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Edited Transcript of CTB earnings conference call or presentation 27-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Cooper Tire & Rubber Co Earnings Call

FINDLAY Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Cooper Tire & Rubber Co earnings conference call or presentation Thursday, April 27, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley E. Hughes

Cooper Tire & Rubber Company - CEO, President and Director

* Ginger M. Jones

Cooper Tire & Rubber Company - CFO and SVP

* Jerry Bialek

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Conference Call Participants

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* Brett David Hoselton

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Christopher Ralph Van Horn

FBR Capital Markets & Co., Research Division - Associate

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* Rod Avraham Lache

Deutsche Bank AG, Research Division - MD and Senior Analyst

* Ryan J. Brinkman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Cooper Tire & Rubber Company's First Quarter 2017 Earnings Call and Webcast. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Jerry Bialek.

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Jerry Bialek, [2]

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Good morning, everyone, and thank you for joining the call today. This is Jerry Bialek, Cooper's Director of Investor Relations and Strategic Planning. And I'm here with our Chief Executive Officer, Brad Hughes; and Ginger Jones, our Chief Financial Officer. During our conversation today, you may hear forward-looking statements related to 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 earnings release we issued earlier this morning and in the company's reports on file with the SEC.

During this call, we'll provide an overview of the company's first quarter 2017 financial and operating results as well as our business outlook. Our earnings release includes a link to a set of slides that summarize information included in the news release and in the 10-Q that will be filed with the SEC later today. Following our prepared remarks, we will open the call to participants for a question-and-answer session. Now, I'll turn the call over to Brad.

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [3]

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Thanks, Jerry, and good morning, everyone. This morning, I'll begin with a brief overview of our first quarter 2017 financial results and then provide an update on Cooper's progress towards our strategic priorities. Finally, I will highlight some of our operational achievements during the quarter. After that, I will turn the call over to Ginger for a more detailed discussion of our first quarter performance, the current business environment and capital allocation.

I will return to present our business outlook for the remainder of the year and then we'll take your questions.

With that, let's get started. Results in the first quarter were driven by raw material costs and related pricing activity. As you know, Cooper is on LIFO in the U.S. and rising raw material costs affect our profit sooner. Our pricing actions in the U.S. in response to these raw material increases occurred later in the quarter, and this drove lower margins for our business. In addition, the timing of price increases and aggressive promotions by competitors as well as weaker sell-out volumes for the whole industry had an impact on our volumes in the U.S. This was partially offset by strong sales in our other regions.

Looking forward, some of these industry dynamics will continue into the second quarter. We believe Cooper is well positioned as we head into the remainder of 2017, as raw materials are beginning to stabilize, price increases are taking hold, and while it is early, we are seeing improving unit order trends in the U.S. market in the second quarter. As a result, we expect U.S. volumes to improve relative to the industry in the second quarter. We also expect margins to improve and we are reaffirming our full year 2017 operating margin guidance at the high end of our 8% to 10% range consolidated operating profit margin range.

Now let's get into the details. Net sales for the period were $643 million, down about 1% compared with the same period last year. Operating profit was $49 million, down $42 million driven by 2 important factors, higher raw material costs of $50 million with an offset of $8 million from our March price increases and mix improvements. Light vehicle volume in the U.S. was down 11.3%, which reduced the profits and had a related effect on manufacturing costs, which were up due to the unobserved costs from managing inventory levels, by lowering output. On the positive side, U.S. TBR unit volume was up 32%, Latin America unit volume was up nearly 16% and International segment unit volume was up 31%. Combined, global unit volume increased by nearly 3% year-over-year.

