Feb 25, 2011
Executives
Curtis Schneekloth – Director, IR Roy Armes – Chairman, CEO and President Brad Hughes – CFO
Analysts
John Murphy – Bank of America Merrill Lynch Pat Nolan – Deutsche Bank Securities Himanshu Patel – JP Morgan Brett Hoselton – KeyBanc Capital Markets Ravi Shanker – Morgan Stanley Saul Ludwig – KeyBanc Capital Markets
Operator
Good morning. My name is Patrick, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Cooper Tire fourth quarter and year-end results conference call. All lines have been placed on mute to prevent any background noise.
After the speaker’s remarks, there will be a question-and-answer session. (Operator instructions) Thank you.
I like to turn the call over to Mr. Schneekloth to begin the conference.
Curtis Schneekloth
Good morning everyone. Thanks for joining our call today.
My name is Curtis Schneekloth, and I serve as the company’s Director of Investor Relations. I would like to remind you that during our conversation today, you may hear forward-looking statements related to our financial results and business operations.
Actual results can differ materially from current management forecasts and projections as a result of factors over which the company has no control. Information on these risk factors and additional information on forward-looking statements are included in the press release, and 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 our Chief Financial Officer. In association with the press release which was sent out earlier this morning, we will provide an overview of the company’s second quarter operations and results along with some comments on the full year.
The press release contains a link to a set of slides that are a summary of information, included in the press release and in the 10-K that we will file later today. These slides are intended to help investors and analysts quickly obtain information.
They will not be used as a focus of today’s call. Following our prepared comments, we’ll open the call to participants for a question-and-answer session.
Today’s call will begin with Roy providing an overview of the results. Brad will then provide a discussion on some of the details by segment and comments on other matters.
Roy will then summarize and provide comments on our outlook. We will then have the Q&A session.
Now let me turn the call over to Roy Armes.
Roy Armes
Thanks Curtis and good morning to all. Before I turn our focus to the fourth quarter, I would like to make a couple of comments about the full-year of 2010.
It was a year of solid progress for Cooper, during which we continued to build momentum in growing the business, a factor which is critical for our future success. Highlights and notable events from the year include or included record sales of $3.4 billion, an increase of 21% over the prior year, including growth in unit shipments of 8%.
We are in $2.24 per share for the year, which is more than double $1.02 earnings per share in 2009. The year also had challenges with the most notable being rapidly climbing raw material prices.
I’m proud of the way the Cooper team faced these obstacles, and continued to make improvements that should provide future benefits. Now let me provide an overview of the fourth quarter.
During the second quarter, we had a net income attributable to Cooper Tire & Rubber Company of $0.64 per share or $40 million. This amount includes $1 million of costs related to restructuring charges and compares with the prior year fourth-quarter net income of $39 million or $0.63 per share, which included $12 million of restructuring charges.
Consolidated net sales were a new fourth-quarter record of $920 million, and we saw growth in the top line of 19% as a result of both higher prices and a 2% increase in unit shipments over the prior year. Our ability to grow in unit sales was limited by our capacity and the inventory we had available for sale during the quarter as demand for our products remained strong.
The amount of inventory we had available for sale was impacted by the units we had in transit, held for product launches that will occur in 2011, and inventory mix. Volume in the North American segment was up 0.5% and the International segment grew by 6%.
Within the international segment both Asia and European volumes increased. Operating profit for the fourth quarter was $55 million compared with operating profit of $60 million for the same period last year.
The North American segment’s operating profit was $42 million or 6.3% of net sales, while the international segment operating profit was $19 million or 5.4% of net sales. Results for the total company in the quarter when compared with the prior year were significantly impacted by higher raw material costs of $138 million.
We were able to successfully recover $115 million of these increases with improvements in price and mix. We use LIFO for cash flow assumptions, which mean that the impacts of the changes in the underlying raw material costs are visible faster than if we were on FIFO, or weighted average methodology.
Compared to the prior year, our improved manufacturing results benefited the quarter $10 million. We continued operating at very high utilization rates to meet the strong demand for our products, and will be adding capacity throughout the year similar to the actions we took in 2010, and intend to produce at least 10% more units this year.
The better sales volumes improved operating profit by $8 million. Now I would like to have Brad to provide you with a little more detail on the individual segments and some of the other financial matters.
So, Brad?
Brad Hughes
Thank you Roy. I will start with some detail on the North American Tire Operations.
North American segment sales were $669 million, an 18% increase compared with the fourth quarter of 2009. The top line increase was driven by primarily improved pricing and mix.
Industry demand continues to be healthy supported by improved consumer demand and low levels of inventory across the industry supply chain. In the Unites States replacement market, our shipments of total light vehicle tires increased by 0.4% in the fourth quarter, compared with the same period of 2009.
This was less than the 7.5% increase in light vehicle shipments reported for the total industry by the Rubber Manufacturers Association, or RMA, and also less than the estimated 1.7% increase in total light vehicle shipments for RMA members during the quarter. As Roy mentioned, our ability to increase unit sales was constrained by the inventory that was available for sale during the fourth quarter.
Our business in the commercial truck tire area also continued to be very strong, and for the full year we more than doubled the shipments of commercial tires compared with 2009. This segment’s operating profit was $42 million for the fourth quarter, or 6.3% of net sales.
