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Edited Transcript of CTB earnings conference call or presentation 29-Apr-19 2:00pm GMT

Q1 2019 Cooper Tire & Rubber Co Earnings Call

FINDLAY May 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Cooper Tire & Rubber Co earnings conference call or presentation Monday, April 29, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley E. Hughes

Cooper Tire & Rubber Company - President, CEO & Director

* Christopher J. Eperjesy

Cooper Tire & Rubber Company - Senior VP & CFO

* Gerald C. Bialek

Cooper Tire & Rubber Company - VP & Treasurer

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Conference Call Participants

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* Anthony J. Deem

Longbow Research LLC - Senior Analyst

* Bret David Jordan

Jefferies LLC, Research Division - Equity Analyst

* Christopher Ralph Van Horn

B. Riley FBR, Inc., Research Division - Analyst

* John Michael Healy

Northcoast Research Partners, LLC - MD & Equity Research Analyst

* Rod Avraham Lache

Wolfe Research, LLC - MD & 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 the Cooper Tire & Rubber First Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would like to now turn the conference over to Gerry Bialek. Please go ahead.

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Gerald C. Bialek, Cooper Tire & Rubber Company - VP & Treasurer [2]

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Good morning, everyone, and thank you for joining the call today. This is Gerry Bialek, Cooper's Vice President and Treasurer. I'm here today with our Chief Executive Officer, Brad Hughes; and Chris Eperjesy, 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 forecasts 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 will provide an overview of the company's first quarter 2019 financial and operating results as well as the company's 2019 business outlook.

Our earnings release includes a link to a set of slides that summarizes information included in the news release and in the 10-Q that will be filed with the SEC later today.

Please note that we'll reference certain non-GAAP financial measures on this call. The linked slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures.

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 - President, CEO & Director [3]

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Thank you, Gerry, and good morning, everyone. I will begin today with a brief overview of our first quarter results. After that, I will turn the call over to Chris for a review of our financial performance in greater detail. Then I'll return to talk about progress on our strategic initiatives along with our outlook for 2019. We will conclude by taking your questions.

Now let's talk about the first quarter. We are pleased to have delivered performance that was better than the outlook we provided back in February. Operating profit in the first quarter was higher than we expected due to stronger performance in North America and Asia.

More importantly, we are seeing continued positive evidence that the strategy we shared last May is working. A few examples. Global net sales grew by nearly 3%, even with a modest unit volume decline. For the third consecutive quarter, Cooper achieved unit volume growth in the United States. Net sales in the Americas were up over 6% and operating profit was up 24%, despite the impact of new TBR tariffs.

We're excited that Cooper tires are now offered as original equipment on the new Mercedes-Benz GLE, our first fitment for this luxury automaker.

Our retail expansion strategy is well underway as we launch new partnerships with fast-growing retailers, build out our e-commerce business and grow in other underpenetrated channels. The process of phasing out light vehicle tire production at our Melksham facility is going according to plan and will result in a Cooper Tire Europe that is more cost competitive.

And we are excited about the progress we are making on our joint venture with Sailun to build a new TBR tire production facility in Vietnam. This will further diversify our TBR sourcing footprint outside of China. These initiatives and others are driving positive momentum for Cooper and position us well for the remainder of 2019 and beyond.

Now I'll turn it over to Chris.

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Christopher J. Eperjesy, Cooper Tire & Rubber Company - Senior VP & CFO [4]

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Thank you, Brad. Moving to consolidated first quarter results. Sales were $619 million, up from $601 million in 2018, this is 2.9% increase -- this 2.9% increase was driven primarily by favorable price and mix, partially offset by unit volume decrease of 0.7% year-over-year.

Operating profit was $26 million, unchanged compared with the first quarter of 2018, resulting in operating margin of 4.3% of sales. This was achieved despite $10 million of additional costs related to tariffs on imported TBR tires enacted in the first quarter of 2019 as well as $5 million of restructuring costs related to Cooper Tires Europe's decision to cease light vehicle tire production in Melksham, England.