Ginger will provide more details on the profit changes. The U.S. light vehicle volume declined, I just mentioned, compared with the Rubber Manufacturers Associations reported increase of 1.4% and the total industry increase of 1.1%. Our performance relative to these metrics was primarily due to the timing of competitor price increases, promotional activity as well as overall weaker sell-out volumes for the industry. The industry has been implementing price increases. However, the nature and timing of these increases have been varied, and there have been more promotional activities than we expected, affecting buyer behavior in the market. In the U.S., Cooper implemented price increases on March 1. We went with a straightforward price increase, while competitors used a variety of approaches, including delayed timing, price protection programs and promotions. This variation in approach created a negative short-term volume impact in the first quarter for Cooper as it motivated some customers to buy from the competition ahead of expected price increases. We also saw increased sales channel inventories across the industry, although, we believe inventories for Cooper are in reasonable shape. At $49 million, Cooper ended the first quarter with an operating profit margin of 7.6% of net sales, near the low end of our 8% to 10% guidance. The quarter also included multiple unusual items totaling a net benefit of $12 million. These unusual items include the reversal of preliminary TBR tariffs incurred in 2016, which totaled $22 million. The $22 million benefit of the tariff reversal was partially offset by $7 million of certain direct expenses associated with the damages from a tornado at the lease distribution center in Albany, Georgia, and $3 million to write-off certain assets related to the company's global ERP system implementation. In addition to the direct costs noted above, the tornado damage also affected our distribution to certain customers and markets in the U.S. Although hard to quantify, this also had a negative impact on our first quarter results. Each of these factors will be discussed in more detail later in the call. Diluted earnings per share were $0.57, down from $1.05 a year ago. Cooper continued to return cash to shareholders through our capital allocation plan, which Ginger will discuss in more detail. We remain committed to returning cash to our shareholders, as evidenced by the $300 million share repurchase program recently authorized by our Board, but we will be opportunistic as we implement the purchases. I'm pleased to report that we continue to earn strong returns on our investment, delivering a 16.6% return on invested capital for the trailing 4 quarters. Cooper will continue to execute our strategic plan priorities of driving top line profitable growth, developing a highly competitive cost structure and building even stronger organizational capabilities. Significant changes to our business model, including positive mix transformation, improved speed to market with exciting new products and cost efficiencies have allowed us to structurally improve operating margins over time. These business model improvements will help Cooper to respond and succeed over the longer term, including during periods of rising raw material costs and product pricing fluctuation. We continue to focus on our house brands and on satisfying demand for tires with larger wind diameters and other high-margin features. New product introductions and innovation continue to play a significant role in driving growth for Cooper. We continue to shorten our product development cycle time. In fact, we have reduced it by over 30% since 2011. This capability to respond quickly to customer requirements is a key enabler for our success in Asia where we have achieved over 80% domestic volume growth versus the prior year. In Latin America, tailored product offerings, along with expanded distribution, helped us to achieve broader market penetration in a corresponding year-over-year domestic unit volume increase of 13.2%. In the U.S., we are growing our TBR business and again significantly outperformed the industry with a strong product offering, including new tires, like the SmartWay Verified RM852, which provides long-lasting mileage and improved traction in challenging weather. Our engineers designed this tire with a compound that offers not only lower rolling resistance for fuel economy, but also a deep thread that can stand up to the demands of the road. It showcases the performance for which our Roadmaster tires are known and illustrates how committed we are to continuing to develop tires that meet the needs of our customers. We're leveraging our global manufacturing footprint and near-source supply strategy, while maintaining a focus on reducing costs to secure our value proposition and enhanced profit margins. In the U.S., we are adding more automation at our facilities to strengthen our long-term competitiveness. In Europe, we are investing in new tire building equipment at our Serbia plant to expand capacity and build larger diameter tires, leveraging this cost-effective facility for future growth, not only in Europe, but also in the Middle East and other markets around the world. In Asia, we continue to upgrade plant capabilities and installed equipment to support growth and meet the rigorous requirements of our OE customers.

Now shifting gears to external factors. As we said during our last call, there were significant headwinds and challenges faced in the industry and the company in 2017. These include volatile raw material costs, competitive promotions and product pricing activity, uncertainty over tax and trade policies and the changing global political environment. Our raw material index was sequentially up during the first quarter from 147 in the fourth quarter to 166.3 in the first quarter, as shown on Page 5 of the supplemental slide deck. This was over 26% higher than the 131.5 index for the first quarter of 2016. The raw material index trend during the first quarter was up sequentially in January, February and March. As we look forward, we anticipate that raw material costs will be up modestly in the second quarter, and will stabilize in the second half of the year. After the broad round of industry price increases announced in the first quarter, we've now seen a large competitor announce a new price increase in the U.S. So we expect the product pricing and program activity will continue during the second quarter. Cooper's marked price increase is fully implemented and we will continue to be market-facing, including promotional programs as appropriate. Again, we expect our U.S. unit volume to improve relative to the industry during the second quarter and anticipate that our price increases will deliver more benefit with a full quarter's impact. For the second half of the year, we expect our U.S. unit volume to be in line with the industry. We remain committed to our long-term approach to recover input cost increases in line with the industry. Overall, we believe the global production capacity remains balanced and as the industry continues to shift towards larger rim diameter and more complex tires, capacity for these HVA tires remains below current demand, which supports a rational pricing environment going forward.