This is an increase of $3 million compared with the same period in 2009. Favorable pricing and mix of $76 million was more than offset by $86 million of increased raw material costs.
Restructuring charges increased by $11 million, improved manufacturing operations contributed favorably to results by $9 million, as our plants continued to operate at high utilization levels. Higher volumes and other costs positively impacted profits by $3 million.
Products liability charges were $10 million higher than the same period last year, primarily as a result of increased charges on existing reserves. For 2011, we expect that the trend of products liability expense will be consistent with 2010, after adjusting for the Toe case, and higher legal fees as we do not expect any insurance recoveries for fees going forward.
For more information on products liability please refer to our 10k. The underlying raw material index was up approximately 23% on a year-over-year.
As a reference point this is also 13% increase from the third quarter. I will remind you that the last-in first-out, or LIFO accounting method, which we use United States charges the most recent costs against sales impacting profits more quickly, than other inventory accounting methods.
North American segment profits benefited in the fourth quarter of 2009 from the liquidation of inventory that was valued at lower historical cost, which in turn increased operating profit by $16 million. We continue to be pleased with the improvements we are seeing across our operations, the manufacturing facilities have done an excellent job of adjusting to the new, higher volumes that they continue to search out – and they continue to search out ways to reduce their costs.
The company’s selling, general and administrative costs were 6.1% of net sales during the quarter, in line with our target of 6% to 7%. Other costs were slightly improved by $2 million.
This includes lower supply chain costs. We have implemented changes to reduce our costs, while maintaining excellent service to our customers.
Similar to the rest of the industry, we have been challenged to meet strong demand for our tires over the last year. We are producing more tires to be able to address this situation, but it will likely take several quarters before we’re back to our traditional fill rates.
We do believe that on balance, we are among the industry leaders regarding fill rates. Let me summarize the operating profit walk forward to compare the fourth quarter of 2010 with the fourth quarter of 2009.
The total increase in North American operating profit was $3 million, and the key drivers were $76 million from improved pricing mix, $11 million from lower restructuring costs, $9 million in lower manufacturing costs, $1 million from higher volumes, and all other costs were lower by $2 million. These positive were offset by $86 million in higher raw material costs, including the prior year fourth-quarter LIFO benefit, and $10 million in higher products liability cost.
Now turning to our International Tire Operations. The international segment had net sales of $341 million, up 25% from the fourth quarter of 2009.
This was driven by price and mix improvements and higher volumes. Increased sales volumes of 11% for Asia included intercompany sales that support both European and North American operations.
European volumes also increased by 6%. This segment’s operating profit decreased by $8 million from $27 million in the fourth quarter of 2009, to $19 million in the fourth quarter of 2010.
Favorable pricing mix of $38 million were more than offset by higher raw material costs of $52 million. Higher volumes contributed $7 million, manufacturing was slightly better than the prior year by about $1 million, other costs were about $2 million higher.
We are excited about the direction of the international operations, and continue to anticipate that they could eventually account for 50% of our sales. They of course, face many of the same challenges as our North American operations.
Let me provide you with the key underlying factors in the form of an operating result walk-forward for the International operations, comparing fourth quarter results in 2010 with 2009. The net decline was $8 million.
Improved pricing mix contributed $38 million, $7 million came from higher volume, offset by $52 million from higher raw material costs, and all other costs were about $1 million. I would now like to cover a few other items starting with income tax accounting.
Income tax expense recorded in the fourth quarter from continuing operation was approximately $1 million, and was computed using the actual tax rates for various jurisdictions. This tax expense also included discrete items during the quarter.
More detail on our tax situation is available in our Form 10-K that will be filled with the SEC. Our taxes and related accounting continue to be affected by tax holidays in certain jurisdictions, the normal reversal of some deferred tax assets and the valuation allowance we carry primarily in the US against certain of these deferred tax assets.
As we continue to generate taxable income, we will benefit from allowable tax holidays and tax credits in addition to using other tax strategies to minimize tax expense and taxes payable as appropriate. For the year, our effective tax rate before discrete items was 13%, an amount slightly below the previously estimated range of 15% to 20%.
The amount of taxes in the fourth quarter was lower than initially anticipated due to higher raw material costs in the quarter. At this time we believe that the company’s full year 2011 effective tax rate will be in the 20% to 30% range.
In projecting this annual effective rate, it is important to realize that it is based on forecasted earnings by tax jurisdiction, some of which are still affected by tax holidays or tax credits. In conjunction with the company’s ongoing review of its actual results and anticipated future earnings, the company reassesses the possibility of releasing the valuation allowance currently in place on its US deferred tax assets.
Based upon this assessment, the release of the vast majority of the valuation allowance is likely to occur during 2011. The required accounting for the release will involve significant tax amounts, and it will impact earnings but not cash in the quarter in which it is deemed appropriate to release the reserve.
At December 31, the US valuation allowance was approximately $184 million. We have $43 million of anticipated tax refund receivables recorded at December 31, 2010.
A portion of these relate to the 10-year specified liability loss carry backs. We anticipate collecting or applying the taxes payable, 30 million of these receivables in 2011.
