Cooper Tire & Rubber's (CTB) CEO Roy Armes on Q1 2016 Results - Earnings Call Transcript

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Cooper Tire & Rubber Co (NYSE:CTB) Q1 2016 Earnings Conference Call April 29, 2016 10:00 AM ET

Executives

Jerry Bialek - Director, Investor Relations & Strategic Planning

Roy Armes - Chairman, President & Chief Executive Officer

Brad Hughes - Chief Operating Officer & Senior Vice President

Ginger Jones - Chief Financial Officer & Vice President

Analysts

Bret Jordan - Jefferies

David Tamberrino - Goldman Sachs

Ryan Brinkman - J.P. Morgan

Rod Lache - Deutsche Bank

Dan Drawbaugh - FBR Capital Markets

Brett Hoselton - Key Banc

Tony Cristello - BB&T Capital Markets

Operator

Good morning and welcome to Cooper Tire & Rubber Company's First 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. [Operator Instructions] As a reminder, this conference call is being recorded.

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

Jerry Bialek

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 am 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 projection. 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.

In addition to other matters, during this call we will provide an overview of the company's first h 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-K that will be filed with the SEC later today. Following our prepared remarks, we'll open the call to participants for a question-and-answer session.

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

Roy Armes

Yeah, thanks Jerry. Good morning to everybody. This morning I’ll begin by briefly covering our first quarter results and then I’ll provide an update on new product introductions and innovation and finally a brief comment on the CEO transition plan. Then I’ll turn the call over to Brad and Ginger for discussion of our operations and financial performance and then I’ll close our remarks with a discussion of our outlook for 2016 and then we’ll open up the line for questions.

I’m pleased to report that Cooper is off to a strong start in 2016, kicking off this year with a record first quarter operating profit excluding CCT from prior years. We’re very proud of this and want to thank all the teams worldwide for putting another great effort together.

Our first quarter performance was a continuation of the positive results we delivered in 2015 and performance highlights are shown on page 4 of the supplemental slide deck we have provided, which include net sales that decreased 2% to $650 million. Unit volumes were up just under 2% year-over-year, with a solid increase in the International segment.

However, this was offset by a slight decrease in the U.S. resulting from lower volumes in the private label business. We generated operating profits of $91million or 14% of net sales compared with $70 million or 10.6% of net sales a year ago. This is a very strong performance in result and it’s not only above our mid-term target, but also exceeds our long-term goal for operating profit margin.

Diluted earnings per share for the quarter were $1.05 compared with $0.69 per share for the same period a year ago, a 52% increase. Cooper continued to return cash to shareholders through the share repurchase program, with nearly $25 million in shares repurchased during the first quarter at an average price of $35.98 per share. And we achieved a solid rolling 12 months return on invested capital of 18.8%.

Moving on to products and innovation, new product introductions and innovation continued to play a significant role in driving growth for Cooper. Cooper is now developing and launching market leading products at a faster pace than ever before. Our increased efficiency and speed helps us maximize the return on our R&D investment by developing ready to use advanced technologies that are reusable across products and can be regionally customized to meet customer needs.

We continue to shorten our product development cycle time, in fact we’ve reduced our development cycle time by over 30% since 2011 and we’re working to achieve a combined cycle time reduction of more than 35% by the end of 2017 and we believe we’ll achieve this perhaps even a bit earlier.

We’ve expanded our Asia technical center and we built technical capabilities to penetrate and win in the original equipment, truck and bus tire in premium passenger segments. As evidence of this, in the first quarter alone, we launched 12 new product lines within the total brand portfolio across the globe.

In Asia, we’re having a continued success with OE customers and received four new OE tire approvals in the first quarter. These add to the growing portfolio of OE segments in this supporting growth area for Cooper.

In Europe, we launched the new CS8 high performance summer tier and so far sales were up 40% year-over-year when compared to the product this tier will place. In Latin America, we launched the new Cooper CS1that was designed exclusively for the Latin American market.

And in North America, we launched four new passenger lines including the LSR Grand Touring within our master craft brand offering and this tier represents the latest in luxury in all-season touring performance for a wide variety or wide range of passenger vehicles.

The LSR Grand Touring is built around innovative design and technology that delivers a well-blended balance between all-season performance and long tread life. In North America new products defined as those within the past 24 months account for approximately 30% of our light vehicle sales. We’re well on our way to our goal of bringing that figure to 35% over the next several years.

As you can see Cooper remains committed to innovation and new product development and we’re accelerating the pace of product launches and we believe this is having a positive impact on our results. Before we move on, I want to reiterate a few elements of our CEO succession plan.

As you know I’ve announced my intention to retire effective August 31, 2016 and in line with the board of directors long-term succession plan Brad Hughes will succeed me as President and Chief Executive Officer upon my retirement and my role as Chairman will be filled by our Lead Independent Director, Tom Capo, who has been on the board since 2007, and has been Lead Independent Director since 2014.