Turning to tariffs. On February 22, the United States International Trade Commission determined that there was a no material injury to the U.S. tire industry from TBR tires produced in China and imported into the United States. This means there will be no anti-dumping or countervailing duties on TBR tires from China and that all of the preliminary tariffs collected during this process are being refunded, because all of our TBR tires are presently sourced from China, this ruling is positive for Cooper. As noted in our release, this resulted in a benefit of $22 million in the first quarter of 2017 for the reversal of the tariff cost incurred in 2016.

Now I would like to talk about some of the operational achievements we had in the first quarter. First, I want to congratulate the team at our Tupelo, Mississippi facility. The Rubber Manufacturers Association has again recognized Tupelo with its prestigious Safety and Health Improvement Program award. This is the fourth time in the past 5 years that Tupelo has received this award. The safety and health of our employees is our top priority. In Europe, we had domestic unit volume growth of nearly 20%, reflecting strength in the U.K. market and the success of new products. For example, our new Cooper Zeon 4XS Sport SUV tire placed in the top 2 of 15 tires from leading brands and earned a highly recommended rating in the most recent annual test of summer tires by the very influential ADAC. The ADAC is a respected testing body in Germany, relied upon by many European consumers for guidance on vehicle and tire quality and safety.

In summary, I'm confident in our business model, our team and in our ability to rise to the challenges presented. Now I would like to turn the call over to Ginger for an update on the financial results and capital allocation.

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Ginger M. Jones, Cooper Tire & Rubber Company - CFO and SVP [4]

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Thank you, Brad. I'll start with our first quarter highlights. Net sales were $643 million compared with $650 million in the first quarter of 2016, a decrease of 1%. While overall unit volume increased, there was an overall negative impact of sales during the quarter as Cooper sold fewer units in North America, the region with a typically higher average price per tire. This resulted in a net reduction to sales of $11 million. We also experienced $9 million of negative foreign currency impact. These reductions were partially offset by $13 million of favorable price and mix, primarily attributable to net price increases related to the higher raw material costs. Operating profit was $49 million or 7.6% of sales compared with $91 million or 14% of sales in 2016. First quarter operating profit as compared with the same period in 2016 was impacted by the following factors, which are summarized on Page 6 of the supplemental slide deck. $50 million of unfavorable raw material cost. As a reminder, ongoing tariff costs are included in raw material costs in the quarter when occurred. We also had $8 million of favorable price and mix, combined these factors totaled $42 million of unfavorable raw material costs net of price and mix as the implementation of product pricing lag raw material cost increases. As Brad mentioned earlier, in the U.S. we use the LIFO accounting method. So our results reflect the impact of changing material costs more quickly than most competitors. We had $10 million of higher manufacturing cost due to lower production volumes in North America, $5 million of lower unit volume driven by the unit volume decline in North America, $3 million of higher other costs, which include $7 million of direct costs related to the tornado damages, $2 million of negative foreign currency impact and $2 million of unfavorable SG&A costs, which include $3 million related to the write-off of certain assets for the company's global ERP system implementation. As you know, we implemented ERP in the U.S. and are planning a global implementation. As part of this rollout effort and as we evaluate which systems to use in each region, we have assessed our global plan and written off certain assets related to the project. These negative factors were partially offset by $22 million of benefit for the reversal of tariffs incurred in 2015 -- 2016. We delivered earnings per share of $0.57 compared with the $1.05 in the first quarter of 2016. A contribution of $0.03 per share came from the lower share count, resulting from our share repurchase program.