The collection of the remaining $13 million is expected to occur upon completion of the standard IRS audit currently in progress likely in 2012. A couple of comments about cash flow, net cash provided by continuing operations was $108 million during the fourth quarter.
The generation of cash during the quarter was driven primarily by operating profits, and the collection of accounts receivable balances that were generated during the third quarter, our peak selling season. Balance sheet highlight include cash and cash equivalents of $413 million at December 31, 2010.
These were $14 million lower than December 31, 2009, however an increase of $66 million from September 30, 2010. The lower balance compared with last year is driven primarily by increased levels of accounts receivable, and inventory as a result of higher material costs, partially offset by higher accounts payable balances.
As noted, accounts receivable and notes receivable of $484 million increased from the December 31, 2009 balances, which were $367 million. The increases related primarily to the growth in sales and increased selling prices.
Inventory balances have grown since last year, but units in finished goods inventory remained relatively low as demand has remained strong. At December 31, 2010, inventory was $387 million compared with $298 million at December 31, 2009.
Almost all of the current notes payable balance of $147 million relates to partially owned ventures in the People’s Republic of China, whose operations are included in our consolidated balance sheet. These are typically refinanced as they become due within ongoing goal of converting a portion to longer term instruments.
Refinancing of these balances continues on plan. Other long-term liabilities increased to $180 million from $146 million at December 31, 2009, primarily as a result of the increase in product liability reserves.
Now, liquidity, we have two primary parent company credit lines to provide sources of liquidity. The first is a $200 million asset-backed or revolving credit facility, which expires in November 2012.
We also have an accounts receivable securitization program for up to an additional $125 million that we have extended and now will expire in August 2011. Both facilities remain undrawn with approximately $40 million of the lines used to back letters of credit; the amount that can be borrowed is subject to the availability of working capital that can be pledged.
These two credit facilities do not contain any significant financial covenants until availability is reduced to specified levels. Additionally, we have secured annually renewable credit lines in Asia, of which approximately $200 million remains available.
These credit lines do not contain material financial covenants. All related borrowings are due within one year, and are included on notes payable on the balance sheet.
At this point, it is probably appropriate to acknowledge that the company’s debt credit rating was increased by Moody’s from B2 to B1 about a week ago, and we are happy with the progress we continue to make in that area. Capital expenditures, CapEx, in the fourth quarter of 2010 was $45 million.
We currently believe capital expenditures for 2011 will range from $150 million to $170 million, including investments in our ERP systems. This is slightly higher than previous years, and reflects the investments in the ERP system, and in acceleration of capacity actions.
Spending will still be relatively close to depreciation levels. I will now turn it back over to Roy.
Roy Armes
Thanks Brad. Before taking your questions, let me give you some other thoughts about the quarter and our outlook.
During December, we announced that we are increasing our ownership levels at the manufacturing operations, and the sales and marketing organization in Mexico. This investment will increase the level of control we have and fits well with our long-term strategic plan.
We also announced the hiring of Chris Ostrander, who has joined us as president of North American operations, and we are excited about having the talent and energy Chris brings to Cooper, and look forward to his contributions as a member of the executive committee here. We implemented a February 1 price increase of 2.5% that was targeted to help offset raw material prices.
Unfortunately it was not sufficient to keep pace with the continued increases in natural rubber and other commodities. Natural rubber hit new historical highs early in 2011, and has continued to be elevated.
To put this in perspective, the spot price for natural rubber increased over 75% between September 30, 2010 and January of 2011, a period of just four months. Raw material costs have increased by between 15% and 20% sequentially from the fourth quarter of 2010 to the first quarter of 2011.
Now we expect raw material costs to remain at elevated levels after the fourth quarter, however, the rate of increase should begin to slow during the second quarter. In the US, we announced a March 15 price increase for a weighted average of between 8% and 9% with different pricing by product as a response to these rising costs.
Other regions where we participate have different mechanisms for adjusting prices. For example, in China, we have recently been implementing pricing actions, almost every month.
While we dislike the idea of having to increase prices this rapidly, it has become a necessity. Our growth rates in the future will vary by region as economic conditions differ around the world, but we expect demand for the company’s products will remain strong.
Actual sales growth may be limited by available capacity, although as mentioned we intend to produce 10% more units globally in 2011 than in 2010. A portion of this production is intended to support increased inventory levels to help meet customer service expectations.
And in the more mature markets, including the US, we expect that the industry will grow around historic rates of between 2% and 3%. We expect that China and other developing regions can grow in the high single or low double digit range, unless there is significant actions taken by governments that events that occur – that will slow down the economies.
2011, it is going to be a year I think with a record number of new product launches for Cooper. These include the new UHP products that will be launched in the US, Europe and Asia.
We also have a replacement for the very popular Discoverer ATR that is called the Discoverer AT3. The initial feedback on these products has been extremely positive, and highlights our ability to bring a great level of value to our dealers and the consumer.
And in addition, we will be launching new commercial tire products that should boost what has already been impressive growth in that product category. Now to summarize, we had a very good year ending with solid profits for the fourth quarter during the fourth quarter.
The company is starting to see the benefits of the changes made in the recent years, and we remain optimistic about opportunities to further improve results. We will continue analyzing how we best deploy our capital to benefit shareholders with an emphasis on ways to grow profitably.
