Cooper Tire & Rubber Company
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good morning, and welcome to the Cooper Tire & Rubber Company's Second Quarter 2017 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:]

Good morning, everyone, and thank you for joining the call today. This is Jerry Bialek, Cooper's Director of Investor Relations and Strategic Planning, and I'm here with our Chief Executive Officer, Brad Hughes; and Ginger Jones, our Chief Financial Officer. During our conversation today, you may hear forward-looking statements related to future financial results and business operations of Cooper Tire & Rubber Company. Actual results may differ materially from current management forecasts and projections. Such differences may be a result of factors over which the company has limited or no control. Information on these risk factors and additional information on forward-looking statements are included in the earnings release we issued earlier this morning and in the company's reports on file with the SEC. During this call, we will provide an overview of the company's second quarter 2017 financial and operating results, as well as our 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. During this call, we will reference certain non-GAAP financial measures. The linked slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Following our prepared remarks, we will open the call to participants for a question-and-answer session. Now, I'll turn the call over to Brad.

[Bradley E. Hughes:]

Thanks, Jerry, and good morning, everyone. I'll start out by saying that we're certainly in the midst of some interesting dynamics in the tire industry, and I want to thank the Cooper team for delivering an operating profit margin at the high-end of our medium-term guidance. We are confident in the improved Cooper business model and in a longer-term, macro environment for our industry. Of course, everyone listening those, that in recent months, the tire industry has experienced turbulence including variability in raw material costs, recent weak trends in retail sell out of tires to consumers in the U.S., elevated inventory in the channels and a fluid pricing and promotional landscape. We believe that this turbulence will continue at least into the third quarter and we'll have more about this later on the call. While certain macro trends are in the industry's favor including miles driven, the average age of vehicles on the road, and gas prices; trends that usually translate into a solid sell-in and sell-out environment. We have not yet seen the positive impact of these factors, that they generally have on the business. Many of the challenges, which affected the industry in the first quarter, also affected the second quarter. In the second quarter, we continued to respond to the challenges and maintained our commitment to be market-facing, with product, pricing and promotions, and Cooper delivered improved results, compared with the first quarter. With respect to unit volume, we improved in the second quarter from the first, and we grew unit volume year-over-year in June. For comparison, our light vehicle volume in the U.S. was down in the first quarter by a little over 11%, while the industry was up 1.1%. In the second quarter, unit volume was down by 10% compared with the total industry light vehicle unit volume decline of 1.4%. Obviously, we are not satisfied with volume declines, but we are pleased that we are able to improve performance for the quarter relative to the industry and outperformed the industry in the month of June. Ginger will touch on this as well later. We continue to be excited by the volume performance of our businesses outside of the U.S. with strong unit volume growth in both Asia and Latin America in the second quarter. Moving to operating profit, we also improved from the first quarter to the second quarter. In the first quarter, operating profit margin was 7.6% and we increased to 10.4% in the second quarter. Based on our ability to respond to the industry environment and with the strength of the Cooper business model as our foundation, we continue to perform on the bottom-line. Specifically, for the second half of the year, we now expect to be at the high-end of our operating profit margin guidance of 8% to 10%. And we believe we'll have unit volume in the U.S. which is in-line with the industry. For the full-year, we are reiterating today that we expect 2017 operating profit margin to be at the high-end of the 8% to 10% range. I'll now cover our second quarter in a bit more detail. Net sales for second quarter were $721 million, down about 2.6%, compared with the same period last