Moving to our segment performance, I'll start with the Americas Tire Operations. Segment sales for the first quarter were $531 million, down 8.3% from $575 million in 2016. This decrease was the result of $43 million of lower unit volume, $4 million of negative foreign currency impact and $1 million of unfavorable pricing mix. First quarter operating profit in the Americas was $63 million or 11.9% of net sales compared with a $106 million or 18.3% of net sales in the same period last year. Operating profit was impacted by $37 million of unfavorable raw material cost, net of pricing mix, $12 million of higher manufacturing costs with cost savings during the quarter, which were more than offset by costs from actions taken to manage inventory levels, $11 million of lower unit volume, $6 million of other expense, which includes $7 million in direct costs related to the tornado damage and $1 million of negative foreign currency. These were partially offset by the $22 million of tariff reversal benefit and $2 million of favorable SG&A costs. The previously referenced $7 million in expenses related to tornado damage in the first quarter includes direct costs incurred in the quarter to destroy damaged tires, freight to move prior to other warehouses and professional fees to secure and maintain the site. We expect that these costs less the deductible will be recovered from our insurance carriers at some point in the future. The estimate of full year 2017 direct costs for tornado damages is expected to be between $12 million and $14 million. These costs do not include indirect costs or the impact of business disruption, which affected our results in the first quarter, and we'll continue to do so in the future. We will seek to recover such costs from insurance carriers. You can see the full profit/loss for the Americas on Slide 7 of our supplemental slide deck.

Now turning to our International Tire Operations. As a reminder, all results for the International segment include the consolidated results of our new joint venture, GRT. Net sales for the first quarter were $142 million, up 37.5% from the first quarter of 2016. Unit volume in the segment was 31.4% higher in the first quarter of 2017, compared to the prior year as a result of increases in both Asia and Europe. Sales increased by $39 million as a result of $28 million of higher unit volume, and $16 million of favorable price and mix, which is partially offset by $5 million of negative foreign currency impact. The International segment improved its operating results compared with last year with an operating profit of $2 million in the first quarter compared to an operating loss of $2 million in the same period a year ago. These results were driven by $5 million of higher unit volume, $3 million of favorable manufacturing cost and $1 million of favorable other costs, which were partially offset by $3 million of unfavorable raw material costs, net of price and mix, $1 million of unfavorable SG&A expense and $1 million of negative foreign currency impact. You can see the full profit/loss for the International operation segment on Slide 8 of our supplemental slide deck. This is a great quarter for the International segment, which is driving unit volume growth and improvement in operating margins.

Now turning to some corporate items. The effective tax rate was 30.7% for the first quarter compared with 32.3% for the same period last year. The decrease in the rate is primarily due to the implementation of accounting standards update 2016-09 under which excess tax benefits from share-based payments must be recognized discreetly in the period in which they occur. The effective tax rate is based on forecasted annual earnings and tax rates for the various tax jurisdictions in which the company operates. We estimate the full year 2017 effective tax rate to be in the range of 30% to 33%. More details on our taxes is available in the Form 10-Q that will be filed with the SEC later today. Cash and cash equivalents were $365 million at March 31, 2017 compared with $434 million at March 31, 2016. Capital expenditures in the first quarter were $45 million, we anticipate our full year capital expenditures for 2017 to be between $220 million and $250 million. We believe this is the appropriate level of capital to support our ongoing modernization, mix transformation, and

automation initiatives in addition to investments in capacity to align with our global strategic growth plans.

Moving to capital returns. In February 2017, our Board extended and increased our share repurchase program by authorizing the repurchase about to $300 million of the company's outstanding common stock through December 31, 2019. During the first quarter, approximately 473,000 shares were repurchased for $17.8 million at an average price of $37.63 per share. This share repurchase began in August 2014, the company has repurchased a total of 12.7 million shares at an average price of $34.21 per share.

I want to remind you that Cooper believes that our existing cash, cash flows and potential leverage are more than sufficient to support our capital allocation priorities. We define those priorities as supporting our ongoing commitments, capital support organic growth and margin improvement initiatives, acquisitions and partnerships and funding our dividend and share repurchase goals. We believe our operating performance, our sustained high-level of ROIC and our demonstrated commitment to delivering on our strategic plan, including a balanced approach to capital allocation delivers long-term value to shareholders. I'll now turn the call back to Brad for a perspective on the balance of the year.

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [5]

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Thanks, Ginger. In summary, the first quarter was one-off transition as we absorbed higher raw material costs and implemented product price increases. Our strategy to diversify and grow our non-U. S. businesses is paying off as we saw very strong unit volume growth in our faster-growing markets of Asia and Latin America and a continued turnaround with double-digit unit volume growth in Europe. The growth in these businesses more than offset the short-term unit volume disruption we experienced in the U.S. That said, we recognized that North America is the largest segment of our business and we are laser-focused on responding to market factors and improving our results there.

