Cooper Tire & Rubber (CTB) Roy V. Armes on Q2 2016 Results - Earnings Call Transcript

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Cooper Tire & Rubber Co. (NYSE:CTB)

Q2 2016 Earnings Call

August 04, 2016 10:00 am ET

Executives

Jerry Bialek - Director, Investor Relations & Strategic Planning

Roy V. Armes - Chairman, President & Chief Executive Officer

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Ginger M. Jones - Chief Financial Officer & Vice President

Analysts

Rod Lache - Deutsche Bank Securities, Inc.

Ryan Brinkman - JPMorgan Securities LLC

David Tamberrino - Goldman Sachs & Co.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Dan Drawbaugh - FBR Capital Markets & Co.

Operator

Good morning and welcome to Cooper Tire & Rubber Company's Second Quarter Earnings Call and Webcast. At this time, all participants on the call are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

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

Jerry Bialek - Director, Investor Relations & Strategic Planning

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, Roy Armes; Brad Hughes, our Chief Operating Officer, as well as 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 will provide an overview of the company's second quarter 2016 financial and operating results, as well as the company's 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. We will reference non-GAAP financials during the call, the reconciliation of which is included in the slides. Following our prepared remarks, we will open the call to participants for a question-and-answer session.

With that, I'll turn the call over to Roy.

Roy V. Armes - Chairman, President & Chief Executive Officer

Yeah. Thanks, Jerry, and good morning to everyone. Before I cover the highlights of what was a very strong second quarter performance, I want to thank each of you for your continued interest in Cooper over the years. As previously announced, I'll retire as Chairman, CEO and President on August 31. So this is my final earnings call.

I'm proud to bring news of such strong performance as I move forward to a new chapter in my life. It's always great to end on a high note. And I want to give credit to the entire team at Cooper for doing such a great job transforming our business model over the past several years to a stronger, more sustainable Cooper for the long-term. It is proving to be a much more resilient model.

It's been my honor and privilege to serve Cooper for nearly a decade, and I'm happy to say that this transition meets my retirement criteria of leaving Cooper in a great position and also leaving it in great hands. Brad Hughes, who takes on the President and CEO role as of September 1, has been a very important part of Cooper's business transformation, and he is well positioned to continue with the strategic plan we have in place. This has been and will continue to be a very smooth transition.

As you know, my role as chairman also will be filled by our lead independent director, Tom Capo, who's been on our board since 2007 and has been lead independent director since 2014. Again I'm very confident that Cooper is in great hands to continue to build on our successes for the years to come.

Okay. Now, let's move on to the highlight for the second quarter results. I'm pleased to report that the second quarter was our best second quarter operating profit ever and our third best quarter of operating profit of all time. We're very proud of this accomplishment as it serves as a further validation for the hard work we've been doing and that we have continued to transform this business model.

I want to thank all the teams around the world for sustaining this strong performance. Looking at the financial details that are shown on page four of the supplemental slide deck, we provided -- and I'll summarize this quickly for you -- we've provided some good information there for you to consider. Net sales decreased 1.5% to $740 million, which is more than explained by negative currency impact and also reflects lower net pricing due to lower raw material costs.

Unit volumes were up just under 1% year-over-year. We generated operating profit of $110 million or 14.8% of net sales compared with $99 million or 13.2% of net sales a year ago. This is a very strong result and is well above our mid-term target. Diluted earnings per share for the quarter was $1.27 compared to $1.03 per share for the same period a year ago, a 23% increase.

Cooper continued to return cash to shareholders through our quarterly dividend and share repurchase program. In quarter two, more than $29 million in shares were repurchased at an average price of $32.77 per share. And we improved our rolling 12-month return on invested capital to 19.3%. I also want to point out that our International segment generated operating profit of $3 million, which is ahead of schedule, in terms of when we projected the segment would surpass breakeven. We'll have more on this later in the call.

Now, I'd like to take a minute to talk about product launches. We recently introduced the new Cooper Zeon RS3-G1, which is an all-season, ultra-high performance or UHP tire that is loaded with innovation and technology that drivers have come to expect from Cooper. This new tire features a brand new coupled silica tread compound, 3D Micro-Gauge sipes and our patented Wear Square technology.

The product's been given the name G1, because it holds up to 1g on corners. And as I said, we just launched this exciting new tire and have put a strong marketing campaign behind it. The UHP segment is the fastest growing segment in industry, and we are confident that this outstanding new product along with our strong price and promotion strategy will help Cooper gain share in this growing category.

And so with that, I'd like to turn the call over to Brad to give you a lot more detailed review of our second quarter operating performance.

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Thank you, Roy. Cooper's global unit sales during the quarter were up 0.9%, outperforming the industry in key markets. Our total light vehicle tire shipments for the U.S. were down 3.4% for the period, a better result than the industry, which had an estimated decrease of 3.9%, and also slightly better than the 3.5% decline reported by RMA members.