Let me elaborate. Regarding TBR tariffs, duties on these tires imported into the U.S. from China were implemented on February 15. The rate imposed for Cooper is just over 42%. Given that Cooper is on the LIFO accounting method in the U.S., we experienced a negative tariff impact immediately. This resulted in $10 million in cost during our first quarter without any offsetting pricing actions. For the full year, we expect the cost of the new TBR tariffs to be around $50 million.

As we've said before, Cooper believes that there will be price increases on TBR tires in the U.S. market to help offset these costs and in fact, there have already been several increases announced. Cooper implemented a price increase on both Cooper and Roadmaster brand TBR tires, which will began to impact our results in the second quarter. We will continue to be market-facing with our TBR pricing and expect that there will be incremental price increases in the market as we progress through the year, but price increases are not expected to offset the full cost of the tariffs in 2019.

Also as we have said before, there is not enough domestic supply to meet demand for TBR tires in the U.S. and the majority of available supply is coming from China. It's important to reiterate that Cooper is committed to continued growth of our TBR business, and we are maintaining our focus on expanding both our Cooper and Roadmaster brand product lines.

Our efforts continue to be recognized in the marketplace. In fact, we recently were named Most Valuable Partner of the Year by one of our key customers, Dickinson Fleet Services, which is a leader in the mobile fleet services industry.

We are also making progress on our global TBR sourcing footprint with a commercial offtake agreement with Sailun Vietnam and the joint venture with Sailun to build a new TBR plant in Vietnam.

As Brad indicated, the Melksham transition is going according to plan and in the first quarter resulted in approximately $5 million of restructuring charges. This amount was slightly lower than our original projection. So we have lowered the previously stated full year 2019 expected restructuring charges to a range of $8 million to $11 million from a range of $10 million to $15 million.

Let's take a look at our first quarter operating profit walk. Total company operating profit compared with 2018 was impacted by the following factors: $14 million of favorable price and mix, partially offset by $3 million of unfavorable material -- raw material costs; $3 million of higher other cost; and unfavorable volume of $2 million. Operating profit benefited from positive manufacturing improvements, including better utilization of $5 million and reduced product liability cost of $4 million.

As previously mentioned, negatively affecting the quarter were $10 million of tariffs enacted in the first quarter of 2019 on TBR tires imported into the U.S. from China and $5 million of restructuring costs related to the Melksham transition.

Diluted earnings per share was $0.14 compared to $0.16 per share in the first quarter of 2018. EPS was negatively impacted by both pension and tax matters, which I will discuss in more detail shortly.

Now turning to our Americas Tire Operations. Segment sales for the first quarter were $515 million, up 6.1% from $485 million in 2018. This increase was driven primarily by favorable price and mix. Segment unit volume was essentially flat compared to the prior year with the unit volume increase in North America offset by a decline in Latin America. Our U.S. light vehicle unit volume increased by 1.1%, while the USTMA increased by 2.2% and the total industry increased by 5.6%.

First quarter operating profit in the Americas increased to $39 million or 7.5% of sales compared with $31 million or 6.4% of sales in 2018. Operating profit included $15 million of favorable price and mix, which was partially offset by $4 million of unfavorable raw material costs. The quarter also included $6 million of manufacturing improvements, including better utilization, and $4 million of lower product liability costs.

These improvements were partially offset by $10 million of additional tariffs enacted on TBR tires imported into the U.S. from China, $2 million of unfavorable SG&A costs and other costs that increased by $1 million.

Now turning to our International Tire Operations. Net sales for the first quarter were $144 million, down 10.8% from the first quarter of 2018. This result was primarily driven by lower unit volume. Segment unit volume decreased 9.1% primarily due to lower intercompany shipments from China to North America and lower unit volume in Europe. Third-party sales were actually up slightly year-over-year in Asia.

The first quarter operating loss in our international operations was $1 million compared to operating profit of $7 million in 2018. The decrease included charges of $5 million related to the Melksham restructuring. Additionally, the segment experienced $2 million of lower unit volume, $2 million of unfavorable price and mix, $1 million of higher manufacturing costs, which were partially offset by $2 million of lower raw material costs.

