talk about what's happening at the refineries and whether or not they're actually continue to produce the same level. There are other developments in that market that appear to be coming along relatively nicely. It looks like on a longer term basis when you get out to '13, '14 and beyond, that some of those structural issues, if there will be any structural supply issues, that they will be addressed on some of the initiatives that suppliers have underway. In the near term, there may be pockets of time where there are shortfalls in different markets. It doesn’t look like it’s anything that is going to be a major disruption for the industry’s ability to continue to make the tires that are being demanded right now.

[Ravi Shanker:]

Very good, thank you.

[Operator:]

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

[Brett Hoselton:]

Thank you very much. Good morning, gentlemen.

[Bradley Hughes:]

Hi, Brett.

[Brett Hoselton:]

A few questions, here. First of all, the $29 million associated with the Findlay situation, are those completely eliminated going into the second quarter?

[Bradley Hughes:]

We don’t think that there is going to be any material implication from the Findlay situation in the second quarter.

[Brett Hoselton:]

You’ve given us an idea of where you think raw materials might be going into the second quarter, how should we think about price mix? You obviously performed well, here in the first quarter. How should we think about mix versus raw materials going forward into the second quarter?

[Bradley Hughes:]

I think there are a couple of ways to think about it. We’ve given you the raw materials side of the equation. On the price/mix side of it, first of all from a mix standpoint as Roy’s pointed out, a number of our new products continue to gain traction and momentum and UHP and light truck, SUV tires are continuing to make good strides with our customers. So from a mix standpoint, we think that that can continue on, we’ll see. We’ve said that it is going to be difficult to determine when the broadline demand returns. And when that does happen, we’re prepared to participate in those markets. But in the near term, I think, frankly, we’ll continue to see some benefits from the new products that we’ve introduced. From a pricing perspective, we are continuing to monitor what competitive activity is taking place out in the market, balancing that against our cost and margin profile. And as we’ve demonstrated historically, we are ready to price when it makes sense for Cooper.

[Roy Armes:]

And Brett, just as a reminder, we did put in a price increase December 1st of last year and also out with a price increase March 1st, I believe it was, for our RMTs. We are continuing to look at that and trying to make sure that we’re having the right balance of our price/raw material relationship, at the same time making sure that we are in a competitive position in the marketplace as well.

[Brett Hoselton:]

And then as far as volumes were concerned; China, surprisingly strong, Europe, weak. As you think about your performance in China going forward from a volume standpoint, do anticipate an 8% number being a reasonable going forward? Do you think you might see a little bit, was it a particularly strong first quarter or do you think it might actually improve going forward? What do you think about the balance of the year from a volume standpoint?

[Roy Armes:]

Well, you know Brett, I feel pretty good about the volume coming out of our Asia operation. I think if you look at what they’re doing there, they’re both from the TBR category which is not only just domestic market but they’re export, which we have been taking a lot of products from there. We've been expanding. We've had four expansions in the last five years. We've had four expansions in our PCR category. The last four years and that's more of a premium mix for us, overall. I think we can expect from what I'm seeing in the business to continue to perform favorably for the remaining part of the year. Now, there are also some things that the government has put in place to try to... They've had a lot of things in place to cool down the economy, the last year or so and we are expecting that they will start to loosen up some of their policies that they've put in place, to allow the economy to grow a little bit more. And as a result of that, we could benefit from that as well. We feel confident about our continued momentum there.

[Brett Hoselton:]

Do you have any sense that Europe might show some improvement going forward or you think it's going to continue to be weak?

[Roy Armes:]

I think it's going to continue to be weak. I think the Euro Zone and the debt crisis, there's still some lingering effects of that. I'm just not sure that at this point in time there is enough confidence to believe that they're going to get out of it in a short period of time. Although, they're making some of the moves to try to rectify that but time's going to tell whether it is going to prove out or not. We're anticipating not a huge recovery there, a slow recovery at best for this year.

[Bradley Hughes:]

I think, Brett, in Europe, I think about it like our PCR business in China. That, given where we are starting from and the initiatives that we have underway, we are somewhat immune to what is going on in the market and have been growing fairly consistently. Much more rapidly than the market, on the light vehicle market tire business in China. In Europe, now with the Serbia facility and our ability to compete in other parts of the market and expand our reach into Russia with a very competitive cost footprint, that even in that soft market we are going to have a chance to do something. As we get Serbia up and running, to some extent a little bit without regard to everything that's happening in the market over there.

[Curtis Schneekloth:]

Brett, it's Curtis, here. Let me add a little more color to what Brad was just talking about. In Serbia as we talked about the last time, we'll start by producing non-strategic brands at that facility and we'll begin to ramp that up and sell those tires out and transition it to more strategic Cooper brands over a period of time. So we have a lot of opportunity with that facility and with the plans we have there. In China we have made a lot of investments in capacity over the years and we continue to invest in the distribution network. So, we are setting up for expansion there also. Quarter-to-quarter, it's a little difficult to tell you exactly how it will look in terms of a growth rate. It's going to be somewhat dependent on what happens with the Chinese government and how they handle the economy there. But we feel very strongly that we have a good set-up that we are going to be able to leverage in the future, in terms of growth for China and Europe.

[Brett Hoselton:]

Thank you, gentlemen.

[Curtis Schneekloth:]

Mm-hmm.

