Cooper Tire & Rubber Earnings Call NUGGETS: U.S. Share Trends, Volume Gains vs. The Industry

On Thursday, Cooper Tire & Rubber Company (NYSE:CTB) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

U.S. Share Trends

Ravi Shanker – Morgan Stanley: Roy, if I can start with how you ended your remarks, just a question on the U.S., your share trends in recent quarters have been most impressive, so can you just help us understand what’s driving that, are you seeing outperformance in broadline versus other segments, what’s causing the share pickup in your branded segment, and what’s the pricing environment like overall?

A Closer Look: Cooper Tire & Rubber Earnings Cheat Sheet>>

Roy Armes – Chairman, President and CEO: Ravi I think there is probably two or three things describing it. First of all, I think we’ve got a pretty impressive product portfolio that we’ve been developing over the last few years and we started introducing this year. Particularly if you look at the UHP category and more of the premium tires, we’ve had some pretty good growth in that area, so I think that would be the first thing. I think the second thing is we do have a pretty loyal customer base that is very interested in our products because I think they feel that we deliver the quality and the performance and the value that they are looking for. So, that loyalty is really helping us well. If you look at the overall industry, while the premium segment has performed well in this economic environment, we see now the broadline category starting to perform or the demand starting to increase a little better than what it’s been over the last couple of years. If you recall there were some concerns about our Company because the broadline was – we had lot exposure there that during so months that was down double digits, the broadline category and the value segment was down double digits and it’s starting to come back a little bit now, which I think some of this pent-up demand is starting to flow through, and when it does from a volume standpoint that’s still a sweet spot. Well, we said, we’re not walking away from the segment and we’re going to provide some very good value in that segment. I think all of those items have really helped us.

Ravi Shanker – Morgan Stanley: Understood. I’m sorry if I missed this and you said during the call, but did you see what broadline was versus the industry?

Roy Armes – Chairman, President and CEO: Ravi we outperformed the industry in all of the reported segments, including broadline.

Ravi Shanker – Morgan Stanley: Finally, the international pricing is probably a little bit of the reversal what’s happening in the U.S. Can you help us understand, how much of this truck (trail) versus some kind of temporary thing? Is there any read between what’s going on pricing wise in China and what we might see in the U.S. post the expiry of the tariff?

Roy Armes – Chairman, President and CEO: Well, I think first of all I’m going to let Brad answer part of this, but I’d start off saying that pricing has been a challenge in Asia, specifically China because of the slowdown in their economy and it’s still growth there, but not as much growth as we’ve seen in the past. I think the government has implemented some stimulus program, they’ve done some things with interest rates, I think they’re doing things to try the peed up the economy given where we’ve been over this past year. But I think that’s going to be a little bit of a lag. It’s going to be more later this year or into 2013. As a result of that, I think we’ll see that economy starting to pick backup, which we’re in a very pretty position to take advantage of. So, the pricing has been a little bit of a challenge in China. If you look at the U.S., I think what we’re seeing is pricing has still maintained some pretty good discipline. There are promotions and some isolated cases where it looks like there is some incentive to try to drive more volume in the industry. But I think, overall, it still has remained fairly disciplined and we’ll have to see going forward how that maintained itself. Now, if you look at the ITC, as you mentioned, we have a couple of factors there, one, we are anticipating some pricing pressure from when the ITC expire – the tariffs expire. On the same token, we have a few million tires that we bring into the U.S. from China that would also benefit from that tariff expiring and would help us on that side. So, the net effect, we are believing that we can still manage this. Will there be some pricing pressure, and we believe so. Will there be some volume pressure, yes. I think from our standpoint, if we lose some volume, it’s going to be more in that lower end category than it will be in the higher end. It gives us an opportunity to ship some of our mix as a result of that expiration.

Brad Hughes – VP and CFO: Ravi, the only thing that I’d add to Roy’s comments is that in Asia, China specifically, and I think we’ve noted this before as raw material prices were increasing and at the similar situation when they’re decreasing that market reacts a lot more quickly with price adjustments to what’s happening in the raw material market both upwards and downwards. To a degree, that’s what we are experiencing. What the industry is experiencing over there right now if there is a more rapid response to some of the changes in the raw material costs.

Ravi Shanker – Morgan Stanley: If I can sneak a quick one in Roy, any thoughts on the new tire labeling standards that go into effect in Europe in November. You’re seeing some other tire makers show AA rated tires at least on a concept or a prototype basis, where do you guys think you’ll stack up?

Roy Armes – Chairman, President and CEO: Well, we’re not going to talk about the grading or what our grading is, but we feel very confident about us being in a competitive position with tire labeling.

Volume Gains vs. The Industry

John Murphy – Merrill Lynch: First question, as we look at your volume gains versus the industry, I mean they have been, but just curious are you seeing the same kind of sell-through to the end consumer. Just trying to figure out if there is any inventory build-up at your distributors or your dealers?

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

Brad Hughes – VP and CFO: John, I’d just add I don’t think there is anything unique about our inventory position in the channels relative to the industry in general. I think we’re about similar and so I don’t think that that’s any part of it. So, I do think that what you’re seeing in terms of our performance versus the market is similar to what’s happening on the sell through.

John Murphy – Merrill Lynch: Second question on the distribution network, you guys highlighted that as a reason for the SG&A increasing and Cooper has sort of historically had a very strong and are doing better relationship with their distributors than a lot of other tire manufacturers. Is there a renewed emphasis to really rebuilding that very tight relationship and could we expect continued costs and hopefully benefits that would come with that in the future?

Roy Armes – Chairman, President and CEO: I think what I would say John is that we have a brand investment in our house brands, Cooper specifically and some mastercraft where we are stepping up the investment to build the awareness, certainly we’re underrepresented in certain regions of the U.S. specifically and that gives us opportunities to grow in those areas, so we are investing there. We are also investing in distribution, particularly on our passenger car tires and like or SUV, light truck tires in China to build distribution there, that’s too or the bigger investments that we’ve had and is it a renewed interest? I’d say we’re probably putting a little more emphasis on it now with our product portfolio being as strong as it is and really helping our dealers and our customers to succeed even more if we can build the house brands to a different level of awareness.

John Murphy – Merrill Lynch: On the ERP system as you guys are implementing this, I’m just curious what kind of cost saves you’d expect in the future and how far along you are in that implementation, you’ve been talking about it for a while, just trying to understand what inning you are in there?

Brad Hughes – VP and CFO: We’re in the very early stages of the implementation; we’ve done a couple of smaller deployments. It will take a few years before we’ve completed fully the deployment process globally, and at that point is when you’re going to start to see the meaningful implication, this is going to make us a lot more effective and efficient company in the way we operate globally. We’re doing this in what we think is the right way to make sure that we protect our business and gain the long-term benefits from ERP by implementing it over a period of years.

John Murphy – Merrill Lynch: Then just two housekeeping issues. The Willamette index you mentioned was going to be down 5% to 10% I think sequentially. Do you have a year-over-year number for that?

Roy Armes – Chairman, President and CEO: We didn’t communicate that. That’s we can pull from the chart and we’ll let you know what that is.

John Murphy – Merrill Lynch: I can get that from the chart. Then the second thing is how many tires are you importing from China really sort of on LTM basis or run rate basis annually?

Brad Hughes – VP and CFO: John it’s been in the neighborhood of 2.5 million to 3.5 million tires.