year. Operating profit for the second quarter was $75 million, or 10.4% of net sales, which is a decrease of $35 million from the prior year, reflecting higher raw material costs, partially offset by price and mix. Operating profit margin for the first half of this year was 9.1% of net sales. Our raw material index was down sequentially during the second quarter, from 166.3 in the first quarter to 163.5 in the second quarter as shown on page 6 of the supplemental slide deck. The raw material index trend during the second quarter was down sequentially in April, May and June. However, the index was more than 20% above our 135.5 index for the second quarter of 2016 and raw material costs increased by $60 million from the prior year. Combined, global unit volume decreased less than 1% year-over-year. Light vehicle volume in the U.S. was down 10%, which reduced profits and had a related effect on manufacturing costs, which were up primarily due to the unabsorbed costs as we had managed our inventory levels by reducing production. The U.S. light vehicle volume decline I just mentioned compared with the U.S. Tire Manufacturing Association's (sic) [U.S. Tire Manufacturers Association's] reported decrease of 2.2% and the total industry decrease of 1.4%. Our U.S. TBR tire unit volume was up 27% and our International segment unit volume was up more than 11%, driven by growth in Asia. I want to take a minute to address mix and its impact on profitability. When we think about mix, we consider both channel-mix and product-mix. In terms of channel for example, Cooper's continued to grow the more profitable house brand business as a percent of our total. When it comes to product-mix, we are continuing to grow our TBR business, which is a higher margin business. Also in product, we are increasing our mix of large-rim diameter tires and tires with other high value-add features. The move to larger-diameter tires is an industry-wide trend driven by OE auto manufacturer specifications on new vehicles. These tires command higher margins than their smaller counterparts. In the U.S. Cooper's mix of greater than 17-inch tires continues to increase. And when we look at just our Cooper branded products, the percentage of tires greater than 17-inches is comparable to the average USTMA mix for these tires. Shifting gears, now to our outlook; as I said earlier, challenging dynamics in the industry are likely to continue into at least the third quarter, and we will continue to manage our inventory levels in line with demand. We believe Cooper is well positioned, as we head into the remainder of 2017, as raw materials are trending down, and we saw improved unit order trends in our U.S. market in June, as consumer sell-out appears to be strengthening. We expect to deliver year-over-year unit volume increases in both the Americas and International segments in the second half of the year, and to have U.S. volume performance that is in line with the industry. We remain committed to our long-term approach to be market-facing, and to recover input cost increases with the industry. Overall, we believe the global production capacity remains balanced. And as product-mix in the industry continues to shift towards larger-rim diameter and more complex tires, we believe capacity for these types of tires remains below current demand, which supports a rational pricing environment. As I said earlier, we are reaffirming our full-year 2017 operating margin guidance, at the high-end of our 8% to 10% range. Cooper will continue to execute our strategic priorities to drive top-line profitable growth, develop a highly-competitive cost structure, and build even stronger organizational capabilities. Significant changes to our business model including positive mix transformation, improved speed to market with exciting new products, and cost efficiencies, have allowed us to structurally improve operating margins over time. As I said earlier, we continue to focus on our house brands and on satisfying demand for tires with larger-rim diameters and other high-margin features. We are leveraging our global manufacturing footprint and near-source supply strategy, while maintaining a focus on reducing costs to secure our value proposition and enhanced profit margins. These business model improvements, along with our great teams around the world, have helped us to navigate through turbulent times in the industry and will help Cooper to respond and succeed over the longer-term. I want to thank all of our employees around the world for their commitment and performance. Now, I will turn the call over to Ginger, for an update on the financial results and capital allocation.