While raw materials and other challenges remain significant in the tire industry, I believe the team here at Cooper is well positioned to succeed, and even with these challenges we are optimistic about our business and direction and the results that we can deliver. Now that does conclude our prepared remarks or comments.
What we would like to do now is open it up for questions and answers, and we thank everybody for attending the conference call. So can we open it up operator to questions?
Operator
John Murphy - Bank of America Merrill Lynch
Good morning guys. It is John Murphy at BoA.
How are you?
Roy Armes
Hi John.
Brad Hughes
Hi John, how are you?
John Murphy - Bank of America Merrill Lynch
Just a question on the split between pricing and mix in the quarter, obviously volumes were slightly positive, but the big upside in the top line was driven by good pricing mix. And I just wondered – you mentioned the upside in sales, and whether that was dominated by your price hikes, and much of it was mix, and how big an impact the commercial vehicle business played in both North America and Europe?
Curtis Schneekloth
It is Curtis here John. The impact was about to parts price to one part mix during the quarter with some benefits from volume also.
We don’t break out the commercial truck product mix impact for you, but it was helpful during the quarter. It remains a smaller part of the business in North America, but it is a very significant part of the business in international.
I believe Roy or Brad commented that we were able to double the shipments that we had in commercial or commercial truck shipments in 2010 versus 2009. So, we are growing rapidly there, but it remains a smaller part of the North American business.
John Murphy - Bank of America Merrill Lynch
Okay, and then maybe a second question on price, I mean obviously you are executing these price hikes fairly rapidly in North America, I was just wondering if you can run us through the mechanics of how many more price hikes, or how quickly you can institute these price hikes in response to rising raw material costs. Because it sounds like they are coming a lot more rapidly than they have historically.
I mean how does that get executed down to the dealer channel?
Curtis Schneekloth
It is Curtis again, we are not going to go too far out in our conversation beyond the price hikes we have out there. We will have to see what happens with raw materials, and what is happening with the market.
We do have the February 1 price increase of 2.5% in North America on light vehicle, and we followed that with the March 15 increase of an average of between 8% and 9%, and the pricing on that will vary by product. The frequency of these historically has been 3 to 4 year that have gone up, but we will have to monitor what happens going forward in terms of both raw materials and the market.
Roy Armes
And I think John you have to think about with our LIFO system we see these very quickly. At the same token, it makes it – we also evaluate how big of an increase those raw materials are because we’re offsetting some of the increases with our improved operations, but when it gets to a point where you can’t do that then we have got to make a quick decision on getting that out there.
I think we have reacted fairly quickly. The thing we have underestimated is how fast the raw material prices were going up in such a short period of time.
But I think we have responded very quickly to this.
John Murphy - Bank of America Merrill Lynch
And then just lastly Roy, you mentioned the need to add some capacity in response to your expectation for units being up about 10% in 2011 for Cooper, I was just wondering how that capacity will be added, is that actually putting plant and equipment in place, or is that human capital, or human capital capacity where you have to add workers, just trying to understand how that will get layered on in response to the rise in units.
Roy Armes
Yes, the first thing we did John to leverage our current facilities was we had some flexibility to increase the mold levels within our current operation. So we did that first.
As you know, last year also we took Texarkana to a 24 x 7 operation, which helped, and then we started increasing mold levels at each of the facilities, and that also helped. We doubled our capacity in Mexico, or doubled our production in Mexico this past year.
And at the same time in the mid year to the latter part of 2010, we also approved some capital investment to add equipment in some of our existing facility. We expanded Tupelo to get additional mixing capacity there, while at the same time we were leveraging some of the equipment we had in Albany, and shifting that to other operations to be able to also increase the – increase capacity there.
So we were able to – those are some of the things that we’re doing. The other thing that we’re doing, as you know, we purchased additional ownership in Mexico, which also give us access to additional capacity.
And we’re right now currently still exploring opportunities of acquisitions, or acquisitions of either companies or facilities, but we’re really not in a position to talk about those yet, but they become still a very good part of our strategy.
John Murphy - Bank of America Merrill Lynch
Okay, and then just lastly, Brad, the 20% to 30% guidance that you gave us for the tax rate for full year 2011, does that include, obviously I think that includes the release of the US allowance, is that correct?
Brad Hughes
Yes. I mean when the tax valuation allowance release occurs it is going to be a big one time event.
The 20% to 30%, you can think about the results excluding that or including it, so either way the 20% to 30% is a good representative way to think about what the tax rate is going to be. But it probably would be easiest to think about that without clouding it with the tax valuation release.
John Murphy - Bank of America Merrill Lynch
But that should be ongoing rate that we should use for 2011?
Brad Hughes
Yes, exactly.
John Murphy - Bank of America Merrill Lynch
Fantastic. Thank you very much guys.
Roy Armes
Thanks John.
Operator
Our next question comes from the line of Rod Lache.
Pat Nolan - Deutsche Bank Securities
Good morning guys. It is Pat Nolan in for Rod.
Roy Armes
Good morning Pat.
Brad Hughes
Hi Pat.