Our raw material index increased 2.4% from the first quarter of 2018. Raw material index decreased sequentially from 165.1 in the fourth quarter of 2018 to 160.4 in the first quarter of 2019. This was in line with our first quarter expectation to be down nearly 3% sequentially, but up nearly 3% year-over-year. For the second quarter, we expect our raw material index to be up slightly on a sequential basis, but down slightly year-over-year.

Turning now to some corporate items. Other pension and postretirement benefit expenses increased $2.4 million versus the prior year. This increase is primarily the result of lower estimated return on planned assets compared to 2018. We have made strides in improving the funding status of our pension plans. As a result, the portfolio is taking less risk in order to protect the funded status, which results in such increased quarterly cost.

The effective tax rate was 46.9% for the quarter compared to 27.8% last year. The higher tax rate for the first quarter of 2019 was primarily driven by the finalization of regulations related to the U.S. Tax Cuts and Jobs Act, which resulted in a $2.3 million negative impact in the quarter. Given the higher first quarter tax rate, we now estimate the full year 2019 effective tax rate will be in the range between 23% and 26%.

The effective tax rate is based on forecasted annual earnings and tax rates for the various jurisdictions in which the company operates. More detail on our pensions and taxes will be available in our Form 10-Q that will be filed with the SEC later today.

Turning to cash flows and some balance sheet highlights. Cash and cash equivalents were $212 million at March 31, 2019, compared with $213 million at March 31, 2018. Capital expenditures in the first quarter were $60 million, equal to the same period a year ago.

Return on invested capital, excluding the impact of goodwill impairment charge in the fourth quarter of 2018, was 10% for the trailing 4 quarters.

Moving to return of capital to shareholders. Returning capital to our shareholders remains an important priority for us. As demonstrated in the first quarter, we are committed to supporting our quarterly dividend, but we'll pursue share repurchases more opportunistically in the near term as we balance attractive opportunities to invest in our business.

I'll now turn the call back over to Brad.

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

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Thanks, Chris. We are pleased that our first quarter results have helped position us well for the remainder of the year. We expect to continue to improve results, building on our strategic initiatives as we make tangible progress on the milestones we communicated at our May 2018 Investor Day. Importantly, we remain focused on building our team's capabilities to advance our strategic initiatives and win in the marketplace.

Again, we are thrilled to be supplying Mercedes-Benz and are excited to be producing these tires at our Tupelo, Mississippi, manufacturing facility. The entire team at Tupelo is dedicated to the excellence required to be awarded OE production for Mercedes-Benz vehicles.

Speaking about Tupelo, I want to also congratulate the team there for earning a Safety and Health Improvement Award from the USTMA. The award recognizes tire manufacturers for working to advance occupational health and safety, which is a top priority in our plants. This is the sixth time our Tupelo team has earned this recognition, and I thank everyone at the facility for their continued focus and commitment to safety.

As the Cooper brand becomes even more recognized and respected through efforts, such as the OE win with Mercedes-Benz, and as we continue to build tires that offer quality and innovation at a great value, Cooper needs to be more available where consumers wants to buy tires.

To increase our availability, we have been executing on our retail expansion strategy and are encouraged by the progress we are making in channels that grow our presence where consumers want to buy tires. This includes many traditional independent and regional retailers as well as general merchandisers, auto dealerships, large national retailers, auto aftermarket change -- chains and e-commerce platforms.

We also remain focused on strategically optimizing our manufacturing footprint. In addition to Melksham, with respect to TBR sourcing, we have a joint venture with Sailun to build the TBR tire manufacturing plant in Vietnam. Construction of the facility has begun, and we are on track for tire production commencing no later than the first half of 2020.

Also as I mentioned earlier, we have an existing offtake agreement with Sailun, which will provide us some of our TBR tires for the U.S. market from Vietnam until our new JV is producing tires. These actions to expand and diversify our TBR sourcing and give us supply outside of China are part of our ongoing strategy to develop a competitive footprint to support our global TBR strategy.