[Ginger M. Jones:]

Thank you, Brad. I'll start with our second quarter financial review. Net sales were $721 million, compared with $740 million in the second quarter of 2016, a decrease of 2.6%. Overall, unit volume decreased slightly, primarily driven by reduced unit sales in North America, a region with a typically higher average price per tire. This resulted in a net reduction to sales of $33 million. Favorable price and mix of $23 million was primarily due to net price increases related to higher raw material costs. We also experienced $9 million of negative foreign currency impact. Operating profit was $75 million, or 10.4% of sales, compared with $110 million, or 14.8% of sales in 2016. Second quarter operating profit as compared with the same period in 2016 was impacted by the following factors, which are summarized on page 7 of the supplemental slide deck, first, $60 million of unfavorable raw material costs, $25 million of favorable price and mix. Combined, these factors total to $35 million of unfavorable raw material costs, net of price and mix. $9 million of higher manufacturing costs, primarily due to lower production volumes in North America and $9 million of lower unit volume, largely driven by the unit volume decline in North America as well. These negative factors were partially offset by $14 million of favorable SG&A costs, driven primarily by reduced incentive compensation, $3 million of lower product liability costs, and $1 million of reduced other costs, which include foreign currency impact, and $5.5 million of insurance recoveries for a portion of direct expenses related to damage sustained in a January 2017 tornado at a leased distribution facility. We delivered earnings per share of $0.85, compared with $1.27 in the second quarter of 2016. A contribution of $0.04 per share came from the lower share count resulting from our share repurchase program. Moving to our segment performance, I will start with Americas tire operation. Segment sales for the second quarter were $615 million, down 6% from $655 million in 2016. This decrease was the result of $44 million of lower unit volume and $1 million of negative foreign currency impact, which was partially offset by $5 million of favorable price and mix. Second quarter operating profit in the Americas was $83 million, or 13.5% of net sales, compared with $116 million, or 17.7% of sales in the period last year. Operating profit was impacted by $31 million of unfavorable raw material costs, net of price and mix, $11 million of lower unit volume, and $9 million of higher manufacturing costs, primarily the result of curtailed production levels to manage inventory based on lower unit volume in the U.S. These costs were partially offset by $14 million of favorable SG&A costs, primarily related to decreased incentive compensation, $3 million of lower product liability costs, and $1 million of favorable other costs, including foreign currency impact and insurance recovery. The insurance recoveries of $5.5 million related to reimbursement for a portion of direct costs incurred in the first half of 2017 as a result of the tornado I mentioned earlier. The direct costs included disposal of damaged tires, freight to move products to other warehouses, and professional fees to secure and maintain the site. Direct costs, net of the insurance proceeds, were $3.3 million in the first half of 2017. We expect to incur additional direct costs of approximately $2 million in the second half of this year. Further, we expect that the remaining unreimbursed costs, less of deductible, will be recovered from our insurance carriers at some point in the future. You can see the full profit walk for the Americas on slide 8 of our supplemental slide deck. Now, turning to our International tire operations; as a reminder, all results for the International segment include the consolidated results of our new joint venture, GRT. Net sales for the second quarter were $151 million, up 22.4% from the second quarter of 2016. Unit volume in the segment was 11.1% higher in the second quarter of 2017, compared to the prior year, as a result of increased volume in Asia, which more than offset a modest decrease in unit volume in Europe where volumes were up year-to-date after a strong first quarter volumes ahead of price increases. Sales increased by $27 million as a result of $27 million of favorable price and mix, and $8 million of higher unit volume, which was partially offset by $8 million of negative foreign currency impact. The International segment operating results declined, compared with last year, with an operating profit of $1 million in the second quarter, compared to an operating profit of $3 million in the same period a year ago. These results were driven by $2 million of unfavorable raw material costs, net of price and mix, and $1 million of unfavorable other costs including foreign currency impact, which were partially offset by $1 million of higher unit volume. You can see the full profit walk for the International operation segment on slide 9 of our supplemental slide deck. Now, turning to some corporate items; the effective tax rate was 32.7% for the second quarter, consistent with the second quarter of 2016 rate. The effective tax rate is based on forecasted annual earnings and tax rates for the various tax jurisdictions in which the company operate. We estimate the full-year 2017 effective tax rate to be in a range between 30% and 33%. More detail on our taxes is available in the Form 10-Q that will be filed with the SEC later today. Turning to cash flows and the balance sheet; cash and cash equivalents were $302 million at June 30, 2017, compared with $412 million at June 30, 2016. Capital expenditures in the second quarter were $45 million. We now anticipate our full-year capital expenditures for 2017 to range between $200 million and $200 million (sic) [$220 million]. We believe this is the appropriate level of capital to support our ongoing modernization, mix transformation and automation initiatives, in addition to investments in capacity to align with our global strategic growth plans. I'm pleased to report that we continue to earn strong returns on our investments delivering a 14.6% return on invested capital for the trailing four quarters. Moving to capital returns. In February 2017, our board extended an increase to our share repurchase program by authorizing the repurchase of up to $300 million of the company's outstanding common stock through December 31, 2019. During the second quarter, approximately 568,000 shares were repurchased for $20.8 million at an average price of $36.55 per share. As of June 30, 2017, $276 million remains of the $300 million authorization. Since share repurchase began August 2014, the company has repurchased a total of 13.3 million shares at an average price of $34.31 per share. I want to remind you that Cooper believes that our existing cash, cash flows and potential leverage, are more than sufficient to cover our capital allocation priorities. We define those priorities as supporting our ongoing commitments, capital to support organic growth and margin improvement initiatives, acquisitions and partnerships and funding our dividend and share repurchase goals. We believe our operating performance, our sustained high level of ROIC, and our demonstrated commitment to delivering on our strategic plan, which includes a balanced approach to capital allocation, delivers long-term value to our shareholders. I'll now turn the call back to Brad, for perspective on the balance of the year.