It's worth noting that we were up against some challenging comparisons in the second quarter of this year due to some unusual items in Q2 2015. A year ago, there was significant customer pre-buying related to the PCR Terra that went into effect in the third quarter of 2015, and in addition, shipments were flowing again following the West Coast port strike resolution.

In fact, U.S. industry shipments in Q2 2015 were the highest for any quarter over the past four years. Given our performance relative to the market in Q2 of this year and the continued strong performance of our house brand unit sales, we remain optimistic for growth in all of our key markets in the second half of the year.

Commercial truck tire sales of the Roadmaster brand were very strong in the second quarter compared with the same period last year. Commercial truck tire shipments for the U.S. were up 23.7% during the second quarter, outperforming both the industry and the RMA. We continue to freshen the TBR product line and recently introduced the Roadmaster RM332 heavy-duty wide based commercial truck tire that we believe will fuel additional growth in this category. We are also seeing solid year-over-year growth in our Latin America business, as we continue our efforts to expand into markets throughout the region.

Additionally, International segment units were up 2.5%, driven by strong performance in the domestic China market for both OE and replacement tires. We continue to experience a favorable environment for raw material cost, with relatively stable pricing within the industry, but it is worth noting that we are seeing some increased promotional and pricing activity.

As expected, our raw material index was up sequentially during the second quarter, from 131.5 in the first quarter to 135.5 in the second quarter, as shown on page six of the supplemental slide deck. This was 11.7% lower than the 153.5 index for the same period of 2015. The raw material index trend during the second quarter was up sequentially in April, May and June.

As we look forward, we anticipate raw material cost will be up modestly in the third quarter of 2016, compared with the second quarter of 2016. Commodity prices have been impacted by global events, such as market instability and overall reduced growth expectations for China. So, we remain cautious about our ability to forecast precisely in this period of volatility.

We are committed to and are continuing to make progress on our planned acquisition of a majority interest in GRT, a joint venture in China to produce truck and bus radial tires for global markets. We expect this transaction to close this year, pending certain permits and approvals by the Chinese government.

We are very pleased with the cooperation from our GRT partners and with the quality of the products that are being produced at that facility and look forward to closing this transaction. As a reminder, when we announced GRT, we noted that it was just our first step in the diversification of our TBR sourcing. We believe this investment remains prudent and we are committed to continuing to deliver high-quality tires and superior value to our TBR customers. As part of that commitment, we are continuing to evaluate other option for additional TBR supply to serve global markets, including alternatives outside of China.

On a related matter, we are assessing the impact of the preliminary countervailing duty tariff announced on July 28, with the goal of keeping Cooper and our customers competitive. As a reminder, the preliminary anti-dumping tariff has not yet been announced. And it's not yet clear how the market and pricing will be impacted.

We believe that there is not enough domestic supply to meet demand for TBR tires in the U.S. and that the majority of the excess suppliers in China. This is different from the past situation with passenger car tires where there was ample supply of product outside of China to meet demand. Although we will not know the full impact of the tariffs until the anti-dumping portion is announced later in the third quarter, we have included an estimate of the impact of the tariffs in our 2016 operating margin guidance.

I want to underscore that we are committed to the TBR business and we'll continue to provide high-quality tires at a great value to our customers. We are also monitoring the market reaction in other aspects related to the Brexit vote, including assessing what impacts if any Brexit will have on our business. Cooper's footprint in Europe, with operations in the UK and Eastern Europe, positions us well to meet customer demand and respond to any changes.

The company regularly performs risk assessments as part of our operational planning cycle, and had prepared for either outcome of the vote.

Now, I'll turn the call back over to Ginger for an update on the second quarter financials.

Ginger M. Jones - Chief Financial Officer & Vice President

Thank you, Brad. As Roy mentioned, our second quarter results were strong, continuing the positive trends from the first quarter. Specifically, our second quarter results included earnings per share of $1.27 compared with $1.03 in the second quarter of 2015. Strong operating performance in the Americas segment was a primary driver, along with a better than expected results in the International segment. A contribution of $0.05 per share came from the lower share count, resulting from our share repurchase program.

Net sales were $740 million compared with $752 million in the second quarter of 2015, a decrease of 1.5%. This decrease was a result of $11 million of negative currency impact, an $8 million of unfavorable price and mix, primarily due to net price reductions related to lower raw material costs. These decreases were partially offset by $7 million of higher unit volume. Operating profit was $110 million or 14.8% of sales compared with $99 million or a 13.2% of sales in 2015.

Second quarter operating profit as compared with the same period in 2015 was impacted by the following factors, which are summarized on page seven of the supplemental slide deck. First $23 million of favorable raw material cost net of price and mix, $2 million from higher unit volume, and $1 million of lower other costs.

These positive factors were offset by $10 million and higher SG&A cost and $5 million of unfavorable manufacturing cost. The higher manufacturing costs were primarily experienced in the Americas segment, where we incurred costs associated with the greater complexity of manufacturing more higher value, higher margin tires. While we have experienced increased manufacturing cost, associated with producing greater quantities of these tires, we are also seeing the benefit of higher margins in our improved operating margin results.