Brad has been a positive and influential force in Cooper for more than six years and he’ll be tremendously effective at leading Cooper to even greater success in the years to come. I expect this to be a smooth and seamless transition and during the coming months and beyond, Cooper will continue to execute our strategy in which Brad was an integral part of developing and that has delivered strong results that we were talking about today.

So with that I’d like to turn the call over to Brad to give a more detailed review of the first quarter operating performance.

Brad Hughes

Thank you, Roy. Global unit sales were up 1.9% during the quarter. Total light vehicle tier shipments for the U.S. were down 1.4% for the period compared with an estimated increase of 6.2% for the industry and an increase of less than 1%, 0.6% to be more precise as reported by our RMA members. Unit shipments for the Americas segment were down one half of 1% as strong growth in Latin America partially offset the U.S. decline.

A few comments regarding U.S. shipments; first, you’ll recall that the disruption from the implementation of tariffs on Chinese PCR tires continued to affect the industry and RMA volumes in the first quarter of 2015, making comparisons difficult. Second, for Cooper, we saw a decrease in private label volume during the first quarter of 2016 compared with the tariff affected quarter a year ago, but we anticipate this will improve for the balance of the year.

Importantly, our house brands performed very well, beating both the industry and the RMA.

In general, profitability of house brands is better than that of private label business. In addition, we again saw strong performance in light truck and SUV tiers. These mix contributors were evident in our operating profit margins.

International segment units were up 4.6% driven primarily by increased sales in the domestic China market for both OE and replacement tires. We’re very encouraged by the volume growth in the international segment and are also becoming increasingly confident that the operating profit improvement is well on track to approach breakeven no later than the fourth quarter of this year, again this prior to any effects from merger or acquisition activity.

Turning to truck and bus radial tire shipments, commercial truck tire unit sales of the Roadmaster brand were very strong in the first quarter of 2016, compared with the same period a year ago. Shipments for the U.S. were up 4.1% during the first quarter, outperforming both the industry and the RMA. We continue to experience a favorable pricing environment on raw materials.

Our raw material index was sequentially down during the first quarter from 146.2 in the fourth quarter to 131.5 as shown on page 5 of the supplemental slide deck. This was 17.3% lower than the index of 159 for the same period of 2015. The trend during the quarter was down sequentially in January, February and March.

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

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

We are pleased with the cooperation from our GRT partners and with the quality of the products that are being introduced and produced in that facility, and look forward to close this transaction. We are executing a first step in the diversification of TBR sourcing through our planned investment in GRT in China.

We believe this investment remains prudent and we are committed to continuing to deliver high-quality tires and superior value to our TBR our customers. As part of that commitment, we are continuing to evaluate other options for additional TBR supplies to serve global markets, including alternatives outside of China.

Shifting gears a bit to address potential TBR tires, as you know the United Steelworkers filed a petition on January 29, with the ITC seeking import duties on TBR tires imported into the U.S. from China. The Department of the commerce is currently gathering information to determine if there was or is substance to these claims made by the petitioner. We expect preliminary rulings in this matter to come down in the third quarter of this year, with final rulings most likely in the first quarter of next year.

Finally, one more operational comment, We’ve begun implementation of a seven day operating pattern at our Mexican joint venture, which is a very efficient way to increase capacity at one of our most cost-effective facilities and this will help support our global and in particular Latin America growth plans.

Now I will turn the call over to Ginger, for an update on the first quarter financials.

Ginger Jones

Thank you, Brad. As Roy mentioned our first quarter results were strong, continuing the positive results from 2015. Specifically our first quarter results included earnings per share of $1.05 compared with $0.69 in the first quarter of 2015. Strong operating performance in the Americas segment was the primary driver. A contribution of $0.06 per share came from the lower share count resulting from our share repurchase program.

Net sales were $615 million compared with $663 million in the first quarter of 2015, a decrease of 2%. This decrease was a result of $17 million of unfavorable price in mix, primarily due to net price reductions related to lower raw material cost and $8 million of negative currency impact. These decreases were partially offset by $12 million of higher unit volume.

Operating profit was $91 million or 14% of sales, compared with $70 million or 10.6% of sales in 2015. First quarter operating profit as compared with 2015 was impacted by the following factors, which are summarized on page 6 of the supplemental slide deck.

$23 million of favorable draw material cost net of price and mix, $ 6 million from lower product liability cost. As a reminder product liability cost are based on the timing of litigation and an estimate of outcomes and therefore often uneven quarter-to-quarter. We currently expect this benefit may be offset by higher product liability cost later in the year.

We also had $2 million in lower SG&A cost and $ 1 million from higher unit volume. These positive factors are offset by $6 million of unfavorable manufacturing cost. The higher manufacturing cost were primarily experienced in the Americas segments, where Cooper incurred cost associated with the greater complexity of manufacturing more higher value, higher margin tires along with nonrecurring costs in our Mexico tire production plant. Resulting from the manufacturing process changes that took place in the first quarter.

While we’ve experienced increased manufacturing costs associated with producing greater quantities of higher value, higher margin tires, we’re also seeing the benefit of higher margins in our improved operating margin results. We also saw $3 million of negative currency impact and $ 2 million of other cost.