[Bradley E. Hughes:]

Thanks, Ginger. One minor clarification, our outlook for capital spending, and this is in our press release that went out earlier today is $200 million to $220 million for the year. In summary, the second quarter was one of challenge and transition, but our business model allowed Cooper to respond to these conditions, and to deliver results in line with our previous guidance. Looking ahead, industry turbulence is likely to persist at least into the third quarter. Raw material costs are trending down at present, but remained volatile, and we expect that uncertain consumer demand may contribute to continued promotional activity. We have reaffirmed our projection, that full-year 2017 operating profit margin will be at the high-end of our previously announced mid-term target of 8% to 10% and have stated that second half OP margin will also be at the high-end of that range. We remain confident in the strength of the Cooper business model, and believe significant levers remain to further improve our business, based on continued execution of our strategic plan. These levers include costs reductions in the way we design and manufacture our products, including automation and process improvement and in how we procure our materials; mix enhancement in both channel and product including a continued shift to house brand, as well as continued growth in our TBR business and participation in the shift to larger, more premium, HVA tires, driven by trends in OE vehicles; growth and scale particularly in Asia and Latin America; optimization of our global manufacturing footprint, and continuing to expand margins in the International segment. Of course, our overarching goal is to drive value for shareholders. We continue to demonstrate this through our dividend and share repurchase programs as Ginger described earlier. That's all we have for our formal remarks. Let's move on to your questions. Operator, will you take the first question, please?

[Operator:]

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

[Rod Lache:]

Thanks, good morning, everybody.

[Bradley E. Hughes:]

Hi, Rod.

[Rod Lache:]

I had a couple of questions. I guess, at this point, there is no surprise that pricing is getting a bit more challenging versus what everyone expected a few months ago. So I guess just in that context, you're talking about Cooper tires volume and market performance being more similar to the rest of the industry in the back half, is that being driven by changes to your pricing? So is pricing for you down sequentially, or are you changing anything vis-à-vis terms, because I did notice the receivables are up a little bit sequentially?

[Bradley E. Hughes:]

Well, there is a lot of factors that are impacting pricing right now, Rod. I think the number one factor that's affecting – and I'll combine pricing and promotional activity, is what happened with raw materials. When we talked coming out of the first quarter, our expectation was that we were going to see a flattening of raw materials and as you know, as everyone on the line knows they've actually begun to decline in a meaningful way. And I think that that impact on what the industry might have done relative to pricing is probably the biggest factor. I do think that as we saw in the second quarter, we saw a continuation through the first part of the second quarter of the weaker sell-out demand that we had experienced in the first half. And so, I do think that that impacted some of the promotional activity. And we'll see how that carries into the third quarter. We've seen what we see as signs of strengthening on the retail sell-out, which will certainly be helpful. So that combination of what was happening with raw materials, the weaker sell-out and sell-out that was probably a bit weaker than the sell-in in the first half of the year, did impact, I think, what was going on in the second quarter. I think we'll see some residual of that in the third quarter, particularly as we all see where raw materials finally shake out. But again, as we look at it longer-term and the macro environment that still pervades out there right now that we expect pricing to come in line with raw materials once we have a pretty good handle on where raw materials are going to stabilize at.

[Rod Lache:]

Right.

[Ginger M. Jones:]

And Rod, also to add. Rod, I'll add on your comment on the AR, we did not have any change to our terms, so we had a very strong sales number in June and so that drove the increase in our accounts receivable.

[Rod Lache:]

Great. But back to the question, so you're expecting to perform more in line with the market. So, is your pricing being adjusted at this point from Q2 into the back half...

[Bradley E. Hughes:]

Yeah.

[Rod Lache:]

...to correspond with the more promotional environment?

[Bradley E. Hughes:]

Yeah. We've continued to make sure that we are market-facing. At times that – when there is a lot of different moving pieces out there that takes some time to make sure that you settle in. We did adjust some program activity and some pricing in the second quarter. Again though, I don't want it to be characterized as something that as a long-term change from the way that we've looked at the industry in terms of price-related to raw material on that relationship. But we did become more market-facing with some things and that was a little bit of catch-up during the quarter that we needed to accomplish to be market-facing and we saw a good response to that.

[Rod Lache:]

So just to clarify because there is a lot of moving parts with the raws falling as well. Your expectations for margins in the back half now are a little lower than where they were before, they were at high-end of the 8% to 10%, but I think you had previously thought it would be over 10% in the back half. So at this point when you're sort of characterizing how the back half is going to look for Cooper, how are you thinking about price/mix versus raws in the back half? And how are you thinking about – there was some pretty impressive SG&A costs, are your – how are you thinking about the costs back half year-over-year?