Pat Nolan - Deutsche Bank Securities
Just a couple of questions, just first on the North American business, the breakdown between price and mix was helpful, but as we move into the first quarter, is there anything seasonal about the mix that we can overlay basically, what revenue per unit was in the fourth quarter and overlay the price increases you guys have announced on top of that?
Roy Armes
The seasonality…
Curtis Schneekloth
I don’t think there is anything there.
Roy Armes
There is nothing seasonally in the mix that I would look to specifically from the fourth quarter to the first quarter, generally though we expect our mix to continue to add to our bottom line, because we are able to produce more proportionally the light truck and the SUV tires and also the RMT tires, and the mix will be growing as a proportion of the overall tires, plus the new UHP launch this year should really help things with mix, and the discoverer AT3 is also another would be on the upper end of the mix.
Pat Nolan - Deutsche Bank Securities
And when we think about the 8% to 9% price increase implemented for March 1, will the full impact be seen in the second quarter or will it take some of it into the third quarter to get the full impact.
Roy Armes
We implement on March 15 with that one Pat, and normally it takes us some time to get that totally dispersed. We will see a big part of that in the second quarter, but not fully in the second quarter, but I think in April, and the mid-part of April is where it really begins to take hold.
Pat Nolan - Deutsche Bank Securities
Got it. And just shifting a little bit to the international business, can you just give us an update on your Chinese business, when we think about the 11% volume growth is that actually a profitable business yet, or is it still operating around breakeven.
And also if you could give us, the 10% increase in production for the North American business is helpful, but can you give us some indication of what you think international shipments are going to look like next year?
Curtis Schneekloth
Just a couple of things there Pat. One is on the international profitability, it has been profitable, including Asia and continues to be profitable.
So that is a part of the business that will continue to be profitable as we go forward than was in the fourth quarter. The 10% increase in volume is a global number, so we are increasing 10% across the global volume, and we are taking actions in every market in which we have production capacity with the exception of the UK at Melksham.
So, in Asia, in Mexico and in the US we are increasing capacity at all of our facilities. And in aggregate, including the actions that we started to take in 2010 from which we will realize the full benefit in 2011, we will be able to produce 10% more units than we did a year ago.
Roy Armes
Now, separating that out a little bit Pat the – we are looking at in our international operation of doing, particularly in Asia, a high single digit to double-digit growth there. And in the US getting more back to historical growth, which is in that 1% to 3% range typically.
But overall, we’re still planning to outperform the market in 2011.
Pat Nolan - Deutsche Bank Securities
And just one last quick one, on the SG&A with given the number of new products that you are going to be launching next year, could you help us frame what kind of SG&A is reasonable to expect next year, I assume there is some higher advertising?
Roy Armes
I still think that the target range that we have communicated of 6% to 7% is appropriate.
Pat Nolan - Deutsche Bank Securities
Okay. Thanks very much guys.
Brad Hughes
Just to clarify Roy’s comment, the historical growth rate of 1% to 3% in the US would be an industry growth rate, and we intend to outpace that during the year.
Operator
Your next question comes from Himanshu Patel.
Himanshu Patel – JP Morgan
Hi, good morning guys.
Roy Armes
Hi.
Himanshu Patel – JP Morgan
Few questions, I appreciate slide five. You know, just could you elaborate a little bit on the commercial truck business, I mean it looks like you outgrew the market by kind of 5X in full year 2010, I know you mentioned it is a modest portion of the US business, but could you dimension it a little bit better, is there any kind of sense you can give us as to how big that business is right now as a percentage of North American volumes or revenues, or however maybe you could characterize that?
Roy Armes
Himanshu, it is becoming an increasingly important part of our business in North America in particular, obviously in Asia it has been to this point. It still represents less than 10% of our business in North America.
But it is growing rapidly, and it is growing faster than the market and faster than other parts of our business. But at this point it is still less than 10% of the total.
Himanshu Patel – JP Morgan
Less than 10% of volumes or revenue?
Roy Armes
I am talking about volumes at this point.
Himanshu Patel – JP Morgan
Okay. Okay, second question on pricing elasticity, just given the magnitude of price hikes the industry is implementing now, does this lead to kind of accelerated downshifting on mix, and in some ways I kind of wonder if that actually helps you guys as people trade down from other brands perhaps into Cooper, I’m just curious Roy if you have a got view on that, have you seen any of that, or maybe are we set to see more of that as we progress through some of these heavy price hikes in the first-half.
Roy Armes
Yes, I think the question is a good one Himanshu, particularly when you think about what kind of tolerance is still out there for some of these price increases. Then you add to that oil prices, gas prices going up and maybe the concern of miles driven coming down, but you also have we still believe some continued pent-up demand out there with low inventories and that sort of thing, but we are definitely seeing where consumers are shifting down into a more value category of products, and it does hit our sweet spot.
And the good news is that we have been able to develop products over the last few years that are really strengthening the sweet spot. Even, not only that mid-tier group, but even a little bit higher than that mid-tier group.
We have got a very broad range that is covering that, and I think we are seeing that as we speak and we are benefiting from it because of where we are positioned.
Himanshu Patel – JP Morgan
Okay, couple of housekeeping items, firstly Brad, I just wanted to follow up on taxes, the two items, I think you mentioned $30 million of tax receivables that you anticipate in 2011, would those be discrete tax items that are not part of your effective tax rate guidance?