Overall, Cooper remains confident about 2019 as our teams around the globe continue to execute our strategic plan and we are seeing early results. Therefore, we continue to expect the full year consolidated 2019 results to include modest global unit volume growth compared to 2018, improving operating profit margin throughout the year with full year operating profit margin exceeding 2018. This includes the net impact of the new TBR tariffs and the Melksham restructuring.

And we maintain our expectation for capital expenditures in a range between $190 million and $210 million. This does not include capital contributions related to Cooper's pro rata share of the previously announced joint venture with Sailun Vietnam or other potential manufacturing footprint investments.

We also now expect charges related to the Melksham phase down to be in a range of $8 million to $11 million, which includes $5 million already incurred in the first quarter of this year, and an effective tax rate in a range between 23% and 26%. Again, these expectations include tariffs already in place, but do not include rate changes or additional tariffs that are under consideration, but not yet imposed.

We are confident that our strategic plan remains the right path to achieve our goals and help drive shareholder value. Cooper has a record of delivering solid returns on our investments, and we remain confident in the strength of our business model.

Overall, we believe that with industry conditions improving, Cooper is well positioned for the future. We have work to do, yet are confident that Cooper will, as we have done for more than 100 years, continue to succeed in the long term.

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) The first question comes from Rod Lache with Wolfe Research.

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Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [2]

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I had 2 questions. One was, can you just talk a little bit about what's happening in terms of U.S. volume for you? It seems like you've got a number of positives that are underway with ATD, Walmart, Monro, and you mentioned today the online initiative. But when I look at the U.S. volumes, they were up 1% and the market there was up 2%.

So I was wondering if those positives are not in the numbers yet, and if you can give us a little bit more color on what's happening underlying this performance?

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

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Yes. Well, first of all, Rod, I think that we continue to be pleased with the demand that we see in the industry in general, so there's a good backdrop. Secondly, as we've been talking about, we are finally exiting the exit that we've been talking about out of our nonstrategic private brand business, and are now beginning to see some of the fruits of the efforts that we've had around expanding our retail presence. And we have 3 consecutive quarters of growth in the U.S. right now.

I think, as you've stated, we are in the early innings of several of these new relationships and partnerships. And so we would expect that as we move forward -- and this will -- it doesn't happen every month or every day, but over the course of the next several quarters into next year, we'll begin to see the contributions from the new initiatives building on the platform that we've got now that doesn't include the same level of nonstrategic private brand wholesale.

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Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [4]

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Can you just maybe give us a framework or just some parameters around the magnitude of the positives that you see, and the magnitude of the drags that are still obviously affecting you to some extent from the exit from nonstrategic brands?

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

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Well, I think the nonstrategic is largely behind us. There may be very small implications as we move quarter-to-quarter. And as we see these new partnerships develop and grow, I think that we will begin to see these things later this year and into next year. Some of these start as pilots, as you know, and then you grow from there and then you expand the lineups that you have, assuming, as we do, that it will go positively and successfully, but it will take a little bit of time before you see the larger contributions from the new channels.

The good thing is we're being well received in these channels. The Cooper brand is becoming more and more well known. And we really have a positive outlook for where this is going to take us.

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Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [6]

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Okay. And then just 2 housekeeping things. Could you tell us what the magnitude was of the price increase that you had in TBR in the U.S.? And also the manufacturing positive year-over-year, $5 million, is that something that's more of a nonrecurrence of a negative from last year because it seems like the operating leverage was probably pretty minimal, just given what the volume performance was?

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Bradley E. Hughes, Cooper Tire & Rubber Company - President, CEO & Director [7]

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Yes. Let me address them in reverse order there, Rod, if you don't mind. So from a manufacturing perspective on the positive that we saw in the first quarter, a portion of that, and a meaningful portion of that, was related to better leveraging our plants by having higher utilization. We do expect that to continue to some degree as we go through the balance of the year, in large part because last year you may recall that we had a significant effort to reduce our inventory levels and that's behind us.