[Bradley E. Hughes:]

So, on the price. Well, first of all just in the bigger picture, our full-year guidance is still similar to what we've been saying or same as what we've been saying at the high-end of that 8% to 10% mid-term range. We did have some timing, that was a little bit different in terms of things that came to us in the second quarter relative to when we thought they might come to us. And that affected slightly the projection that we have for the second half. So, big picture, full-year is still the same. We did a little better in the first half than we thought we might, some of that was because some things that we were expecting in the second half or at a later time, came to us in the second quarter. When we look at the raw material and the pricing situation again, it's hard to predict exactly, when that's going to end up being behind us. But we expect, that we're going to get fully back to where we had been as an industry previously in terms of the price versus raw material relationship. On third quarter, again, we think, that as you look at what's going on there that will be a bit choppy. It may smooth out, as we get into the fourth quarter or it may be, as we get into next year. But as we exist this year, that we should be coming more into line with where we were price-raw material as an industry.

[Rod Lache:]

Okay. So, price versus raws, towards the end of the year, they start to neutralize, but there is still a headwind in Q3, and Q4. Any comment on the SG&A and the cost performance?

[Bradley E. Hughes:]

Yeah. SG&A, we're always looking at that. As Ginger mentioned, one of the contributors to that was lower incentive compensation as that's coming into line with our expectation for the business for this year, so that's now consistent with what we're telling you with regard to the guidance around operating profit margins and volume. But we are also constantly looking at ways that we can ensure that we're funding the important strategic initiatives that we're pursuing, but at the same time, ensuring that our cost structures in line with the performance of the business.

[Rod Lache:]

So, you could sustain this level, just to clarify that SG&A, what we saw in Q2?

[Bradley E. Hughes:]

I think there is a little bit of what's in the first – in Q2 that – some of that's related to the incentive comp, and you can't put that in every quarter. You've got to smooth that out a little bit as we get into the second half of the year.

[Rod Lache:]

Okay, okay. Thank you.

[Bradley E. Hughes:]

Thanks, Rod. Next question?

[Operator:]

The next question comes from Christopher Van Horn with FBR Capital Markets. Please go ahead.

[Christopher Van Horn:]

All right. Good morning. Thanks for taking the call.

[Ginger M. Jones:]

Good morning, Chris.

[Christopher Van Horn:]

Thanks for all the color on the pricing, I think that that gives a lot of clarity. My question is really around, you mentioned, that the mix is being helped by this house, moving to the house brand, moving to more high value. Would you be able to disclose a little bit on the trajectory of the percentage mix that you're seeing there on, both of those categories?

[Bradley E. Hughes:]

A couple of things that we can share with you. First of all, on the house brand versus the private brand, one thing that I do want to make sure is we're – we have a lot of very good private brand business that we're very excited about with our customers and we'll continue to support that. But, at the same time we're growing our house brand business faster than the other side of the business. And so our focus on doing that is going to help on our profit margins. We have been trending towards a house brand, I'll give you some perspective here, Chris. Four years, five years ago we were probably more 50-50 something around that depending on the quarter house brand versus private brand, we're now more like 70-30. There is probably a little bit of room to go there, but right now we're probably closer to 70% house brand, 30% private brand. And then on the – for example, the larger-rim diameter, we did continue to grow on that business as a percentage of our total during the quarter across our total brand portfolio, when you look specifically at the Cooper brand, that's in line with the USTMA mix for that type of product. And so we're about where we need to be, that's going to continue to grow for the industry, Cooper will – we would expect, stay in touch with what's going on in the USTMA. And that we've got opportunity to close that gap on some of the other brands in the portfolio looking forward. So there is continued opportunity there as well. And I don't want to lose sight, we continue to – our truck and bus radial team continues to do a super job in terms of growing that business here in the United States with another quarter of double-digit, 27% increase in volume year-over-year and that contributes from a mix perspective.

[Christopher Van Horn:]

Okay, got it, great. And then just one more from me. So, could you comment on the GRT ramp and the timing, is there any change to the production rollout of the tires out of that plant?

[Bradley E. Hughes:]

No, no, they are on increasing production as planned and we continue to be very pleased not only with the facility, but with that partnership as well.