Moving to our segment performance, I will start with Americas tier operations. Segment sales the first quarter was 579 million down 3.2% from the 599 million in 2015. First quarter operating profit in the Americas rose to 106 million or 18.3% of net sales compared with 90 million or 15% of sales in 2015. The major drivers of the increase were 27 million of favorable nonmaterial cost net of price and mix and 6 million of lower product liability cost.

These positives were partially offset by $5 million of unfavorable manufacturing cost, which I described in my earlier comments. We also had 5 million of unfavorable SG&A cost. The unfavorable SG&A spending is primarily due to an increase in brand and product marketing programs, the timing of brand and product marketing programs spending move very quarter to quarter. We also had 5 million of negative currency impact and other cost and $2 million due to lower volume. You can see the full profit walk for the Americas segments on the Slide 7 of our supplemental slide deck.

Now turning to our International tire operation, net sales for the first quarter were 103 million down 3.6% from first quarter of 2015. Unit volume in the segment was 4.6% higher in the first quarter of 2016 compared to the prior year. Sales decreased $4 million as the higher unit volume of 5 million was not enough to offsets 6 million of unfavorable price and mix, primarily due to the net price reduction related to the lower raw material cost and negative currency impacts of 3 million.

The international segment improved its operating results compared with last year with an operating loss of 2 million in the first quarter compared to an operating loss of 3 million in the same period a year ago.

Raw material benefit of 5 million was fully offset by price and mix during the quarter. The results were positively impacted by these improvements, 2 million from lower SG&A and 1 million for additional unit volume. The improvements were partially offset by $2 million of negative currency impact and other cost. You can see the full profit walk for the international operation segment on Slide 8 of our supplemental slide deck.

Now turning to some corporate items, the effective tax rate was 32.3% for the first quarter, compared with 34.8% for the same period last year. The reduction in the effective rate year-over-year was primarily the results and discrete tax items during the quarter of approximately 1.3 million. The tax rate is based on forecasted annual earnings and tax rates for the various tax jurisdictions in which the company operates.

We have updated our expectations for the full year 2016 effective tax rate, which we estimate will be in a range of 33% to 35%, down from our previous guidance of 34% to 36%. More detail on our tax is available in the Form 10-Q that we’ll file with the SEC later today.

Cash and Cash Equivalents were $434 million at March 31, 2016 compared with $449 million at March 31, 2015. Capital expenditures in the first quarter were 36 Million. As we noted in the press release we’ve updated our full-year capital expenditures to be between 210 million and 240 million, down from our previous guidance of 240 to 260 million.

This reduction does not signal any change in our investment strategy or plans, but does better reflect the expected timing of capital spending for those investments. Depreciation and amortization in the First Quarter was 32 million consistent with prior quarters. We expect depreciation and amortization to be approximately 130 Million in 2016.

As a reminder we believe 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, capitals to support organic growth and margin improvement initiative, acquisitions and returning excess cash to shareholders.

In February 2016, our Board extended an increase to our share repurchase program by authorizing the repurchases of up to 200 million of this company outstanding common stock through December 13, 2017.

In the first quarter we repurchased approximately 690,000 shares at a cost of 24.8 million or $35.98 per share. Purchases have continued in the second quarter under this authorization, with an additional 206,000 shares purchased at an average cost of $36.43 for $7.5 million through April 27, 2016.

Since we began the share repurchases in August of 2014, Cooper has purchased 10 million shares at an average price of $34.12 per share; this is 15.7% of the outstanding shares as of August 2014. The remaining share repurchase authorization is $185 million. We believe all of these actions demonstrate our commitment to delivering on our strategic plan including a balanced approach to capital allocation, which we believe delivered longtime shareholder value.

I’ll now turn the call back to Roy.

Roy Armes

Yeah, thanks Ginger. In summary Cooper delivered another excellent quarter putting us in a very good position as we start 2016. Our first quarter performance was the result of continued great results in the Americas segment and improving results in our International segments. We expect the global car markets will remain highly competitive and our cadence of innovative new products, expectations for unit volume growth and improving mix of sales focused on higher value and higher margin tires positions us well in such an environment.

Our performance in the first quarter supports that confidence as we saw very strong unit volume growth in our U.S. house brands and unit volume growth in Latin America in the international segment and for the full year of 2016 we expect unit volume growth in each segment. We are very encouraged by the volume growth in the international segment and increasingly confident about the improvements in operating profit performance and we expect raw material cost to trend modestly higher through 2016, but it is difficult to predict because of the current volatility.

Cooper is also updating totally company operating margin expectations excluding the impact of acquisitions we expect to be modestly above the full year 2015 levels of a 11.9% for the full year 2016 and as a remainder Cooper announced in our investor day and has continued to emphasize our mid-term goal is to consistently deliver operating profit margins 8% to 10% and our actual performance in Q1 of 2016 was better than this and is aligned with our long-term goal for operating margin that consistently exceed 10%.