Moving to our segment performance. I'll start with Americas Tire Operations. Segment sales for the second quarter were $655 million, down 2.7% from $673 million in 2015. This decrease was a result of $12 million of lower unit volume, $5 million of negative currency impact, and $1 million of unfavorable price and mix, reflecting lower raw material costs.

Second quarter operating profit in the Americas rose to $116 million or 17.7% of net sales compared with the $109 million or 16.1% of sales in the year ago period. The major drivers of the increase were $23 million of favorable raw material costs, net of price and mix. These positives were partially offset by $7 million of unfavorable SG&A costs.

The unfavorable SG&A spending is primarily due to an increase in brand and product marketing program. We also had $6 million of unfavorable manufacturing costs, which I described in my earlier comments, and $3 million due to lower unit volume, driven primarily by our private label category. You can see the full profit walk for the Americas on slide eight of our supplemental slide deck.

Now, turning to our International Tire Operations. Net sales for the second quarter were $124 million, down 0.9% from the second quarter of 2015. Unit volume in the segment was 2.5% higher in the second quarter of 2016 compared to the prior year. Sales decreased $1 million as a result of $5 million of negative foreign currency impact and $1 million of unfavorable price and mix, which is partially offset by $5 million from higher unit volume.

The International segment improved its operating results compared with last year, with an operating profit of $3 million in the second quarter compared to an operating loss of $4 million in the same period a year ago. Those results were driven by $6 million of favorable raw material costs, net of price and mix and $1 million of favorable SG&A expense. You can see the full profit walk for the International Operations segment on slide nine of our supplemental slide deck.

Now, turning to some corporate items. The effective tax rate was 32.7% for the second quarter compared with 36.5% for the same period last year. The reduction in the effective tax rate year-over-year was primarily due to improved results in international locations that have lower statutory tax rates, which reduces the effective tax rate along with the release of certain tax contingencies due to statute lapses. The 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 2016 effective tax rate to be in a range of 33% to 35%. More detail on our taxes is available in the Form 10-Q that will be filed with the SEC later today.

Turning now to cash flow and the balance sheet. Cash and cash equivalents were $412 million at June 30 of this year compared with $408 million at June 30, 2015. Capital expenditures in the second quarter were $49 million. There is no change for our capital expenditure guidance, which we anticipate for full year 2016 to be between $210 million and $240 million.

Depreciation and amortization in the second quarter was $32 million, consistent with previous quarters. We expect depreciation and amortization to be approximately $135 million in 2016. In order to reduce the size and potential future volatility of our U.S. defined benefit pension plan obligations, the company has recently offered approximately 1,200 former employees, who have deferred vested pension plan benefits, a one-time option to receive a lump sum distribution of their benefits by the end of 2016.

The vested benefit obligation associated with these former employees is approximately $42 million, which is equivalent to about 4% of the company's benefit obligation for its U.S. plan. Eligible participants had until July 31, 2016 to make their election. If the percentage of eligible participants that choose the lump sum options exceeds approximately 30%, the company will recognize a one-time non-cash settlement charge in the third quarter. We have not included this potential charge in the earnings outlook for 2016, and if a charge does occur, it will be identified as a discrete item. The lump sum payments will be funded from existing pension plan assets and will occur by the end of the third quarter.

Turning to share repurchases, in February 2016 our board extended and increased our share repurchase program by authorizing the repurchase of up to $200 million of the company's outstanding common stock through December 31, 2017. In the second quarter, we repurchased approximately 894,000 shares at a cost of $29.3 million or $32.77 per share.

Purchases have continued in the third quarter under this authorization, with an additional 373,000 shares purchased at an average cost of $30.61 per share for $11 million through August 3, 2016. Since we began the share repurchases in August of 2014, Cooper has purchased 11 million shares at an average price of $33.85 per share. This is 17% of the outstanding shares as of August 2014.

The remaining share repurchase authorization is $152 million and expires on December 31, 2017. 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 to support organic growth and margin improvement initiatives, acquisitions, and returning excess cash to shareholders.

In summary, we believe our strong operating performance, our sustained high level of ROIC, and our demonstrated commitment to delivering on our strategic plan, including a balanced approach the capital allocation, delivers long-term value to our shareholders.

I'll now turn the call back to Brad for a perspective on the balance of the year.

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Thank you, Ginger. All of us at Cooper are very pleased to have delivered another excellent quarter, which puts us in strong position for the full year 2016. Our second quarter performance was the outcome of continued great results in the Americas segment and much improved results in our International segment, as noted earlier. I also want to extend my thanks and congratulations to the Cooper team around the world.

We expect that global tire markets will remain highly competitive. Our cadence of innovative new products, expectations for unit volume growth and improving mix of sales, focus on higher value and higher margin tires positions us well in such an environment.