Brad Hughes
Correct.
Himanshu Patel – JP Morgan
And then second question is I guess I’m still a little bit confused, I presume once the valuation allowance is removed, your effective tax rate actually…
Brad Hughes
I think that is a good clarification and I’m not sure I got to the heart of John’s question. But the 20% to 30% is excluding the tax valuation allowance release.
It is going to have a significant one-time effect on profit, but the 20% to 30% is set aside the valuation allowance to 20% to 30% of the guidance.
Himanshu Patel – JP Morgan
Okay, I guess just the bigger question is, I understand there is a one-time impact that quarter, but after you passed that quarter, presumably not having a valuation allowance in place against your US DTAs [ph] triggers a higher ongoing effective tax rate. So what happens after that one time event, what is kind of the sort of run rate on taxes if you will after…
Brad Hughes
We are expecting it to be 20% to 30%. It is not going to have a material effect on the ongoing tax rate beyond the release.
Himanshu Patel – JP Morgan
Okay, understood. Could you go back and reexplain the product liability changes, I don’t know if I missed it or not, but it sounded like there was something material there in sort of how – what sort of coverage you have for 2011 versus 2010 on that?
Roy Armes
Yes, let me elaborate a little bit. As we said in the notes, we expect the 2011 costs to trend consistently with what we have seen through 2010 after you make two adjustments.
Firstly, you need to back out the one big case that we had in the first quarter, the Toe case, where we had an adverse verdict, and that was required to reserve increase of about $22 million. Secondly, we have historically been able to recover some of our legal fees through some older insurance policies, and we are not anticipating that we will be able to continue to do that going forward.
So that was worth about $5.6 million in 2010. It is important that when you are thinking about this that you look at the product liability expenses over a longer period of time.
So, for example, over the year as opposed to a quarter because in any given quarter, unique circumstances within a given case or a given reserve requirement can cause there to be variability in quarterly results. So looking at it over a longer period of time, and then refer to the 10-K where, I think you’ll find even more information with regard to product liability expense.
Himanshu Patel – JP Morgan
So, I mean – in a nutshell is it sort of 16 million lower cost in 2011 versus 2010?
Roy Armes
Those are the two adjustments that we are suggesting that you need to look at that were included in the 2010 results, and then you just need to look at overall what has been happening with the liability expense from year to year.
Himanshu Patel – JP Morgan
Okay, understood. And I guess last and final question, it looked like the actual expensing of raw materials in the fourth quarter was a bit higher than what the – your internal index would have sort of calculated or imputed, I wonder if you could shed some color on what happened there?
Roy Armes
Yes, just to reinforce a couple of things, everybody knows that we are on LIFO, and that has implications to the amount of cost that we actually incur in a quarter. It is intended to accelerate costs, and it does.
So there may be three things to talk about there. One is the fact that a year ago in the fourth quarter, we actually benefited, as our inventories got to historically low levels, we were digging into historical layers that were very low cost.
And that gave us about $16 million benefit in 2009 that didn’t repeat in 2010. In addition to that, if you look at (inaudible) as a surrogate for the movement in terms of natural rubber, which was the biggest mover during the quarter, and this isn’t exactly correlated to our raw material costs, but it gives you a sense of how quickly things were moving.
Natural rubber prices increased by 5% during October, and incremental 10% in November, and then a further 15% in December. So we end up picking up the very latest cost.
That is the way that we end up meeting the value, the raw materials that we are consuming in a particular quarter, and they moved relatively quickly during that quarter. In addition, we actually purchased a lot of natural rubber in the fourth quarter, which now being able play Monday morning quarterback did turn out to be a very beneficial decision, as prices continued to increase during the first quarter.
And there is a portion of the cost associated with the amount of natural rubber that we bought in the fourth quarter that we also pick up in the cost of goods sold during the quarter. We don’t break that out, but it was another factor that affected our raw material costs in the fourth quarter.
Himanshu Patel – JP Morgan
So, I mean I guess the corollary to that last point is your raw materials P&L expensing in Q1 that should be a little bit more favorable than what your index would otherwise imply, right, because it looks like you guys tried to time the market a little bit, and you got it right in December?
Roy Armes
We can’t say that definitively. At some point in time, there will be a portion of the cost that we incurred in the fourth quarter that will come back to us, but it isn’t necessarily the next quarter.
It depends, there are other factors that determine the timing of that. But at some point in the future we will see the offset to that.
Himanshu Patel – JP Morgan
Okay, great. Thank you very much.
Operator
Our next question comes from Brett Hoselton.
Brett Hoselton - KeyBanc Capital Markets
Hi, good morning gentlemen.
Roy Armes
Hi Brett.
Brad Hughes
Hi Brett.
Brett Hoselton - KeyBanc Capital Markets
Curtis, can you walk us through the index, fourth quarter, and then of course you have given us 15% to 20% in the first quarter, and then my question is as you look at raw material cost today, can you take a guess at what you think the change might be in the second quarter of 2011?
Curtis Schneekloth
I can walk through some of that. The raw material index in the fourth quarter was 205, and for the first quarter we’ve said it will be up somewhere in the range of 15% to 20% sequentially.