Looking ahead, while raw material costs seem to be stabilizing, we expect that additional price and promotional activity will affect U.S. volumes in the second quarter. For the full year 2017, we expect continued strong unit volume growth in our International segment and in Latin America. We continue to closely monitor the raw material and related pricing environment and currently project the pricing dynamics will normalize in the coming quarters. Our unit volume in the U.S. is expected to improve relative to the industry for the second quarter and be in line with the industry in the second half of the year. We still believe that first half operating profit margin will be around the low end of our 8% to 10% range with raw material costs projected to level off in the coming quarters and product pricing actions in place, we anticipate that full year 2017 operating profit margin will be at the high-end of our previously announced mid-term target of 8% to 10% with operating profit margin exceeding 10% in the second half of the year. We remain confident in the strength of the Cooper business model and we believe significant levers remain to further improve our business based on continued execution of our strategic plan. These levels are -- levers are cost reductions in the way we design and manufacture our products, including automation and process improvement and in how we procure our materials, mix enhancement with a continued shift to larger, more premium HVA tires driven by trends in OE vehicles, growth in scale, particularly in Asia and Latin America, optimization of our global manufacturing footprint and continuing to expand margins in the International segment. With these opportunities and others, we are confident that as price increases are implemented and raw material costs stabilize, further improvements in operating profit will be achieved. With that, let's move to your questions. Operator, will you take the first question please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Christopher Van Horn with FBR.

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Christopher Ralph Van Horn, FBR Capital Markets & Co., Research Division - Associate [2]

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The back half of -- the guidance for the back half implies pretty strong margins, and I just want to kind of jump into pricing here. Is that kind of the main driver in order to get us there or are there other levers you can pull if pricing doesn't really pan out. And then just kind of your commentary, maybe so for this month, what you're seeing from a pricing perspective, are we starting to see those prices go through and just kind of your confidence level there?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [3]

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Let me go at it in reverse order. I'll start and then sequentially move into the second half. As we look at how we were transitioning out of the first quarter and into the second quarter, the industry has been implementing price increases. They come in all kinds of different forms as we alluded to during the commentary a moment ago. There was price protection for a period of time to allow people to bring orders in. There were later announcements, some of the larger players have price increases that aren't effective until April 1 or even May 1. So all of that continues to come into play. We are seeing a relative level of promotional activity that may be a little bit higher than it would be at this time of year in other years. But overall, it looks like the pricing is coming into the market, it's just a matter of getting it all-in and in-place and everybody resettling into their appropriate positions on a competitive basis. And we think that will happen largely in the second quarter. As that is completing itself that process, we do anticipate to see our volumes improve relative to the market, although we don't know if we will get all the way back to performing at market levels in the second quarter. As we move into and I'm going to stay on the volume theme for a moment here, Chris, as we move into the second half of the year and we think that the market has digested the price increases as raw materials will have stabilized at that point in time, we will see our volume move back in line with at least in line with the market in the U.S. So from a volume perspective, that's our outlook for our business. We do think that pricing is going to play an important role in what's going on in the industry as we move into the second and then into the second half of the year. We really haven't seen anything to suggest that people are not going to follow through with the pricing that they have announced and put in. There will be promotional activity as there always is. But we think there will be pricing in the market in line with what's happened with raw materials. Now as we are looking at raw materials, we're talking, our projection is that we will see a modest increase in the second quarter and then a stabilization. Some of the more important commodities we've actually even seen the potential but there may be some decline as we move forward. So we will continue to monitor that. For Cooper, in addition to the pricing and on margin improvement along with stable raw materials that we expect to see moving into the second half, we continue to have a number of cost initiatives underway that we also think will contribute to our margin improvement.

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Christopher Ralph Van Horn, FBR Capital Markets & Co., Research Division - Associate [4]

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Great. That's very helpful. On the positive side, the international markets did very well. I'm wondering if you could just give us a little more detail. I know you said Europe and Asia were both contributors, but a little more detail on, was 1 outside versus the other. And then was it OEM versus replacement business and just what you're seeing in those marketplaces?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [5]

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Yes. Just to clarify a couple of the comments that I made in, it was in both, but so if we talk about Asia and Europe. Specifically, we talked about an 80% increase in domestic volumes in Asia in the first quarter year-over-year. That was -- it was both OEM replacement, but OE was clearly the stronger contributor to that growth. In Europe, we had double-digit increases close to 20% in that market, and a lot of that driven by a stronger U.K. market, which is important to our business both from a volume and a profit perspective, along with an overall continuation of refreshing of the product portfolio there and having more competitive products that are helping us in all of our markets in Europe.