For the full year 2016, we expect unit volume growth in each segment in the second half. We expect raw material costs to trend modestly higher through 2016, but this is difficult to predict because of the current volatility.

Excluding the impact of acquisitions and non-cash pension settlement charges, we expect full year 2016 operating margins to be modestly higher than the full year 2015 level of 11.9%. This projection includes an estimate for the impact of the pending truck and bus radial tire tariffs, which was not included in Cooper's previous margin outlook.

As a reminder, Cooper announced at our Investor Day in 2014 and has continued to emphasize that our mid-term goal is to consistently deliver operating margin of 8% to 10%. As we reported, our actual performance in the first half of 2016 was better than this mid-term goal, but is aligned with our long-term goal for operating margins that consistently exceed 10%.

On a personal note, I want to thank Roy for being such a great leader, teacher and friend. I've learned a tremendous amount from him, and I'm honored to be entrusted with the leadership of Cooper at such an exciting time in our history. Roy, thank you for all you've done for Cooper, and we all wish you the very best and much happiness in your future.

With that, we'll close the formal remarks and move on to your questions.

Operator, will you please take the first question?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer sessions. The first question comes from Rod Lache with Deutsche Bank. Please go ahead.

Rod Lache - Deutsche Bank Securities, Inc.

Good morning, everybody, and congratulations, especially to Roy. Great job over the past couple of years.

I had a couple questions just in terms of your commentary and the guidance. Your margin performance year-over-year in Q1 was up 340 basis points, Q2 160 basis points, and you mentioned again you're expecting operating margins to be up modestly versus 2015. And to get up modestly, which I'm interpreting is maybe something like 50 basis points, not hundreds of basis points, it would seem that your North American margins would have to contract fairly meaningfully, maybe from 18% down to maybe closer to 10%. And I would guess that that would be driven by price versus raw materials and tariffs.

So, maybe just to start off, can you give us some view on what kind of an impact you've incorporated, the magnitude of the impact you've incorporated for the tariffs, what's the percentage of your volume that's affected, and what's the expectation on timing?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

So, with regard to the tariffs, Rod, we're not going to identify a specific amount. We've made our best estimate without knowing yet the preliminary anti-dumping tariff. What we've done is to try and model something off of what has happened in the past with PCR tariffs, which may or may not end up being accurate, but, we put in what we believe is a reasonable estimate based on what we do know for the complete impact of the tariff for the balance of this year.

On the countervailing portion, that's already in effect and we are assuming that once the anti-dumping are announced that that will be added and incremental to what's happening on with the TBR tires as we move forward.

Again, the other thing that's not known at this point is how the market's going to respond to those tariffs and specifically with regard to pricing in this market. As we continue to reinforce, it's a bit of a different situation than PCR in that, we don't believe that there is enough domestic supply of tires to meet the demand for TBR tires in the U.S. in the near-term. The majority of the excess supply is in China and that's going to have an implication that's potentially going to be different from what we saw with the PCR tariff.

So we have an estimate in. We think that it is as good as it can be given what we know today, but there's still a fair amount of information that's going to unfold over the second half of the year.

Roy V. Armes - Chairman, President & Chief Executive Officer

I would also add there, Rod that we are expecting some increases in raw material costs here in the second half as part of our forecast and those are all besides the tariffs and things Brad had mentioned, those are all the things that we're building into our thinking on these margins.

Rod Lache - Deutsche Bank Securities, Inc.

What's the percentage of your North American volume that's effected, could you at least quantify? Can you just size that up for us?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

On the TBR tires, Rod?

Rod Lache - Deutsche Bank Securities, Inc.

Correct?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Yeah. The TBR, we still are continuing to – all of our sourcing today is in China. So, all of the TBR tires that we're bringing into the U.S. are going to be affected by the tariff.

Rod Lache - Deutsche Bank Securities, Inc.

So the percentage of North American revenue from TBR today is roughly what, if I can go back to my notes?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Yeah. We haven't broken that out in the past, Rod. It's an important business for us, but – and one that is growing and we expect to continue to grow, but it isn't a huge portion of our revenue in the United States.

Rod Lache - Deutsche Bank Securities, Inc.

Okay. You mentioned what the raw material index has done and the expectation. Could you just remind us in the back half on a year-over-year basis, what's the magnitude of the headwind? And you also mentioned that you're starting to see some promotional activity in or expecting to see much or if you are seeing it or you are expecting to see increasing promotional activity, just give us some color if you can on what you think is behind that, what makes you a bit more cautious on that activity? Is that more related to just what OEM production is doing or capacity or is there something else that you're seeing?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

First of all, with regard to the raw material index, again we're indicating that we think that there will be a modest increase in the raw material index in the third quarter. And I think it's relatively safe to say that, that would be the outlook for the second half, not just the third quarter. So, it's a modest increase on that we're looking at. We don't think it's going to be significant based on what we know today. Again, we always put the caveat in about some of the other market factors that could affect that. But, based on what we can see today, we don't think that's going to be a significant change from where we're at today.