So that brings you into a range of 235 to 250. Spot prices have continued to move up since then, but with the different kinds of commodities we buy right now, I can’t give you what the second quarter number is going to be.
We believe that that rate of increase from the first quarter to second-quarter will slow down. We don’t believe it will be as significant as it was from the fourth quarter to the first quarter.
So you will be able to use those numbers to come up with your own estimate of the second quarter. With all the moving parts and the raw material volatility, we typically don’t go out with very specific numbers on that that is second quarter out.
Brett Hoselton - KeyBanc Capital Markets
The primary reasons for the slowdown in the rate of increase, your primary rationale, why would – why do you think it is going to slow down?
Curtis Schneekloth
That would be because natural rubber prices have slowed down in terms of the rate of their increase.
Brett Hoselton - KeyBanc Capital Markets
Okay, and I don’t recall, do you provide, I mean given the significant change in raw material expenses, typically you talk about raw materials as being about 55% of your COGS, I would assume that that has changed to some extent, can you give us a sense as to what the raw materials were in the fourth quarter and what they were in 2010?
Curtis Schneekloth
Well, let us say recent experience Brett is that you are right. The overall index of raw material cost has increased.
It has probably moved from being in the range of 50% to 55% up to more like 60% to 65% in the most recent period. So it has changed a little bit that relationship.
We will see if that is ongoing. I would also note that another contributing factor there is we are making improvements in some of the other cost elements that contribute to the production of a tire.
But the biggest contributor is the change in price for raw materials.
Brett Hoselton - KeyBanc Capital Markets
And then Roy, as you think about some of your capacity actions, I think in the past you have suggested that 2012 you may be able to ship an additional 5% more tires, or produce 5% more tires in 2012, the question is do you think that is still a good number or do you think it could be higher or lower than that?
Roy Armes
Brett right now, first of all I would say that is a good number. At the same time, I would share with you that we are continuing to look for opportunities to expand more capacity, because we do think that with the demand that we have out there that we’re going to need that capacity, but as I said too that I’m not in a position to say anything about that at this point in time, but on an ongoing basis that 5% is still a pretty good number.
Brett Hoselton - KeyBanc Capital Markets
Very good. Thank you very much gentlemen.
Roy Armes
Yes, thanks Brett.
Operator
Your next question comes from the line of Ravi Shanker.
Ravi Shanker - Morgan Stanley
Good morning guys.
Roy Armes
Hi Ravi.
Curtis Schneekloth
Hi Ravi.
Ravi Shanker - Morgan Stanley
Hi. Roy, I think you said a couple of quarters ago that you typically get about 40% of your announced price increases, and you thought that in the rest of 2010 you could probably do a little better than that.
With this elevated pace of pushing through price increases, do you still think you can do 40% or better, or is there going to be some pressure on that going forward?
Roy Armes
Well, I’m going to have Curtis to answer some of that for you Ravi, but first of all I would say that the dynamics certainly have changed here in the last couple of quarters. For example, we went out with a price increase February 1.
We basically went with that price increase across the board, and we got all of that price increase okay. Normally we announce an up to number, and that is where we get somewhere in a 40% to 50%.
Now this 8% to 9%, it is hard to tell right now. But that is really what we’re targeting as an average.
Curtis Schneekloth
Ravi, it is Curtis here, I just wanted to point out to those who don’t follow us quite as closely that there has been a change in the way that price increases are announced, last year we announced up to numbers, and if we gave you a price increase of up to 6%, we would give you that historically we were able to by intent get about 50% of that out. Some quarters would be better, maybe 60%, but 50% to 60% typically.
The February 1 price increase was an across-the-board 2.5%. So it was not an up to number, it was just 2.5% on light vehicle tires in the US.
This price increase that we’re going to have March 15 is yet again different. The weighted average impact of that will be between 8% and 9%.
So every product can have a different price increase, but the weighted average impact when you put them all together will be 8% to 9%. There is no up to involved in that and there will be no achievement.
It will be an impact of 8% to 9%. Did that help you?
Ravi Shanker - Morgan Stanley
Yes, the 8% to 9% is equivalent to an across-the-board 2.5% in terms of impact?
Roy Armes
It is a little bit different because it is an average, as the 2.5% affected all tires, almost all tires exactly the same, but it is an average increase as opposed to an up to.
Ravi Shanker - Morgan Stanley
Got it. And just on the international price increases, Roy, you said you are raising prices almost every month in China, can you give us a little more colored there in terms of what size are these price increases, and what the competitive dynamic there is and how consumers are reacting to that?
Roy Armes
Well, it is – Ravi, it is about 4% to 5%, it has been averaging per month as raw material prices have gone up. That is both on the export product as well as the domestic product that we sell in China.
So it has been averaging about 4% to 5%, and it has been at least in the last part of last year and starting out this year almost month, and I won’t say that it is going to continue every month. But that is exactly what we are doing, because we’re trying to get ahead of this curve, and it is changing so fast there that is but what we have been pushing.
It has been in the 4% to 5% range.
Ravi Shanker - Morgan Stanley
And the market there is able to absorb that because demands are strong?
Roy Armes
So far we have seen some good discipline there. And I think all the companies really need to given these material costs.