We feel good about where we are with our inventories. And so we'll be producing at a level that is more reflective of demand and won't have that additional headwind of reducing inventories. So from a manufacturing perspective, we would expect that to continue through the balance of the year to some degree.

Regarding the TBR pricing, we don't communicate specifics around the amount of the pricing; have not in this particular instance. It did start, in some cases, at the beginning of the second quarter and we'll begin to see contributions from the announced price increase and, in fact, in large part implemented increase that went into place for the second quarter.

We also do, I think, it's important to note -- expect that there will be additional pricing actions, as Chris mentioned, as we go through the year, given the dynamic of supply and demand around TBR tires in the U.S. So one round in, and we'll begin to see the benefits of that in the second quarter, but we expect that there will be more as we go through the course of the year.

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Operator [8]

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The next question comes from Chris Van Horn with B. Riley FBR.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [9]

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On the guidance around modest volume growth, I was hoping maybe you could give us a little bit additional detail or any additional commentary around maybe regionally? I know you mentioned some channels, the product mix. What's kind of -- and maybe any puts and takes around what that modest volume growth could look like?

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

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So when you look at it, we're talking about this obviously on a global basis. And you look at markets, let's start outside of the North America market, and you look at what's happening in China and continues to happen with regard to vehicle demand, which first quarter pretty challenging, maybe some positive signs with regard to what we've seen more recently and some of the announcements from the government with regard to policies that they're planning to implement that might positively affect vehicle demand.

But first quarter was a challenge. There, our team, I think, did a really great job of managing through that, where we had third-party sales that were up slightly compared with last year, which was a pretty strong quarter.

But as we look forward through the balance of the year, we remain cautious about the Asia market. Europe, for the industry, has been a pretty tough market when you look at it in the first quarter, and so that's another bit of a negative when you look at it on a global basis. And Latin America is, if you follow that market closely, has a number of challenges there as well.

So when you look at the 3 markets outside of North America, all of those represent, to some degree, challenges both in the first quarter and, in some cases, we believe continuing into the balance of the year. And then that leaves you with North America. And so for us to be projecting modest global growth, that would suggest that we're going to be relying on North America to deliver a fair share of that.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [11]

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Okay. And then on the OEM strategy, has anything shifted? And maybe just update us on the pipeline there from an OEM perspective either in North America or abroad?

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

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So as you know, our strategy in China has been built around a platform that includes success in the OE market, which we believe we're beginning to see the very early evidence that that's flowing through to the replacement market, but that still is an important market for us. And again, given the overall challenge of that environment, our team in Asia has done a really good job of balancing the portfolio in a way that just allowed us to navigate with minimal to-date impact from a volume perspective over there, and we think that we're going to be able to continue to do that as we go through the year.

In the U.S., again, we've announced on April 2 that we've started our relationship with Mercedes-Benz on the GLE. We're on 3 -- with 3 fitments on that platform right now and those will begin to roll out, or in some cases already in dealerships around the United States. We look to grow that relationship with Mercedes and there is more in the pipeline there coming forward as we look down the road.

We have a relationship with Volkswagen in Europe, you may recall, on a platform over there. And as we look at our overall OE strategy, we would like to partner with a limited number, 2 to 4, let's say, based on what we see today, partners globally that we think are going to make us a better company and are going to represent Cooper brand well on their products. And we think we're off to a great start with the folks that we're working with right now, both globally and in Asia, and we look forward to sharing news as it becomes available.

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Operator [13]

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The next question comes from Ryan Brinkman with JPMorgan.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [14]

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Can you talk about the price and volume environment in the U.S.? It seems like the other day one of your competitors signaled a willingness to be a bit more competitive on price versus how they'd sounded prior. I'm just curious how the price and volume dynamic played out relative to your expectations in the first quarter, and whether or not that helps or challenges your outlook for improving margin as the year goes on?