[Christopher Van Horn:]

Okay. And then – sorry one on top of that, so in the past, you've kind of broken out your China growth, is there any color you could provide there?

[Bradley E. Hughes:]

Yeah. It still very strong double-digit growth in China. Again, largely driven by our OE business performance there, as we continue to add some new business and to grow with some of the partners that we do have.

[Christopher Van Horn:]

Okay. Thanks, guys.

[Bradley E. Hughes:]

Thanks, Chris.

[Operator:]

Next question comes from Ryan Brinkman with JPMorgan. Please go ahead.

[Ryan Brinkman:]

Hi, good morning, thanks for taking my question. At the time of 1Q earnings, you'd discussed that volumes were improving after the quarter in April, after other manufacturers increased their prices, and that sort of jibes with what we've heard from Goodyear last week that their volumes fell off in April, when they increased price. In your press release today, you talked about volume finishing 2Q better than they started. So is the message sort of that as more competitors continue to catch-up with you on price, that your volume kind of steadily improves? And how much of the market do you think still has yet to catch-up on price? And then similar to last quarter, are you willing to provide any sort of color into volume trends after the quarter ended?

[Bradley E. Hughes:]

So let me – I'll try and pick those pieces off there. Yes, so we did see improved volume during the quarter. I do think that in general, the pricing activity and some of the promotional activity started to stabilize a bit during the second quarter. However, as raw materials continue to decline into the third quarter, we may see more activity related to raw materials there. Also from our perspective, and I think we've seen this in other reports, we see anecdotal evidence in our network that the retail sell-out started to pick-up at later in the second quarter and hopefully that continues into the third quarter, that will help a lot with some of the channel inventory that built-up in the first half of the year, hopefully without requiring a lot of promotional activity. So, I think there is going to be more stabilization of pricing and promotion activity as we move through the second quarter, but that will be dependent on what happens with raw materials and whether or not we see a sustained pickup in the retail sell-out activity. So, I think right now both of those look more positive than they did earlier in the second quarter.

[Ryan Brinkman:]

Okay. That's helpful. And then all I've got is some quick housekeeping; just can you confirm where the insurance recovery is in the income statement, I think the damage in 1Q was in COGS, but I didn't see where the recoveries were this quarter?

[Ginger M. Jones:]

Both of those, Ryan, are in other. And they primarily are – other on our profit bridge and costs of goods sold on our income statement.

[Ryan Brinkman:]

Okay. Perfect. And then can you just help me lastly understand the kind of managerial accounting that allows the price/mix to benefit revenue in the Americas by $5 million, but EBIT by $18 million. Is the implication that you had like negative mix that was more than offset by positive price that has greater flow through to EBIT than does mix, or how to think about that?

[Bradley E. Hughes:]

Ryan, I'm going to – I'll suggest that you and Jerry hook up later to make sure that you get a through explanation of this, but typically what can happen there is there are some things that we end up capturing sometimes in mix and sometimes in pure volume growth if it's a new product or it's a new category, and it can make that a little bit less intuitive then we might like. But, I'm sure, Jerry can provide you with the specifics on that.

[Ryan Brinkman:]

Okay. It's very helpful. Thanks a lot.

[Operator:]

Next question comes from Brett Hoselton with KeyBanc. Please go ahead.

[Bradley E. Hughes:]

Hi, Brett.

[Brett D. Hoselton:]

Good morning, Brad, Ginger and Jerry.

[Ginger M. Jones:]

Good morning.

[Brett D. Hoselton:]

Wanted to just follow-on on pricing, and just trying to get an understanding of how you're characterizing on kind of a net basis, it sounds like you're seeing it's firming up, but your thought is that as we go forward with the decline in raws, we may see some declines in kind of that pricing, is that a fair characterization or did I misunderstand something?

[Bradley E. Hughes:]

I think, it's a fair characterization of what might happen depending on how far we see raw materials go from where they're at today. I think that they came down certainly further than we were thinking they were going to during the second quarter. And to the extent that they – depending on what they do from here, if they do continue to move down, I do think that there is a potential that there could be some additional activity, maybe not pricing, maybe it's on the promotion side. If they stabilize or move a little bit higher, just kind of stay in a band around where they're at right now, we may be closer to the finish line in terms of that activity than they keep moving.