We are down relative to where we were a year ago in the second quarter. We just noted that it's down over 11%, in fact almost 12% year-over-year in the second quarter. So, that will carry some into the second half of the year.

Well, with regard to the pricing environment, we have seen some promotional activity. There has been some, what I will describe as select targeted pricing activity and that's based on what we're seeing – what we have seen as opposed to what we're expecting to see, but I wouldn't make a lot out of that based on what's happened with raw materials, overall, it still seems to be quite a disciplined market out there.

Rod Lache - Deutsche Bank Securities, Inc.

Okay. Great. Thank you.

Roy V. Armes - Chairman, President & Chief Executive Officer

Thanks, Rod.

Operator

Thank you. The next question comes from Ryan Brinkman with JPMorgan. Please go ahead.

Ryan Brinkman - JPMorgan Securities LLC

Hi. Congrats on the quarter. Thanks for taking my question.

Roy V. Armes - Chairman, President & Chief Executive Officer

(28:40).

Ryan Brinkman - JPMorgan Securities LLC

Thanks. First question is just on the tariff environment, does your guidance now include only the impact of the announced countervailing duties on the truck and bus tires or have you made some sort of assumption regarding anti-dumping duties too? And then, just how should we think about any sort of potential pre-buy of these types of tariffs like we did see on the light duty side in 2014 and 2015?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Yes. Ryan, the estimate is intended to cover both the countervailing duty which we know, we know what that number is, and we've got an estimate in for the balance of what will be announced during, we believe late in the third quarter. So, we just intended to be comprehensive. Again, we'll find out when the anti-duty tariff is – the preliminary tariff is announced, how close we are, but we've made our best estimate for what that looks like. On the – I'm sorry, the second part of your question?

Ryan Brinkman - JPMorgan Securities LLC

Was there potential for any sort of pre-buy impact (29:40)?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Oh, potential pre-buy, yeah. Clearly I think there is a possibility that that could happen. As we, again have noted when we look at the supply and demand circumstances in the U.S. and what that may foreshadow with regard to potential pricing on TBR tires, I do think it's possible that we may start to see some pre-buy activity.

Ryan Brinkman - JPMorgan Securities LLC

Okay. That's helpful. Thanks. And then, just on Brexit, I mentioned, you must be a pretty big net exporter of tires right from the UK to Continental Europe, I think your only clients in Europe are Avon in the UK and then the Serbia plant, maybe. So, I'm curious, I know we don't know what's going to happen with tariffs post-Brexit and that could be not until another couple of years. But just on the currency movements, could these be positive for you, from a currency transaction or market competitiveness basis or aren't you looking at it like that?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Well, we're looking at the fact that we today have manufacturing capability in the UK and in Eastern Europe and that's a pretty good place to be right now with the situation with Brexit. We're continually evaluating how we can source most efficiently to all the markets that we serve and with what's happened with Brexit here in the near-term having some supply in both Eastern Europe and in the UK is a pretty good situation to have.

Ryan Brinkman - JPMorgan Securities LLC

Yeah. I would agree. And then just the last question is on the International segment, it's doing better than we had thought, better than your initial guidance. Do you attribute that mainly to the macro factors that are also impacting North America like the lower raw material prices, et cetera or more towards company-specific costs or mix actions. And then, how should we think about this segment trending into next year like what's the next step there, in terms of your strategy beyond the capacity expansion plans?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

So, there is the macro environment out there, but frankly, I do think, we had taken that largely into account, when we were projecting, what we thought, we were going to be able to accomplish from a profit improvement perspective. I think where we're really excited is, we're excited about the response that we're seeing to the new products that we're launching in Europe, which are going very, very well and helping to contribute to the improvements, we're seeing in that market. And we are continuing to grow at a very rapid pace in domestic China driven in large part by the success that we're having in the OE market there, which is even a little bit ahead of where we thought we might be at this point and congratulations to the teams in those two business units for doing a great job.

Ryan Brinkman - JPMorgan Securities LLC

Okay.

Roy V. Armes - Chairman, President & Chief Executive Officer

We're seeing some good growth in Latin America as well, so all of those are contributors to the International segment. So, we're very encouraged and pleased by what we're seeing right now.

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

I think on what we expect to see now is a continuation of the growth in those international markets. Clearly, domestic China is a really big opportunity for us on, and so we're now focused on making sure that we continue to have the right products and that we've got enough capacity to meet the demand that we're seeing down the road.

Ryan Brinkman - JPMorgan Securities LLC

Okay. Thanks for all the color and congratulations to Roy.

Roy V. Armes - Chairman, President & Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from David Tamberrino with Goldman Sachs. Please go ahead.

David Tamberrino - Goldman Sachs & Co.

Well, thank you, and congrats on the quarter.

Roy V. Armes - Chairman, President & Chief Executive Officer

(33:21) David.