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

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Well, as you saw, we had pretty positive performance in price and mix, particularly in our Americas business segment. And as I mentioned earlier, we feel pretty good about the demand in the U.S. and North American market through the first quarter. And we haven't seen anything that would suggest that that's changing dramatically going forward.

From a pricing perspective with that demand backdrop, the pricing that was put in place last year appears to remain firmly in place and that's a positive. And we, as a smaller producer in the U.S. relative to some of the others, are looking and monitoring the market to see if there is any change. There, we certainly would be ready to respond to changes, while remaining market-facing to pricing in the market.

And just to reiterate, we really do believe that the pricing environment around TBR tires will be strong. In addition to what we've put in place already, we think that there will be more change as we move down the road in the TBR market, specifically in the U.S.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [16]

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Okay. And then in terms of the raw material price outlook, what price of oil are you assuming? And what are your thoughts on that commodity's recent rise and the ability to pass along higher input costs, if necessary, in the context of current demand environment?

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

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So with regard to raw materials, we've -- as Chris noted, we have a projection of a minor increase as we move sequentially into the second quarter that would be down slightly from a year ago. So not a lot of change in that, if that does incorporate on recent oil prices, although those continue to bounce around a little bit within a relatively tight range that's in a relatively historical low place.

And so as we look at the raw material outlook, it looks relatively benign even though we think over the longer-term it'll continue to rise. We do think that the demand situation in North America specifically does present a backdrop that if raw materials do increase that there -- the industry should be in a position to price. So if that remains and we do see increases in raw material index or costs, we do think that the demand backdrop is appropriate for action.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [18]

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Okay. That's very helpful. And then just a follow-up on reference earlier to American Tire Distributors. There was some thought earlier that others having walked away from utilizing their services would create an opening for you. Just what is the latest thinking there in terms of the size of that opportunity and the cadence of when the benefits roll on?

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

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So again, a big focus for us is on our retail expansion and what we're doing there, it'd be available where people want to buy tires, consumers in the U.S. importantly right now with some of the initiatives we have underway. We also continued to build in our more traditional wholesale distributor relationships, one of those is ATD, and we feel positive about the way that that's going.

And in all of those, the conquest programs that we put in place last year, which was one component of what was happening at ATD, but that was offered across our wholesale distribution channel on that build, so you end up signing up new customers, smaller retailers, independent retailers and wholesalers and they begin to order tires, and we believe that we'll begin to see some of that flow through in demand as we move through the course of this year.

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Operator [20]

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The next question comes from Bret Jordan with Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [21]

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If we look at the growth of 1.1% and we sort ex out what were those legacy private label volumes, how will your branded volumes compare against the USTMA growth of 2.2%? Did you guys gain share within the brand, ex-private label?

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

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Let's see how. I'm going to say that we're -- when you look across our brand portfolio, obviously we didn't see much from the private brand wholesale. So you take that out of the equation, you end up looking at branded business. And I would highlight that within that pocket of business, the Cooper brand, in particular, was performing extremely well, and we feel very good about that. And I think that's probably where I'll leave it for now, Bret.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [23]

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Okay. And then I guess, if we look at the growth again, and we sort of ex out the new channels, the Monro's and I guess maybe incremental volume with ATD. How much of that growth came from the new channels, new retail strategy versus the legacy channel?

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Bradley E. Hughes, Cooper Tire & Rubber Company - President, CEO & Director [24]

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Not as much as there will be as we move forward. That's an area where, while it has started, there is ample opportunity for that to improve as we move forward.

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Operator [25]

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The next question comes from Anthony Deem from Longbow.

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Anthony J. Deem, Longbow Research LLC - Senior Analyst [26]

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Starting off. Outside of the $5 million to $10 million restructuring upside in the quarter, Chris, if there were other specific segment income drivers of upside relative to your expectations that you mentioned?

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

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Yes, yes. There were other areas that performed a bit better than what we thought in -- and I think you said outside -- I mean that's the overall business. Because the restructuring charges were in the international business and a fair amount of the improvement that we saw as we noted in my opening comments came from North America and from Asia. So I think Asia, as I've mentioned, our team has done a really good job of performing in a challenging market. And so they did better than what we had expected.