[Operator:]

Thank you. (Operator instructions) And we do have a question from the line of Saul Ludwig.

[Curtis Schneekloth:]

This will be our last call, Operator.

[Operator:]

Thank you.

[Saul Ludwig:]

Well, thank you. The issue of tariffs, you know Roy that's coming off in September. When you talk to your customers who buy some product from you, some product from China, do you sense that they're teeing off to change where they are going to get their sourcing come September as this tariff ends? And, what do you think the net effect on your business and profitability, directionally, is going to be once the tariff ends? We know there are a lot of people with a lot of different opinions and no one knows for sure, but what's your best shot as to how that's going to manifest itself?

[Roy Armes:]

I think, Saul, I would say you could add my opinion to all the other ones, I guess and then figure out which one you want to use but I do expect that the tariffs are going to expire, that's one. I think secondly, there will be some pricing pressure. I don't think it's going to be as great as maybe we believed a year ago, because so many things have changed over that period of time. I don't believe that a lot of our customers are going to be running our and wanting to shift immediately to Chinese imported tires. And I think a lot of that has to do with, I think we have become more efficient. I think we have delivered some products and some good value to our customers. And the supply line is something that is much more important to them because a lot of our customers are managing their inventories much tighter now than what they have in the past. And a lot of that has to do with the economy, a lot of it has to do with or some of it has to do with just managing cash and there's a lot of it that has to do with the distribution network that's set-up that gives them more options and alternatives to get tires and not carry the inventory themselves. So I think it's a combination of all of those. And I think our customers aren't going to quickly jump but I think they're probably out there now and going to be looking when the tariffs expire to say, "Hey, what are the opportunities" out there for them and if there are some opportunistic challenges for them, I think some of them may take that. I'm not expecting a huge exodus at that point in time.

[Saul Ludwig:]

So in your own planning as it relates to Cooper Tire, it sounds like the expiration of the tariffs is not expected to be a net-plus or a net-minus to any significant degree?

[Roy Armes:]

I think that's the way we're looking at it, Saul.

[Saul Ludwig:]

Okay.

[Roy Armes:]

Hopefully I'm not wrong, but that's the way we're looking at it.

[Saul Ludwig:]

Second, a quickie. Corporate expense was $7.5 million bucks, that's a lot higher than normal run-rate. Brad, what should we be looking at going forward?

[Bradley Hughes:]

Well, I'd try and steer you towards looking at SG&A in aggregate on a consolidated basis in that 5% to 7% on . . .

[Saul Ludwig:]

I'm looking at the way you report it on a segment basis, so that doesn't help a whole lot.

[Bradley Hughes:]

I understand. That use where you're going to see some of the depreciation and amortization of the ERP investment show up. However, over time that will also be in the business segments directly, as well. So I think it's best to try and look at it and consider it on a consolidated basis and look at it in that 5% to 7% range.

[Roy Armes:]

Well, maybe to help a little bit, Saul, I say help, maybe not so much, but we are investing more in our distribution network in China, and that's one of the reasons that we continue to see some good growth there. At the same time, we're investing in building our brand equity in North America, as well, more so than we have in the past, so there is some more spending there. Then you add the ERP category. So it's mostly in Asia and in North America that we're spending on building the brands and building a distribution network to support the business going forward.

[Saul Ludwig:]

So those expenses, though, are in those segment results. I'm talking about the line that's says corporate expense below the segment earnings, that was the one.

[Bradley Hughes:]

Saul, don't expect that there's going to be any significant increase from that level as we go through the year.

[Saul Ludwig:]

Gotcha. And one final question. There was a previous question about productivity gains, and there's a lack of wanting to quantify anything, but let me put it in this context. In the first quarter you had the $28 million negative for manufacturing, of which $29 million related to the labor situation. So you had a $1 million plus from manufacturing savings. Directionally, without quantifying it, should that positive number tend to increase as we go through this year?

[Roy Armes:]

I would think that's a good assumption, Saul.

[Saul Ludwig:]

Great. Thank you very much guys.

[Operator:]

Thank you. I'll return the floor for closing remarks.

[Roy Armes:]

Yes, I'd just like to summarize a few things here. We feel really good about this quarter, with our sales being up, operating profit up 50%, earnings per share up 36%, cash position pretty strong, even after investing in Serbia. We've resolved the work stoppage, purchased some assets in Serbia, began production there. Our North American sales have increased. Our operating profit, even including the impact of work stoppage, has increased. We had a record first quarter in International Group of 11% growth, 8% in the volume growth, and 65% operating profit growth, which leads us to our eleventh consecutive profitable quarter since revamping our business model or since introducing our strategic plan. And we've been very successful with new product introductions in that premium segment, both in the UHP, as well as the light truck and SUV, which has resulted in some very good volume and that premium makes for a shift to a premium mix. And we've been very, very satisfied with our RMT sales and growth. And last, but not least, our business model has proven to be resilient in this volatile market, in this volatile economic market, and that gives us a lot of confidence that we can continue to move through this economic recovery in a strong position and come out of it even in a stronger position, particularly as the demand starts to pick up. I think we feel very confident about how we can succeed and how we can perform in that kind of environment. So thanks again for your time and attention today, and looking forward to talking to you next quarter.

[Operator:]

Thank you for your participation in today's Cooper Tire First Quarter 2012 Results Conference Call. You may now disconnect. Copyright policy