David Tamberrino - Goldman Sachs & Co.

Just on the sustainability of margin improvements in North America. Just wondering if you maybe could break that down for us as to how much you think is due to a company-specific actions like mix improving to a higher percentage of HVA tires, the return of commercial vehicle tires into the mix over the last year or so versus shorter term raw material benefits that we've been seeing year-over-year from the current environment.

And the reason I ask is, because couple of years ago, the long-term guidance was to have between 8% to 10% corporate sustainable margins, obviously that China JV goes away, but North America has been running pretty well over the past couple of years. So, trying to understand if anything above that 10% corporate in the near-term is really a raw material benefit versus where you think structurally you've improved the business to?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Well, we're obviously extremely pleased with the margins that the business is delivering, particularly from the Americas. We're excited about the trends that we're seeing in the International segment. And as we said for the full year and I don't want to lose sight at this, we expect our margins to expand compared with where we were in an extremely strong 2015. There are market factors out there that will continue to be out there around raw material index and how the market response to pricing out there. And we focused very much on making sure that we have competitive pricing for our customers. But, we're also balancing that against delivering the types of margins that we expect from the business.

We do focus and this is to, I think one of your main points, David, on what we can do to improve the overall performance of our business model. So, we are focused on mix improvements that includes the higher margin products that we're selling more of and building capability to produce more of. We're focused on – it then includes, TBR as you noted, TBR sales are continuing to grow, that's a contributing factor and we are always focused on making sure that we are doing everything we can on cost to ensure that we can provide the value equation that our customers expect, which is great products, but at a price that they can deliver more profit to their business with.

Roy V. Armes - Chairman, President & Chief Executive Officer

Yeah. I think, one of the other things you might want to think about here is that, we've said for the last several years now that, we are pushing our product development, where we would have 20%, 25% of our revenues on an ongoing basis that would generate – 20% to 25% of our revenues would be generated via these new products that we've introduced in the last 24 months. And with that, the majority of those products are in the higher value-add categories. So that's clearly been helping us as we move forward to continue to not just grow that part of the business but to expand margins.

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

And David, just to add one note, to build on something that Roy was talking about earlier: one of the things that's really exciting for us and for me now as we're making this transition is the strength of the business model, and we are in a position we believe now to really start to see some of the growth in our markets, in particular globally. And taking and being able to leverage the strong margins that we're seeing into a growth move is something that really excites us.

David Tamberrino - Goldman Sachs & Co.

That's very helpful. Just on the beginning part, start thinking about some of the self-help actions that you've been taking, I mean, where do you feel like you are? If this was a ball game, are you in the early innings, middle innings or late innings of some of those actions in having that margin expansion come to fruition?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Things that we -- the improvements in mix and in cost, I mean, we are no further than the middle innings. And part of that's driven by the industry, and part of that's driven by the fact that we are probably moving faster in some of those higher margin products than even the industry is.

David Tamberrino - Goldman Sachs & Co.

That's helpful. And then, just lastly for me, you touched on GRT, obviously not in your forecast for the International segment right now. But if that does come into the back half, is that going to materially change the guide to be profitable for the full year or is it only a slight headwind?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

I would describe it as – we do believe we're going to close that transaction this year. It will depend a little bit about when the exact timing of that is, but we don't believe that it's going to have a material impact on the results for the year.

David Tamberrino - Goldman Sachs & Co.

Thank you. Congrats again on the quarter, and Roy on everything.

Roy V. Armes - Chairman, President & Chief Executive Officer

Yeah. Thanks a lot.

Operator

Thank you. The next question comes from Brett Hoselton with KeyBanc. Please go ahead.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Thank you very much. Good morning, gentlemen and ladies.

Roy V. Armes - Chairman, President & Chief Executive Officer

Good morning, Brett.

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Hi, Brett.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Roy, congratulations.

Roy V. Armes - Chairman, President & Chief Executive Officer

Thanks. I appreciate it.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

And you're right, it is – I mean, you're leaving a very well performing company. So, good job. I wanted to delve into the first half, second half margins maybe a little bit more and just make sure I kind of understand it. It looks like you're forecasting some margin contraction going forward. Sounds like you're anticipating a little bit more competitive pricing, a little bit higher raws and then the tariff seem to be three of the major components. Is there anything else in there that is of significance, or is it those three things primarily?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

I think, Brett, always the most important things to our business are the price, raw material relationships. And so those are the most important factors as we look forward. We've noted that we now have included our best estimate -- it is an estimate -- but our best estimate for what the tariff implications will be this year in the guidance, and that wasn't in previously.