And then the North America business did better. And we saw pretty positive performance from our perspective in the price mix versus raw material space. And then we saw a pretty strong performance in the manufacturing space with regard to the utilization of our facilities. So we were pleased with both of those aspects.

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Anthony J. Deem, Longbow Research LLC - Senior Analyst [28]

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And so North America price mix overall is manufacturing. Asia -- was that more of holding the line on volumes or better prices?

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

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Yes. It was holding the line on that overall business equation and making the right tradeoffs to maintain and even grow a little our volume on, and still keep in range with the price and mix performance over there.

And I probably should mention as well, in the Americas, we did have some additional good news from product liability of about $4 million, which is difficult to project. I mean that directionally has been moving that way for a while, but when you're going to see it can be a bit lumpy from quarter-to-quarter.

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Anthony J. Deem, Longbow Research LLC - Senior Analyst [30]

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Yes. And while we're at it, in your guidance, are you still holding the view that we should reverse that $31 million benefit from third quarter last year?

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Bradley E. Hughes, Cooper Tire & Rubber Company - President, CEO & Director [31]

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Yes. I think that we had indicated that the ongoing performance should be about $5 million better than what you would have seen excluding that $31 million.

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Anthony J. Deem, Longbow Research LLC - Senior Analyst [32]

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And a few questions on the tariffs. Any outlook, is there any expectation, that $50 million, any expectation of change in market share or volume versus the prior year?

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Bradley E. Hughes, Cooper Tire & Rubber Company - President, CEO & Director [33]

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Well, as we've indicated, we think that there was going to be a shortfall in supply relative to demand in the U.S. market. With that, combined with the introduction of the Cooper brand for us last year, we do think provides us with opportunities in the U.S. and North American market to perform ahead of the industry.

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Anthony J. Deem, Longbow Research LLC - Senior Analyst [34]

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And you don't have to confirm or deny this, but it seems like it's a low double-digit price increase on TBR is in the ballpark. And I'm wondering if the comment on a potential second round of price increases in TBR, is it because inventory positions might be high right now and they could tighten later in the year? Or is this more of a raw material issue that you think could allow for some greater price realization down the road?

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Bradley E. Hughes, Cooper Tire & Rubber Company - President, CEO & Director [35]

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Well, while I'm not confirming or denying, the -- most of this of our expectation around the pricing environment is related to the demand versus the supply situation and how that's going to unfold over the course of the year. We do think that there were probably some shipments and purchases pulled ahead. And so there may be inventories onshore or on their way here that will be worked through. And then as we get into the second half of the year later in the year that we'd expect that there will again be -- supply will not be able to meet the demand equation.

And since we're on this topic, as we look at this with our business, we are going to have to absorb that estimated $50 million of tariff cost this year and then that's likely going to be built into where we go from here from a tariff perspective. But as we begin to shift our production to markets and sources that don't have that level of tariff, there isn't anything to suggest that the pricing that's going to go into the market is and -- will continue to go into the market is going to subside.

And so as we look forward, while we've got a little bit of a headwind this year, we look forward at something that we think may be a bigger opportunity than we might have thought previously.

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Anthony J. Deem, Longbow Research LLC - Senior Analyst [36]

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Great. And if I could fit in 2 more. $50 million negative impact this year, are you stating what the outlook was last quarter, that was incorporated into the guidance? I assume it was a lesser number.

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Bradley E. Hughes, Cooper Tire & Rubber Company - President, CEO & Director [37]

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We did have guidance -- we had estimates built into the guidance we provided previously and again, obviously we've got guidance that includes that with regard to operating profit margin that we're providing right now. I would say that there's not huge changes in the guidance that we're -- the projections that we're making.

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Anthony J. Deem, Longbow Research LLC - Senior Analyst [38]

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Great. And then last question and I appreciate it. Can you give us an update on capacity utilization in North American plants? You mentioned that as an upside driver this quarter, but are you advanced in your planning on some of the Americas cost initiatives, it's particularly what I'm interested in, and how utilization is going overall?