So before we get to the question I want to congratulate the teams at our Clarksdale and Tupelo Mississippi facilities both of these plants were honored recently by the RMA with organizations safety health improvement program or it is called SHIP award. Clarksdale earned excellence award and Tupelo earned in improvement award. This program recognizes tire companies for excellence and improvement in worker health and safety as measured by the instant rate for loss work day cases.

The excellence award is given to those who achieve a day’s away restricted transfer or commonly known as dark rate that is 75% better than the average. The improvement award goes to the plants that achieve a dark rate that is both 10% better than the previous year and is the same or better than the RMA average incident rate. The safety and wellbeing of employees is the top priority for Cooper on a global scale and we are proud that our teams in these facilities and all of our facilities are making safety a priority each day.

So with that operator, we would like to go ahead and move on with the questions, so let’s take the first one if we could please.

Question-and-Answer Session

Operator

[Operator Instructions] And today our first question comes from Bret Jordan of Jefferies. Please go ahead.

Bret Jordan

Hey good morning guys.

Roy Armes

Good morning Bret

Bret Jordan

Hey, could you tell us what the private label mix was as a percentage of revenue in the quarter and maybe what its decline year over year was, so we can get a feeling for how the house brand outperformance looked?

Brad Hughes

Bret, we don’t break it out that specifically in any given quarter. I think as you know we have been communicating that private label was still an important part of our business has been declining, overall as a percentage of our total in the North American market and it dropped a low 30% of our total business. And in the first quarter which again we think is a bit of an aberration but the decline would have taken it below 25% of the total mix in the first quarter. But again I caution against looking at that as a long term trend.

Bret Jordan

Okay and then internationally could you compare Europe to Asia sort of give us a feeling for which one is leading versus lagging and whether Europe or Asia is profitable?

Brad Hughes

Actually both of them are improving, both of them are improving at a phase that gives us confidence that we are going to deliver that breakeven or approaching breakeven by the fourth quarter as we had communicated earlier. So we are seeing improvements in both clearly Asia with the volume growth there that we are seeing and in the mix of business that we are seeing there, they are moving at maybe a little bit faster phase, but I reiterate that both business units are improving.

Bret Jordan

Okay and then lastly the cadence of the competitive environment in the U.S., I mean there was a little bit of increase in brand support, are you seeing that there is increasing promotion from the competition out there or anything changing as we have seen maybe some price pass through with lower commodity costs.

Brad Hughes

Again we have been relatively pleased with the discipline that we have been seeing. There have been some adjustments mostly from what we can see in promotional activity that we think is again in response to what is happening in the raw material environment and will continue to monitor that as we look forward and watch what happens, but still the big picture is pretty well disciplined.

Bret Jordan

Okay great thank you.

Roy Armes

Bye Bret.

Operator

And our next question comes from David Tamberrino of Goldman Sachs. Please go ahead.

David Tamberrino

Hey, good morning and thank you for taking our questions. I think the first one from us is just was rising raw material input cost, you know going forward from here obviously not up year-over-year but sequentially increasing. Do you expect to be able to price for that in the current environment or playing off of the competitive dynamic question you just answered. Should we be expecting your overall price mix monetary wise for the full year to be more flat?

Roy Armes

Dave, we got a model internal here that says we have to offset these costs as they start to increase. I think we are still able to do that I think the one caveat I would add to that is there is a timing issue with some of this when pricing changes our there particularly the fact that, we are a life hold system and as raw material change as pricing change, it takes a while to get it set up in the market place but our intent is to be able to offset these increase through either cost or price.

David Tamberrino

Okay and then just again on the competitive dynamic playing off of that, is that something that you expect to continue for you to continue to see within the market as these raw material input increase or do you think competitors will be more rational and also be looking to price up for rising input cost.

Roy Armes

Well you know as Brad indicated just a few minutes ago that, there have been some relatively disciplined approaches in the market place in terms of pricing. We don’t see that change actually that has been that way for the last few years and I think that we are expecting that to continue.

Brad Hughes

I just David will continue, you know over the way that we look at this, we watch what is happening in the market and we want to make sure that we are keeping our customers competitive while watching our operating profit margins at the same time and you are getting some view on what we think we are looking at for the balance of the year with the revised outlook that we provided on our operating margin this year.

David Tamberrino

Appreciate, that’s helpful and then just lastly you touched on a little bit potential impact from tariff investigation going on truck, bus radial tires in China. Did you see any pull forward of sales during the quarter from your customers, what would be ahead of potential look that period or was it more normalized year over year commercial vehicle tires.

Brad Hughes

I think it is largely just year over year growth in terms of demand for our products on but there could be some pull ahead and I don’t think it was material enough that we would break that out because it would be difficult to determine that but you know we see good demand and I think our customers recognize that we are committed to providing them with great products at the right value.

Roy Armes

And I think in this case David, we have gone out to make commitments to our customers that regardless of what happens here, we are going to supply them with product and I think that was a bigger issue to them and I think we have kind of ease some of those concerns and we are continued to be committed to that. So I don’t think there was a whole lot of pull up in there as Brad had indicated.