Roy V. Armes - Chairman, President & Chief Executive Officer

Yeah. I think, the other things we've already talked about with the closing of GRT is not going to have a significant or material impact on the bottom-line. We also have the non-cash pension settlement that would be taken in the third quarter. I mean those are other things there, but I think you've hit the three big ones, Brett.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Yeah. As we think about the tariff, I guess, conceptually my understand is that it's probably a back half and actually fourth quarter potentially event. So, how do I think about that relative to your guidance? Because, it looks like it's – I mean, it looks like we're going to settle up in November, so looks like maybe a couple of months worth of a hit, possibly retroactive. So, I guess how should I think about the timing and so forth, because it doesn't seem like if you're going to catch the back half that significantly?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

So, Brett, the portion of it – the preliminary countervailing duties, which have already been announced, actually took effect in July and began to affect shipments in the month of July. And the countervailing duties, which we're expecting to be later this quarter, the third quarter, will kick into effect when those are out as well. They will not be final until, we think, sometime in the first quarter of next year, so there could be some adjustments on even at that point in time. But there will be -- if impacts have already started, it will continue through the rest of the year.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Okay. And then taking a step back, switching gears, International segment. There was a time when you used to make $100,000 or so in that segment. So, is it really cranking? Can you kind of broadly speaking and – kind of again 30,000-foot perspective -- is that a segment that you think that you can potentially get back to $100,000 at some point in time? I don't know maybe three years or five years down the road? And if so, kind of what would be the major milestones that are major drivers of the improvement in the profitability in that segment?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Well, and I think you mean $100 million, Brett?

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

I apologize. Did I say $100,000?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

You did. So I'd like that as my goal for next year.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

I apologize.

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Because I know I would be able to crush it. So, but no – $100 million, and you know this included on a pretty big contribution from CCT, now PCT and we've divested our ownership in that. I want to remind everybody it's one of the best returns we have had on any of our investments within the company, but was the right thing to do at the time.

And we have on, not only do we need to continue to improve the business that we have today, we will bring GRT on, again we believe before the end of the year and we'd indicated that, that will begin to be accretive in 2018. So that will begin to add in. But that's not nearly the same size of business that CCT was. So, we are going to be doing this largely through organic growth. At the same time, we continue to monitor everywhere around the world for opportunities to build our business through potential M&A activity as well and we will continue to do that.

So, based on what we have today on, $100 million is several, several years down the road, but we certainly have a lot of opportunity to grow that business and to grow the profit contribution from that business even with what we do have, we are excited about that on and we will look to see if there is any way that we can accelerate that through M&A activity.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

And then, finally on the truck tariff itself, it seems that on the passenger car side, when it kicked in, a lot of suppliers resource their product to elsewhere and so, the Chinese started shipping to Brazil, for example and then people started buying tires from Vietnam or whatever. So, my question is, it seems like, well, kind of what's your plan B and how is it going? In other words, do you think you might be able to resource some of the truck tires from elsewhere that you can avoid paying the tariff and how does that potentially factor into things?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Two points. One is on, there are tariffs now that does not change our view on GRT. We still think that's going to be a very prudent investment and one that will be profitable for us in the long-term as part of our global TBR business and as one source of tires for our global TBR business. And we have been and continue to develop and look at other sources outside of China, because as we look at a global TBR business, we believe even before the tariffs, we believed that we needed a footprint that was in different locations to support what we think, we can do in that business. And so, I think that we will be doing that and that TBR business is going to be one that is going to be very good for us in the future and GRT is going to be an important part of it, but it won't be the only part of it.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Is that something that you might be able to or might be able to impact your performance? I guess, in another words, if you were to source some of your U.S. targeted production of truck and bus tires from some other – is that something that could potentially take place within six months, a year, two years, I mean, how do we think about that? Because that does seem like it could offer some meaningful upside to your numbers longer term, if you could somehow resource it to find a different source of tires or different location, at least for the stuff that comes to the U.S. I should say?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Yeah. The timing is dependent on the different things that we're looking at. In some cases, it could be a relatively short timeline, because you're certifying your products in an existing facility, if it becomes something more than that or different than that, it could be a longer time horizon.

Again, Brett I think the important thing is, we are going to be making sure that we've got a good business strategy support, a TBR business that we think can grow. We're going to do it in a way that makes sense for our customers and our shareholders in the near-term. We are committed to making sure that our customers are competitive with the great products. They've come to us expect from us and they will continue to receive. And we'll take the appropriate actions on as quickly as we can to move that strategy forward.

Roy V. Armes - Chairman, President & Chief Executive Officer

Yeah. Brett, let me just add a little bit more to that with Brad. We're going through this now, as we're trying to look at what we want to produce at GRT. And normally, just to get the ramp up started, you're talking six months to a year. To get the full volume transfer, it takes a little bit longer than that and that's why we were staying focused on certain products. And remember, the one of the reasons, not one, but there were three reasons we bought into GRT. The first one was to make sure we have an alternative for TBR production and that also says it's a good reason to have something like GRT there.

Secondly, we knew we were going to start off with exports there. We didn't know about the tariffs at that time, but we still think we can be and plan to be competitive with even products coming out of there with the tariffs and I think that's an important note. But more importantly, it's the largest market in the world and that domestic market we haven't even started to penetrate yet, which is another growth opportunity for us, we get the distribution in place and once we get the ramp up with the GRT.