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Operator [6]

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The next question is from Rod Lache with Deutsche Bank.

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Rod Avraham Lache, Deutsche Bank AG, Research Division - MD and Senior Analyst [7]

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I had a couple of things to follow up. First, just hoping to dive in a little bit more into this 11% drop in the U.S., because I don't recall, certainly not recently any period of this magnitude of variance for you guys versus the industry. So just in terms of further explanation, do you believe that it's tire companies managing their pricing to FIFO whereas you guys obviously have to face the LIFO impact? Is the promotional activity centered in there, any area like within LVA or within certain brand tiers, are you seeing it pretty broadly?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [8]

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So this is a more significant deviation from the industry, although there is 1 example to this in my tenure here that goes back to 2011 that was somewhat similar. And I only raise that because at that time, again we saw, it was significant movements in raw materials, tire companies making their pricing changes to respond to that, and the timing and the implementation of it was a bit choppy there as well, and it hit us for a couple of months. We responded and moved back in line with the market in a relatively short order. I can't say that this will be exactly the same situation, but we do have confidence that we know how to respond to what we're seeing. With regard to LIFO, I can't comment on what other people do. Certainly we are incentivized to respond as early as we can, because we are seeing the impact in our profitability front increases in raw materials sooner than others that are not on LIFO, which to my knowledge we're the only ones on LIFO in the U.S. So there is clearly an incentive for us to move on earlier. However, we also are looking at the market; and trying to remain market-facing as we looked at some of the announcements that came out in the early part of the quarter, we jumped on those and jumped in with our price increase with an anticipation about how those would be implemented and how the rest of the industry would follow. As it turns out, we ended up implementing effective March 1, and others -- even some that implemented March 1, may have protected orders through the end of the quarter to try and drive some volume. Several others announced price increases that weren't effective until April or May. There was promotional activity that came in behind some of the price increases. So there were a number of things that were moving around. I think the important points though Rod, are, one, there is pricing, and it does look like the pricing is winged to remain in the market, we'll see during this quarter, the next couple of months to finalize that comment, but it does appear that that's the case. And as that's coming into line and as we have better insights into what our key competitors are doing on key segments, we're realigning where we're at to make sure that we're appropriately market-facing with our pricing. And as we've done that, as I mentioned, it's a little bit early, but we have seen a nice response in our orders so for in April. So I wouldn't say that it's honed in on any particular segment in terms of the activity, I just think this is the way that it has to happen as various competitors are coming in with their own unique approaches to pricing. But once that's in place, we still have the same competitive product line up we had, we still know how to position ourselves, and we still have great relationships with our customers.

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Rod Avraham Lache, Deutsche Bank AG, Research Division - MD and Senior Analyst [9]

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Great. And in terms of the raw material cost inflation that you are expecting for the year, if raw stay stable at this level, is it still just under about $300 million impact for you guys on a full year basis? And do you still believe that raw material costs could be fully offset for you guys in the back half?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [10]

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Well, we haven't quantified the dollar impact of the raw materials. We're staying with the guidance that we provide on the raw material index. And again, there will be timing that will affect this, but we continue to believe that the industry, given the backdrop of a balanced supply and demand and even an undersupply relative to the demand for HVA products that the pricing environment is such that we would expect the industry is going to price to recover on increases in raw materials, albeit with a lag.

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Rod Avraham Lache, Deutsche Bank AG, Research Division - MD and Senior Analyst [11]

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Okay. But earlier I think on the last call, you were pretty explicit in saying that you thought that by the back half price and mix will fully offset the raw materials, if I remember correctly, is there less conviction in that or is that still a go?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [12]

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No. Again, I -- we think that, that is still on a reasonable outlook right now based on what we can see, and again I know that we said this a number of times, but we are reaffirming our guidance around margins for the full year and including the second half.

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Operator [13]

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Our next question is from Brett Hoselton with KeyBanc.

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Brett David Hoselton, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [14]

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On the topic of the volume, can you talk about the first quarter kind of on month-by-month basis, I mean, it seems like that's something that would has maybe impacted the later half of the quarter as opposed to January and February?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [15]

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I would suggest that the volume trend was impacted by the pricing. We're making that point in this discussion. And our pricing went into effect March 1, and not everybody else went at that point in time. And so yes, as the pricing announcements came out and the way that those were executed was better understood by the market, it began to have an effect. And so I would say that it's accurate to think that the latter part of the quarter was more affected.