David Tamberrino

Right thanks for your time this morning gentleman.

Roy Armes

Thank you.

Operator

And our next question comes from Ryan Brinkman of JPMorgan. Please go ahead.

Ryan Brinkman

Hi thanks for taking my question. Just on the decision to raise the full year guidance today. You know maybe some thought process behind that because your earnings in 1Q seem to be roughly in line with our in consensus expectations and then as David just mentioned commodity prices there sequentially higher so does it mean that your own internal forecast was for different cadence of earnings throughout the year than may be the streets or in 1Q was better than your own internal expectation or does it reflect conservatism in initial guide or less price competition as well as maybe mentioned than you are worried out our last year’s call or something else?

Roy Armes

I think on the front end Ryan, we may have been a little more conservative just now know what is happening in the market. We are building confidence and understanding what the rest of the year could potentially look like and how we would address any issues that would come up. Unfortunately we can’t predict with this volatility, we can’t predict what is going to happen in raw material cost particularly and your question, there have been a lot of question around pricing as well, those are hard to predict. But I think from our view point we don’t see any huge spikes that will take place that we can’t manage within our business. So we are building a little bit more confidence I guess coming up a little more conservative view in the first quarter previously.

Brad Hughes

I emphasize that you know the first quarter was a very strong result, even relative to last year which also a great year and so we got one in the books and as we looked forward with that in nine months ahead of us that we need to project that we’re more confident about what we think we can accomplish this year even relative to last year which was such a good year.

Roy Armes

Yeah, I think I would just end there with what Brad did with the units. When you think about given the guidance involved last year’s performance and operating margin that says the lot coming off of a record year and then having a record first-quarter when you exclude CCT, I think it does indicate some of the confidence that we’re building about what we can do for the rest of the year.

Ryan Brinkman

Okay, great, thanks. And then, I guess more strategically, can you talk directionally about the degree to which the percentage of tires that you sell today or HPA [ph] tires versus when you communicated your step up efforts to penetrate HPA market back in 2014, where are we in this process of the increasing HPA penetration, basically I’m trying to gauge how much of the associate margin tailwind has already been realized versus maybe as yet to be realized?

Brad Hughes

Ryan you may recall the year ago in the first half of the year we were talking about some of the transformation that we were working on inside of our plant footprint to accommodate the accelerated demand that we had for some of those higher on those premium products. We thought that a lot of that was behind us in the first three quarters that we serve last year. As we look at it we actually had to step up that activity again in the first quarter of this year to be in a position to lead what we project the demand to be for those higher margin products. So which is going to be an ongoing as we’ve said we believe that this will be an ongoing, but at times we’re going to have to pick up the pace little bit. We actually had more a bad activity in the first quarter of this year that we did a year ago. So it looks like its continuing and that should be a positive that we are still in the near-term force.

Roy Armes

Yeah and we didn’t give specific numbers on the percentage of that Ryan, but if you go back and look at these numbers as were increasing in the premium higher value add segments, it is helping us reduce our exposure on the private label side as well.

Ryan Brinkman

Okay great. Last question, Goodyear spoke on their conference call of increased price competition in Eastern Europe from more imports of low-cost Chinese tiers. That’s something that I think, the industry used to worry about more, when the U.S. tiers were first announced and those tires would get dumped elsewhere, but then we kind of not to worry about that as much because of the depreciation of Latin America or Eastern European currencies made the import of tires from China more expensive. So are you seeing this potentially stepped-up competition to an how does that impact some of the productions that’s coming out of your Serbia plant and you still have confidence to approach breakeven in the context of more press competitions outside of China?

Brad Hughes

Yeah, I can’t remark on anybody else’s business, but what we’re seeing is, globally the tire industry is continues to be competitive, the implications of tariffs that we put on the tires coming out of China that were intended for the U.S. market. You continue to see some of the flow through implications of that in markets around the world, but for us in Europe right now we are feeling increasingly confident about our ability to move the business in the direction that we had indicated previously.

Roy Armes

And I think we have a - if you look at our overall manufacturing footprint Ryan, I think we’re in a pretty good competitive position including our Serbia operation to combat what’s going on in the Europe with some of the import. So we feel pretty good about where the position we are right now, competing is important or competing against the traditional competitors.

Brad Hughes

Maybe just one last to add on to that Ryan, while I’m thinking about it here, in addition and we’ve talked about this previously, the Serbia plant very critical to what we’re doing in Europe and part of what’s happening there right now. In addition to that that’s picked up some of the volume that we had been producing in China for the U.S. market. And again that’s one of the benefits of the manufacturing footprint that we have around the world.

Ryan Brinkman

Okay, great. Thanks a lot for the color.

Operator

And our next question comes from Rod Lache of Deutsche Bank. Please go ahead

Rod Lache

Good morning everybody. I had a couple of questions, one is just maybe a little bit more color on what’s happening competitively in the private label market. If there is some weakness there and I appreciate that you said that it’s temporary, where is the additional competition coming from, presumably it’s not China at this point?