So, to start doing a transfer is usually six months to a year depending on how many trials you have to run on these products and it could drag out to a couple of years for full volume if we wanted to do that. So, we're looking at all alternatives as Brad had mentioned earlier to see what makes sense for us during this period of time.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Great. Thank you very much. And Roy, again, congratulations.

Roy V. Armes - Chairman, President & Chief Executive Officer

Thanks, Brett.

Operator

Thank you. The final question comes from Christopher Van Horn with FBR & Company. Please go ahead.

Dan Drawbaugh - FBR Capital Markets & Co.

Hi, guys. This is Dan Drawbaugh on the line for Chris.

Roy V. Armes - Chairman, President & Chief Executive Officer

Hey, Dan.

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Hey, Dan.

Dan Drawbaugh - FBR Capital Markets & Co.

Hey. So, congrats on the quarter first of all, and congrats to Roy. I have a good wish to you as you head out.

Roy V. Armes - Chairman, President & Chief Executive Officer

Thanks.

Dan Drawbaugh - FBR Capital Markets & Co.

I think we would like to first turn to Latin America, you guys mentioned that you saw some upside there. Is there any way you could specify sort of what segments you're seeing or what type of tires are selling well? And can you give us a way to think about where that segment goes from here in terms of a ramp?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Yes. I'm happy you asked about it because we're very excited about what's going on there. We're doing extremely well in Mexico. That continues to be with a blend of products that many of which are coming from the facility that we have, the joint venture that we have in Mexico, Cooper Tradoc Tire, in the portfolio that's offered out of that facility. It's all light vehicle on out of that facility, but it ranges from PCR into some SUV and light truck products, and then that supplemented with products from other parts of our global manufacturing footprint, primarily the U.S.

And I would say that that's similar to the profile that we're seeing in other markets in Lats, in Central and South America. It's largely light vehicle at this point. And it's coming from that CTT facility and from the U.S. plant footprint. We do have our TBR business, that's doing pretty well in Mexico right now and our booking at that is a potential opportunity in some of the other markets in Central America and South America.

And so, it's just – it's a very good time for us right now, as we're having great success and reception in some of the newer markets that we're entering right now. And yet we continue to grow in some of the markets where we already had a presence, particularly Mexico.

Dan Drawbaugh - FBR Capital Markets & Co.

Excellent. That's very helpful. Thank you. Then turning to the commercial truck volumes growth in the U.S. Can you break that out between class A and medium duty?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

We typically don't do that, Chris (sic) [Dan] (50:34) and so, I'm not prepared to do that right now. It's not much different from what it was, but the growth profile was very similar to the base that it started from though.

Dan Drawbaugh - FBR Capital Markets & Co.

Okay. Fair enough. Thank you. And then, in terms of sort of regional demand, are you seeing any particular area of the U.S. or is it just a broad market trend that's carrying that higher?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

I'm sorry, in the U.S. you're talking about with light vehicle?

Dan Drawbaugh - FBR Capital Markets & Co.

Yeah. U.S., actually, I'm trying to get back to that commercial volume growth.

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Okay. No, on the commercial side of the business, I wouldn't suggest that there is any big significant difference regionally, in terms of where we're seeing the growth. We're having pretty good growth across the customer profile right now.

Dan Drawbaugh - FBR Capital Markets & Co.

Okay. Fair enough. Thank you. That's helpful. And then, last one from me. You mentioned M&A couple of times. Can you give us a sense of where certain things are in the pipeline there? I mean, are you looking closely anything in particular, are you taking more sort of overall perspective on things, anything is there?

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Chris (sic) [Dan] (51:59), what I can say is that we are continuously looking at our strategy and how we could advance it potentially through M&A on. We are consistently looking for opportunities to see, where we have matches between those two, our strategy long-term and where there might be an M&A opportunity that can match up and contribute or accelerate that on. And as always, when appropriate we would say something about it, but until then we will continue to work on it.

Dan Drawbaugh - FBR Capital Markets & Co.

Okay. Great. Thank you for the help. And again, congrats on the quarter.

Roy V. Armes - Chairman, President & Chief Executive Officer

Thanks.

Bradley E. Hughes - Chief Operating Officer & Senior Vice President

Thank you.

Operator

Thank you. That does conclude the question-and-answer session. I would like to turn the conference back over to Mr. Roy Armes for any closing remarks.

Roy V. Armes - Chairman, President & Chief Executive Officer

Yeah. Thanks. I'd like to thank everybody for being on the call today. I certainly enjoyed getting to know you over the years, and I look forward with confidence to watching this great group of people build on our successes as a team, and they're continuing to focus on the strategic plan that we have in place that's going to help drive the growth.

It's been my utmost honor and privilege to serve Cooper. And I've nothing but confidence in the direction Cooper is headed today. And I really would like to wish everybody the best and have a great day. And thanks so much for all the support, you've given to Cooper.

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