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Brett David Hoselton, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [16]

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And as we look at kind of April, we are largely through April at this point in time, how can you assess, how things have maybe improved here in the second quarter thus far?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [17]

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Well, what we can monitor, Brad, is our order pattern, I mean, that's what we can see. And so as we're looking at how the orders are coming in for us relative to a year ago and relative to the first quarter we're indicating that we're seeing improving trends, unless there's a real significant change in what's going on in the overall industry, which we wouldn't have view to yet. We think that, that will suggest that our performance is improving relative to the industry.

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Brett David Hoselton, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [18]

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Okay. And then switching gears here. As I think about your guidance and the reversal of the tariff -- truck tariff, how should I think about -- that normally would have had a I think a pretty material positive impact on your guidance, here I think we're basically, if I remember correctly reiterating your guidance. So what would be the offset? Would it primarily be a weaker-than-expected first quarter and second quarter?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [19]

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Well, there is like a few factors at play here Brett. Firstly, when we talked about the tariff initially, when we believed there was going to be a tariff in place, we indicated at that time that we thought that the industry would take some pricing as a result of that, given the supply and demand of the TBR market for the U.S. that there would be some pricing that will be taken. So as we were looking at the tariff going away, we are now also reevaluating on what those pricing assumptions should look like with regard to our Roadmaster brand here in the U.S. In addition, there will be presumably additional competition in the market as we're not the only one that will benefit from that tariff going away, and so we're assessing that. And then frankly, as we are evaluating the overall, not just TBR, but the overall volume and pricing and raw material environment, we've chosen to be a little bit conservative about the way that we're looking at the second half of the year in terms of the guidance, because on a net basis that tariff change is a benefit for us, but we're looking at it little bit more cautiously right now given what we've seen happen in the first and the second quarter.

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Ginger M. Jones, Cooper Tire & Rubber Company - CFO and SVP [20]

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Yes, and Brett, I would add also the other thing that wasn't known when we set that guidance originally was obviously the positive benefit of the tariff, but also the negative impact of the tornado. So, that, we should also factor in as you think about onetime, both positive and negatives for the year.

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Brett David Hoselton, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [21]

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Regarding this, as I think about the margin, sequentially here, adjusting for some of the unusual items, you're operating margins are kind of around 7% or something along those lines, to get into that low 8s or get into the 8s or something like that, I was expecting some margin expansion into that second quarter, and then kind of in well above the 10% range to kind of average out around 10% for the full year, is that generally my understanding and more importantly, is that primarily, it sounds like primarily pricing is going to be the major driver of that improvement going forward?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [22]

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I'm not sure I've put the adjectives on, we didn't use the adjectives you used, but yes, we're expecting our margins to improve as we go into the second quarter. And that clearly is driven by a stabilization of the raw materials and having the full effect of a price increase that we just implemented in March through 3 months of the second quarter. But there are other things that are going on. As I mentioned earlier, we do have cost reduction initiatives in place. We are expecting to see a continuation in the growth of volume in markets outside of the U.S. or North America, and that will have some margin improvement, along with it in terms of its overall contribution. And we are expecting, we did indicate that we're seeing an improvement. We're expecting an improvement in the U.S. volume. So all of those things are going to contribute. And I missed one, there is -- we continue to see improvements in mix as well both in terms of just overall product mix, but also in terms of, specifically those HVA categories that we referred to.

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Operator [23]

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Our next question is from Ryan Brinkman with JP Morgan.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [24]

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I noted in the press release that you mentioned that raw material costs are expected to increase modestly in the second quarter before then stabilizing throughout the balance of the year. Are you referring there to what you recognized in your P&L or to spot prices? I'm asking because, it seems like from some of the metrics that we are able to track that natural rubber and butadiene have declined in April. I'm just trying to understand if your margin guidance assumes that raw material prices do not decline from their highest?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [25]

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Well, the first part of the question, Ryan, it is our index, it isn't necessarily precisely what you see flow through our cost of goods sold for raw materials, but we think that it's directionally a good indicator of what you should see. And as we indicated in the discussion earlier, sequentially, that raw material index increased January, February and March. We're looking at the same data that you are looking at in terms of some of the commodity prices out there and then the timing of when that is going to end up effecting that raw material index is a little bit of a factor in this. But we are seeing the same thing that you are seeing.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [26]