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Bradley E. Hughes, Cooper Tire & Rubber Company - President, CEO & Director [39]

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Yes. Thank you. So again, I'll just reiterate that on -- we do believe that not only in the first quarter, but through the balance of the year as long as demand remains in place that our manufacturing utilization will be improved compared with last year, particularly in the Americas business segment. And a large part of that is due to not repeating the inventory drawdown that we accomplished last year, which was the right thing to do. And we'll continue to make sure that we're monitoring inventories. But based on everything that we see right now, we do expect there will be better utilization as we move through the course of this year.

We do continue to evaluate our overall footprint, supporting North America. And if there is anything to be shared there, we will certainly share it when it's appropriate. We're focused again on capacity, the capabilities required to service the customers and consumers that we have going forward and cost, all 3 of those. And so we continue to make sure that we're progressing appropriately against the 3 of those with regard to the footprint that we have in North America.

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Operator [40]

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The next question comes from John Healy with Northcoast Research.

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John Michael Healy, Northcoast Research Partners, LLC - MD & Equity Research Analyst [41]

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I apologize I dialed in a few minutes late. But I wanted to ask just on the price increases to offset the tariff cost. It sounds like those actions were more of a 2Q item than 1Q. Are the actions that you've put forward as of right now enough to offset the, call it, $10 million to $12.5-or-so million headwind that you would be incurring? Or do you need additional price increases to offset that headwind completely?

And then secondly, the realignments in manufacturing in Asia, at what point do you think that you can start actually producing truck tires outside of China and take advantage of some of those efforts in Vietnam?

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Bradley E. Hughes, Cooper Tire & Rubber Company - President, CEO & Director [42]

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Okay. So first of all, with regard to the tariff, we had no pricing that offset any of that in the first quarter. So the $10 million that we reported for the tariff is the gross tariff, but also the net amount because there was no pricing. We've announced price increases that will go in effect in the second quarter and begin to offset that amount, but we do believe that there will be and will need to be additional price increases as we move through the year to offset more of that.

The other comment that we made, John, was that for this year, when you look inside of this year, we don't think that the pricing will fully offset the tariff cost of $50 million. You think -- you look at that, we got $10 million already in the books and without any pricing. And so from a lag perspective, certainly we're not going to get there for the calendar year 2019.

And then with regard to other sourcing opportunities, clearly the one that we're focused on longer term is the joint venture we'll have with Sailun in Vietnam where we believe that no later than the first half of 2020 we'll be producing tires in that facility. I would say that we are at least on schedule with regard to the construction of that facility. So we'll continue to monitor that and provide updates as appropriate.

But it's also important to note that we also have an offtake agreement with Sailun in Vietnam and we're just beginning to bring tires in -- underneath that agreement for this year. And it's a material amount, but it's certainly smaller than what it will be when we get to a full production facility over there as part of the joint venture.

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John Michael Healy, Northcoast Research Partners, LLC - MD & Equity Research Analyst [43]

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Great. And then just one clarification question. The commentary that you've put forward about margins for 2019, do those include the European restructuring? Or are those excluding European restructuring?

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Bradley E. Hughes, Cooper Tire & Rubber Company - President, CEO & Director [44]

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No; and I am glad you asked the question, just so we can clarify that. The margin guidance that we provided includes both the net impact of the tariffs, so the tariffs less any pricing effect that we have or have projected for the balance of the year, and it includes all of the restructuring costs that we're projecting for the cessation of light vehicle tire production at Melksham. So both of those are included in that margin guidance, which is still projected to be higher than last year, which exclude -- didn't have either of those.

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Operator [45]

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This concludes our question-and-answer session. I would like to turn the conference back over to Brad Hughes for any closing remarks.

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Bradley E. Hughes, Cooper Tire & Rubber Company - President, CEO & Director [46]

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Just very briefly today, I want to thank you all for joining us today, and I want to thank our Cooper team around the globe for all that they do. So thank you very much.

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Operator [47]

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