Brad Hughes

Well I think there’s a few things that are happening for Cooper is that space and part of it is just the overall competitive market. When we look at the important data, Rod you can see that, looking at the first few months of this year, Chinese imports, have benefited by the tariffs that’s been offset probably almost tire for tire by imports coming from other markets. So it is still a competitive market in the U.S. even with the tariffs in place. It just shifts around a little bit where that competition’s coming from. Inside of that well there’s also some unique factors that were affecting our customers and inventory management things, some tough comps year-over- year because of some of the - we auctioned to what was going on the year ago related to the tariffs on. So I wouldn’t take too much way from that, we still - it’s an important part of our business, we think it’ll improve from what we saw in the first quarter and so we’ll see that flow through in the balance of the year, but it’s competitive in the U.S. market and we think it’s going to continue to be.

Rod Lache

Okay, great. Thank you. And also just kind of separate line, you mentioned that you’re expecting breakeven in international by end of the year and if that happens it looks like, you kind of implicitly baking in a pretty significant margin decline in North America over the rest of the this year considering that Q1 was so strong, is that correct and could you maybe just elaborate on how you see that playing out?

Brad Hughes

We are increasingly confident about the statements we made previously about approaching breakeven in the fourth quarter for our international operation. So you’re seeing that in our revised guidance right now. Again we are looking at raw materials that we think are going to move up in the second part of - in the latter part of the year, as we move forward from here actually. And as you know, Rod, even if the market overtime is able to price for that, which we’ll see because we need to remain competitive make sure our customers are competitive. Sometimes that can take time, so we look at it, again we look at this quarter-by-quarter, we reflected some additional confidence coming out of the first quarter and as we demonstrate what we think we can do following the second quarter, we’ll see where we go. But we remain confident in our business model as we look forward for the balance of the year and that’s what we try to reflect in our statements today.

Rod Lache

Thanks. Just to put some brackets around, the hurdle from raw materials. Obviously you just alluded to the fact that there’s some lag even for you guys at the life of - on raw material. So if were to just assume hypothetically that raw materials stay at the current pricing level, the current spot level, could you just give us a sense of what kind of an increase we would be expecting sequentially as you go from Q2 into Q3 or Q2 into the back half of the year?

Brad Hughes

Well, I think the guidance that we provided won’t quarter out as where we’re going to stick on raw materials right now Rod, but just to be clear, maybe I wasn’t previously. The lag I was talking about was specifically in pricing tires to reflect changes in the raw material index. That as you know can take three to six months or even longer depending on the severity of the increase in raw materials.

Rod Lache

Right, but you are presumably expecting some - everything is being equal, some additional raw material cost increased from Q2 to Q3 I would imagine?

Brad Hughes

We reflecting - we’re expecting that the second quarter is going to be higher than the first quarter and that in general they are going to be upward trending. Again, given all the dynamics that are affecting raw material prices today is a little bit difficult for us to see with great deal of certainty what - we know what’s going to happen with them quarter-to-quarter, but next quarter we think they’re going to be above where they were in the first quarter.

Rod Lache

Excellent.

Roy Armes

And some of the products built into our guidance on the margin side for the rest of the year as well.

Brad Hughes

It’s seen now what I was trying to get to, but thank you appreciate your help.

Roy Armes

Thank you

Operator

And our next question comes from Christopher Van Horn from FBR and Company. Please go ahead.

Dan Drawbaugh

Good morning guys. This is actually Dan Drawbaugh on the line for Chris. Hey guys, I just have a couple of questions most of mine are already been addressed, but I was wondering just to clarify the CapEx guidance reduction, should we be thinking about that as sort of fourth quarter or late year spending being pushed out into 2017?

Ginger Jones

I think that’s fair. We want to make the point that we are committed to the projects and the investments that we want to make but what we have done is really adjusted what more likely timing is and so we think that 210 to 240 is a reasonable estimate for 2016 and then some of that will shift into 2017 and future years.

Roy Armes

And that’ll also Dan - I think you can expect the spend is going to be higher than historical average not just comparing it to this year alone. Because we are continuing on with the investments back in the business and we feel pretty good about where we are particularly when you look at the return on invested capital numbers that we are aching, 18%, 19%.

Dan Drawbaugh

Great, thanks that helpful. And then secondly on South America I was wondering if you had any incremental update on where you are with the - eventually you have with Fate just any kind of color you can provide?

Bradley Hughes

Yeah, I think I appreciate you asking, we are proceeding with the actions that we outlined in our letter of intent, which is we are going to begin to sell Cooper produced tires in that market through their distribution network and we are working on other future potential opportunities around producing tires in that facility.

Dan Drawbaugh

Okay thanks. Is there any sense you can give us of what their capacity levels look like in terms of production. I know they are one of the largest in the region.

Bradley Hughes

Yeah, I think on the debt what we are going to stay for right now in fact they are the Argentina and they produce a wide variety of products from PCR to light truck and SUV to TBR and some off road products.

Roy Armes

But we can go as far as saying that the utilization rate for Fate has been pretty high for their facility there. So they have been doing pretty well and I think we are pretty excited what they can do for us as well as an alternative source.