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Okay. And then it seems like you lost a significant share in March, right, in the U.S. after you increased your prices, but competitors announced increases that would take effect later, I guess, kind of creating their own sort of pre-rise. In surveying what increases have been announced by whom, it appears that some increases did take place on April 1, just after the quarter closed, and then some others will take place next week, on May 1. So the question is, did your share already started to recover after the April 1 increases, and that's kind of what's giving you the confidence that your volume performance will improve relative to the industry as the year progresses? Or are you still waiting to see recovery in share until more of the competitor hikes are implemented?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [27]

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Well, we don't have complete data right now. What we do have visibility to is, our order patterns so for in the month of April, and that's what in large part what we are basing our statement on in terms of we've seen an improvement in order activity and that we think that we are going to improve our performance relative to the industry. That is with some -- with a necessity that we think a little bit about what the industry is going to look like for the second quarter. But we don't have full details yet. But it does, again, what we're seeing right now is improved from what we were seeing and that's with most of the increases in and not all of them yet in.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [28]

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Okay. And then just last question from me on manufacturing costs and overhead. I mean, manufacturing at least was a $10 million headwind in the quarter. How should we think about the production cuts that you implemented in 1Q impacting overhead absorption going forward? Is there anything we need to be mindful of about the second quarter, anything like that?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [29]

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Well, we are going to continue to make sure that we don't get into an inventory problem. So to the extent we need to adjust our production schedule to ensure that, that doesn't happen, we will do that. As we see an improvement in our volumes and as we move into the second half of the year, I would expect that that $10 million will reduce and then not repeat. But again, we'll have to -- that will be determined as we go through the year. I would note and it's a little unfortunate that it's washed out by what we needed to do from a scheduling standpoint, but we are making improvements in our overall manufacturing costs. Unfortunately, there were more than overwhelmed by the days that we took out of the schedule.

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Operator [30]

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Last question comes from Bret Jordan with Jefferies.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [31]

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This is David Kelley in for Bret. I will keep it brief. I guess, if we're isolating the U.S. aftermarket, it sounds like really the entire sector experienced a weaker Q1 largely due to what I think people are attributing to mild winter weather here. I guess, is that something you observed as well and are you seeing or expect to see maybe an uptick in U.S. demand in the second quarter given some of the deferred replacement and maybe higher miles driven we have seen over the last couple of years or so?.

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [32]

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David, what we've said in our comments here is that we do believe that the overall industry in terms of the sell-out to the end consumer was weaker in the first quarter, that's from some of the information that we have available, and frankly, monitoring comments from others, including in your industry. And we'll see what happens in the second quarter. There were some factors in the first quarter that may have affected that and that may not be as significant as we move into the second quarter. Overall, when you look at some of the important variables that in the past have been good indicators about what's going to happen with replacement tire volumes, like miles driven, like where gas prices are, those things all seem to suggest that there should be some recovery as we look forward over the balance of the year. And we hope to see that. But you're right. In the first quarter, we believe that the industry did see a weaker sell-out environment.

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David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [33]

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Okay. Great. And then final one for me, just a quick high-level question. We have seen significant mix-shift in U.S. new vehicle demand, light trucks and SUVs and kind of away from the passenger cars since 2012, those vehicles are beginning to roll off warranty and enter the aftermarket, it seems like replacement cycles including tire replacements beginning to kick in here. Maybe if you could just talk about how you view that opportunity, the product mix shift there over the next several years as we see that ramp up in mix-shift?

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Bradley E. Hughes, Cooper Tire & Rubber Company - CEO, President and Director [34]

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Well, the -- you're right. In terms of the to's and fro's of the auto industry, certainly the last several years you've seen a recovery in the light truck and the SUV market. We believe and I think that we've recognized, we have a very strong product lineup to support that part of the market. It's a place that we have earned, I think, a well-deserved reputation for the products that we provide. And so I would look to that as being an opportunity for Cooper.

Okay. With that I think I'm going to move to my closing remarks. And first of all, I want to thank you all for being on the call with us. We do believe that Cooper is well positioned to emerge in a strong position from what's going to be a dynamic 2017 as we continue to execute our strategic plan and leverage the strength of our business model. As always, if you got additional questions or things that you want to dive into a little bit more deeply, please contact Jerry, with further questions or comments you have. Thanks, again.

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Operator [35]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.