[Brett D. Hoselton:]

And then, how do you think about – I mean the industry saw some very, very strong margins over the past couple of years here. How do you think about that relative to where you're at today and your ability to return to those levels, is that something that you think Cooper and/or the industry can achieve again once things settle out? Or do you think that there is some impediments there?

[Bradley E. Hughes:]

I think, with regard to Cooper specifically, we do believe that we have structurally improved our margins over the last several years with some of the improvements that we've made to our business. There's still some opportunities to continue down the mix path as we've talked about, around the cost path we've talked about, including the way that we utilize our global manufacturing footprint. On the other side from a macro perspective with regard to the industry and where we're at in that price-raw material relationship. We don't see anything that is fundamentally different than the backdrop that we've been operating with for the last couple of years. You do go through these periods when there is volatility around raw material prices up, down, up and down, where it takes a bit of time for – on pricing to realign itself to where raw settle in and so there will be a bit of disruption. We've historically Brett – you've been watching us for a longtime and we talk about margin guidance over a cycle because we know that you go through these types of changes, but we don't see anything that suggests that the macro environment is different than what it was 18 months ago and that that we won't see the industry continue to do what they were doing at that point in time on price-raw material specifically.

[Brett D. Hoselton:]

Thank you very much, Brad.

[Bradley E. Hughes:]

Thanks, Brett.

[Operator:]

Next question comes from Bret Jordan with Jefferies. Please go ahead.

[Bret Jordan:]

Hey, good morning, guys.

[Bradley E. Hughes:]

Hi, Bret.

[Bret Jordan:]

A question on the inventory growth, just sort of looking at the volume that is up. Is that a result of the relatively tough first half unit trends and we should clear that as we pick up units in the second half? And I guess, the follow-up on the second half guide for volumes being in line with the market. Obviously, you seem to benefit in June as some of your peers brought pricing up. Do you expect the second half requires you to bring pricing down, or is it just continue to sort of shift back to you as your peers have become less aggressive in promotion?

[Bradley E. Hughes:]

So on the inventory question and Ginger can jump in here on with some additional color, if she'd like. But typically our inventories rise towards the end of the second quarter as we get ready for the bigger shipment quarters in the third quarter and fourth quarter – for example, winter tires you're building those and getting those ready to ship to customers during the third quarter and fourth quarter and for the summer driving season. So, I don't think there is anything too unusual with regard to the volumes although I would, because we did – as we said in our prepared comments that we did do some things at the facilities to make sure we didn't let the inventories get outside of the range that we were comfortable with by taking some production out, so I think that's more related to the seasonal trends, Bret. And as we see, the shipments begin to pick up in the third quarter and fourth quarter as they do typically that that will begin to reduce the inventory levels as we've seen in the past.

[Bret Jordan:]

Okay. I'm looking year-over-year, June – second quarter versus second quarter that seem to be up a bit. So, adjusting for the seasonal impact, but maybe I'll talk to Jerry offline.

[Bradley E. Hughes:]

Yeah, you should. And he can take you through that. And then with regard to the pricing, yeah, again the benefit here is as things stabilize and everybody gets to their right position from a market-facing perspective, which is what our key objective is with regard to pricing and promotional activity. As things begin to stabilize on the raw material front, we believe that there will be more stabilization in the price and promotion activity and that was – is the most important factor for us as we move into the third quarter and fourth quarter relative to what we're experiencing in the first quarter and the second quarter.

[Bret Jordan:]

Okay, great. And then one last housekeeping. On the SG&A benefit, the $14 million, how much of that was lower incentive comp, I mean, I'm trying to figure out sort of in line with the question earlier, how do we run SG&A going forward?

[Ginger M. Jones:]

Bret, the majority of that was incentive compensation is that will naturally go up and down based on business results. There was some good control of SG&A, that was a smaller piece of that, and as Brad said earlier, we'll continue to manage the SG&A as we go into the second half of the year.

[Bret Jordan:]

Okay, great thank you, guys.

[Bradley E. Hughes:]

Thanks, Bret.

[Operator:]

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

[Bradley E. Hughes:]

Okay. Again, I want to thank, everybody, for being on the call with us today. We continue to believe that Cooper is well-positioned to perform in what will continue to be a changing and challenging time, as we continue to execute our strategic plan and leverage the strength of our business model, and as we noted a couple of times here today, please feel free to reach out to Jerry with additional questions or comments. Thank you.

[Operator:]

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