Dan Drawbaugh

Okay great, thank you guys. I will turn back in queue.

Roy Armes

Yep.

Bradley Hughes

Thanks Dan.

Operator

And our next question comes from Brett Hoselton of Key Banc. Please go ahead.

Brett Hoselton

Good morning Roy, Brad, Ginger and Jerry.

Roy Armes

Hi Brett, how you doing.

Bradley Hughes

Hi Brett

Jerry Bialek

Good morning.

Brett Hoselton

I am just going to take an –just want to clarify mean I am just going to ask the same question I think Rod asked and I think you are going to tell me Brad that you are not going to answer but I think what Rod was asking is that if sport prices were do remain where they are currently at, what would happen to your raw material index after the second quarter. What it would like in the third quarter and what it would look like in the fourth quarter at current spot prices. Can you provide us with some indication what that might look like?

Bradley Hughes

Again I am hesitant to go off boat, we provided as guidance in the material that we have already distributed for the second quarter because that was our best view and what we thought was going to happen as we looked into the second quarter, beyond that the general guidance which is again I recognize not answering specifically what you are asking but the general guidance is that we think that it is going to continue to gradually increase but it could be choppy and we used the word volatile to describe that. So I apologies for not being more specific but that is confidently as we can tell you what we think is going to happen.

Brett Hoselton

And when you talk about up modestly in the second quarter, how would you characterize modestly is that like one or two percent or is that like 5%, 10%, what is modestly.

Bradley Hughes

Are you on raw material still?

Roy Armes

Yeah, raw material.

Brett Hoselton

Yes, second quarter you said that raw are going to be up modestly I believe versus the first quarter. I am just wondering how do you characterize modestly just in terms of a percentage change.

Bradley Hughes

Right now we are going to were around 4% is the index that is the guidance that you see in the deck.

Brett Hoselton

And then with regards to pricing environment is seems pretty stable from what we can see particularly in the consumer side as you kind of look into the back half of the year what is your general sense in the back half of the year?

Bradley Hughes

You know again on what we seen up until now is similar to what you are describing, there has been promotional activity that’s shoddy [ph] here and there. Certain segments that are affected more than others but in general pretty stable pricing environment and we don’t see anything that’s is going to change that significantly and the fact that it was promotional activity versus invoice pricing and the fact that raw materials are at a minimum stabilizing and maybe starting to increase a little bit, we think it gives the industry, it positions it so that if raw materials move up that they are going to opportunities to responded to that.

Brett Hoselton

And then with regards to GRT joint venture, two questions, one can you give us any sense of the potential impact on earnings maybe in the fourth quarter and then into 2017?

Bradley Hughes

Am sorry, say it again Brett.

Brett Hoselton

With regards to the joint venture in China GRT.

Bradley Hughes

Yeah.

Brett Hoselton

Can you kind of give us a flavor of what do you think the impact might be on earnings in the back half of this year and into 2017. We assume that it is going to be dilutive to earnings in the back half of this year or is that potentially neutral and as we look in the 2017 is it going to be dilutive or accretive to earnings, how do we think about the impact on earnings?

Bradley Hughes

One thing what we have indicated in the past and what I will continue to communicate now it depends somewhat on the timing of the close in terms of as how this transition is going to take place. But initially we are expecting as we are making investments in the ramp up and in the facility in growing the volume that it will be initially dilutive but that by the time we get through to the end of 2017 that it should be at a point where it is beginning to break even now again that can be affected a little bit by the closing time and when that actually ramp up starts but based on the third quarter timing that we spoke about today that would be our best outlook.

Ginger Jones

And what we said is that we expect it to be accretive beginning in 2018, so just confirming Brad’s point there.

Brett Hoselton

Can you quantify what dilutive might look like is that, $0.01, $0.05, $0.20, I mean any thought whereas the magnitude?

Bradley Hughes

We haven’t been that specific yet Brett, it’s a relatively small plan.

Brett Hoselton

Got it, and then with regards to the tariff. Obviously speaking with Ginger it sounds like you have got some alternative plans that you are developing case and tariff gets put into place. Can you maybe talk a little bit more on greater detail as to what those alternative plans might be, if we get a tariff on Chinese tires imported in the United States?

Roy Armes

I think the first think we are going to do is the take a look at the market; our sense is there could be price increases that take place here to offset some of that. Secondly we said that we are going to be making sure our customers have a product available, all the current source that we have and thirdly we are continuing to look throughout the region for alternative sourcing that is still is something that we the best part to be able to have that outside of China. So we are continuing that evaluation investigation. No timing, those take time but in the meantime we plan to continue make product available for our customers.

Brett Hoselton

Very good, thank you very much.

Roy Armes

All right thanks Brett.

Operator

And our next question is a follow from David Tamberrino of Goldman Sachs. Please go ahead.

David Tamberrino

Yeah, hi thanks just last one from me on a competitive dynamic within the industry does the couple of foreign tire manufactures with plans that are opening or have opened this year in North America, never had physical plant locations here. Was wondering what you guys saw as the impact would be within the Americas region as a result of those.