Now, at the same time we’re going to step back and look and make sure that it continues to be able to – that market can continue to absorb that. Right now we have been – our demand has still been pretty good there with those price increases.
Ravi Shanker - Morgan Stanley
Very good. Thank you.
Curtis Schneekloth
Operator, we will take one more call.
Operator
Okay. Our last caller in queue, or last question in queue comes from Saul Ludwig.
Saul Ludwig - KeyBanc Capital Markets
Hi, good morning.
Roy Armes
Hi Saul.
Saul Ludwig - KeyBanc Capital Markets
Has there been any change in the natural rubber to synthetic rubber content in your tires, let us say if you go back to the beginning of 2010 to now, have you been able to shift that, and what would you say the mix is now between natural and synthetic in the tire?
Roy Armes
Saul, I don’t know what the specific number is right now. We have had our technology guys working on additional transition from natural to synthetic.
So, yes we have, I don’t have the exact percentage in there, but that has also helped us, as well as we have been doing a lot in reducing in the weight of our tires. So, the usage of the material has helped us at the same time.
And the new designs are incorporating the synthetics, sorry the synthetic conversion. Although it varies from product to product, it is more difficult in bus and truck tires than it is in passenger tires for example.
Saul Ludwig - KeyBanc Capital Markets
Next question, Brad, the notes receivable of $60 million, $70 million whatever, is that the tax thing or is that the other notes receivable that is listed as a current asset, do you get that money?
Brad Hughes
We do get that money. Those are actually in our – in China, those are notes there commonly used as a form of payment, and we have just broken that amount out separately to provide some more clarity and transparency around that.
But they are actively traded notes from banks that serve as a way to pay for products in China.
Saul Ludwig - KeyBanc Capital Markets
Brad Hughes
Yes, I think that is a good way to think about it.
Saul Ludwig - KeyBanc Capital Markets
Okay, secondly, the inventories grew $90 million, was all of that raw material inflation or did you actually put any more units in inventory?
Roy Armes
We put some units in inventory Saul, because really there is a part of it that we have built some additional inventory in the fourth quarter as you saw in the numbers, but we are also continuing to build some on the new products particularly, so we have enough to start this launch in April.
Curtis Schneekloth
Of course, Saul the raw materials don’t contain the finished goods units which you are talking about. Finished goods unit went from 188 million last year to 240 million in terms of the dollars.
The raw materials went from 88 million to 120 million.
Saul Ludwig - KeyBanc Capital Markets
So, is that about a million units, were you able to put about a million units in inventory?
Roy Armes
We don’t disclose those units, but I don’t believe it was that high.
Saul Ludwig - KeyBanc Capital Markets
I mean, if you say from 188 to 240 that is $55 million, a figure around $55 it is high, or something like that, or little less than a million units.
Roy Armes
We are not going to disclose the number of units.
Saul Ludwig - KeyBanc Capital Markets
Okay, and on the tax rate, should we think about the tax rate as being 35% of your US earnings plus, I don’t know 10% of your international earnings, I mean, if we were to think about it in that context, we could hone in each of us on our own estimated tax based on how we are estimating your North American versus your foreign earnings, could you give us the guidance in that context Brad?
Brad Hughes
I prefer not to. I mean we give you guidance for global effective tax rate, and the reason for that is as we have highlighted and as you know, is jurisdiction by jurisdiction, and it is the amount of money that we believe project that we are going to make in each one of those jurisdictions, and then we need to pull that all together, and at this point we would prefer to maintain that global rate.
Saul Ludwig - KeyBanc Capital Markets
But in the US (inaudible) you are paying 35%?
Brad Hughes
In the United States we are a taxpayer now, and we are basically at the full marginal tax rate. So that is included in that range that we provided to you.
Saul Ludwig - KeyBanc Capital Markets
Then the final question Roy, you know, you have had a good run this year when you give us your earnings walk in terms of manufacturing efficiencies. You know, and each quarter was pretty good except the second quarter of last year, but would you expect manufacturing efficiencies to be a profit contributor as we go through this year, or you are at the point now where you have really sucked out the lion’s share of the manufacturing efficiencies that you can get?
Brad Hughes
I think it is a good way to look at it, Saul, is that it will be contributing to our profitability this year because we have increased our volume from last year with the increased molds and the increased utilization rates. All of that is contributing to what we are doing, and we are continuing to increase that production this year, plus keep in mind on a low cost country capacity that we have out there, it has gone from less than 15% a few years ago to this year it is about 36% of our capacity is in low-cost countries.
So, we have got a good mix that is working in our favor. So we are anticipating that it is going to continue to improve in our manufacturing operations, and I don’t think we’ve drained everything out of there, to answer your question.
Saul Ludwig - KeyBanc Capital Markets
I mean, is that a number that could be substantial, 20 million, 30 million bucks?
Brad Hughes
I am not going to talk to the number Saul.
Saul Ludwig - KeyBanc Capital Markets
Okay, but directionally yes. Okay, very good.
Thank you very much guys.
Roy Armes
All right. Thank you.
Curtis Schneekloth
Thanks for your time today.
Roy Armes
Yes, thanks a lot guys.
Operator
And this concludes today’s conference call. You may now disconnect.