Bradley Hughes

Yeah I think we commented in the past David that is those who come online there is going to be more capacity available in and produced in North America and there could be some short term effects from that as we look at this over the longer term. We continue to believe that globally and in most of the markets around the world that the demand and supply are relatively well balance and these are in response to trying to meet the growth and in demand in some of the markets. So while there could be disruptive for short period of time than and clearly it is going to increase competition when they first come online, the things will rebalance across the globe. Some of this maybe replacing volume that is coming to the US already but it is being imported at this point in time and so to be here instead of coming in from some place out. But that asset rebalances given our view on supply and demand that it won’t be a huge factor in the near term.

David Tamberrino

Okay that’s helpful. And from your own perspective of your plans how tight are you on capacity for HVA tire demand right now. I think another North America manufacturer assumes if they are running pretty tight and can’t keep up with some of the orders that they are getting. Just wondering how you are progressing because I know there was some conversions that were going on in the U.S. plants at least in middle to last year?

Bradley Hughes

Yeah and they will continue and as I was describing earlier, we actually had to pick that activity up again in the first quarter to make sure that we’re going to be in the best position possible to meet it as we go forward. So we think that’s going to be an ongoing transformation in our business and at times it’s going to move up down as we watch that demand grow. But we’re seeing demand force us to do some things that are even more than what we thought we were going to need to do in the first quarter.

Roy Armes

Yeah, I’ll just add to that David, it’s probably safe to say that we are tight on the high value add, but what we’ve been able to do is - with the private label business being down, so it’s freed up some capacity that we could use for other products, so it’s helped us in that situation. And our Cooper brand - overall our Cooper brands or house brands have been growing very well.

David Tamberrino

Well, I appreciate it. Thanks again.

Operator

And our last question today comes from Tony Cristello of BB&T Capital Markets. Please go ahead.

Tony Cristello

Thank you, good morning. The question on Mexico, it seems like there were some abnormal costs or outsized costs this quarter that came through and I’m not sure if it’s related to what you were talking about in terms of trying to accelerate some plans there. I’m just wondering is that something that has been removed from second half of the year will subside or is there opportunity to potentially increase production of some of the higher end HPA down there as well to meet some of the demand?

Bradley Hughes

Yeah, the first quarter issues that we spoke about in the comments on are behind us. We were doing some transformation in the plan and process change and it did our affect our production in the first couple of months of the first quarter, but that is specifically behind us as we look forward. Now, we’re implementing the seven day operating pattern as I mentioned in my comments earlier and that’s started, it’s going to occur over the course of the second quarter and that could have some impact. Clearly our expectation is as we look through the balance of the year, once that’s fully in place that that’s going to be a benefit to what’s happening at the facility in Mexico. In the second quarter I don’t think there will be anything too material from this, but we are ramping it up. But we’d expect that that for the year is going to end up being a benefit.

Tony Cristello

Okay and then if I could just ask on the HPA side, when you look at those higher end vehicles, could you gauge in terms of what you’re fill rate is in terms of demand versus what you’re able to provide from supply at this point.

Bradley Hughes

Well, as always it depends on which product you’re talking about and I would say that - even on some of the higher value added and even in some of the product categories that we have that we’re not able to meet all of the demand. Now, we’ve got some products, we talked about private label and how that was affected in the first quarter where we have more available and we’re trying to convert that over to where we’ve got the excess demand as quickly as we possibly can. But that’s typical, I mean overall we think we’re doing a pretty good job on fill rates, but certain product categories are more difficult than others.

Tony Cristello

And is there a long lead time to convert from a production of say traditional private label to an HPA and what is involved with that conversion process either from a cost stand point or a low order equipment standpoint.

Bradley Hughes

First of all we’re getting really good at it. The plants have done a fabulous job in terms of helping to accelerate this conversion process as we’ve done more of it. It isn’t overly complex, it doesn’t take a huge amount of time and it isn’t really expensive inside of our facilities as they stand today. But it does take some time, so you can’t respond, you can’t just turn the key and produce it immediately. You do have to put in new presses and new molds, but again we’re doing pretty good at that.

Roy Armes

Tony, keep in mind, we were converting and transforming into these new presses last year to be able to produce more of the high value add, which gives us also flexibility producing other products on including private label, so it’s easier transition now that we’ve gone through a bulk of the transformation within the factories. It’s a little bit easier for us now than it was before.

Tony Cristello

Okay, that’s great color. I appreciate the time.

Roy Armes

Thanks Tony. I’d like to thank everybody for being on the call today. We feel we had a very strong first quarter here in 2016. We’ve got confidence as we go into the rest of the year on what we can deliver. I think this is just an outstanding execution by our people in the operations against our strategic plan. And we do appreciate your interest in Cooper and with that operator I think we had to close this out. One last reminder for follow-up questions feel free to call Jerry Bialek, our Director of Investor Relations and to get further detail and answers to some of the questions if you have them. Thanks.

Operator

And ladies and gentlemen the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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