Cooper Tire & Rubber Company
Q4 2017 Earnings Call Transcript

Published: 20 Feb 2018

[Operator:]

Good morning, and welcome to Cooper Tire & Rubber Company's Fourth Quarter and Full-Year 2017 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jerry Bialek.

[Jerry Bialek:]

Good morning, everyone, and thank you for joining the call today. This is Jerry Bialek, Cooper's Vice President and Treasurer. I am here today 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 fourth quarter and full-year 2017 financial and operating results, as well as the company’s business outlook. Our earnings release includes a link to a set of slides that summarize information included in the news release and in the 10-K that will be filed with the SEC later today. Please note that we will reference certain non-GAAP financial measures on this call. The linked slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Following our prepared remarks, we will open the call to participants for a question-and-answer session. Now, I’ll turn the call over to Brad.

[Bradley Hughes:]

Thank you and good morning everyone. I want to quickly congratulate Jerry on being named Treasurer. He succeeds Tom Lause, who has retired from Cooper. In addition to this new role, Jerry will continue to lead Investor Relations and we look forward to his continued contributions. With that, I will begin today with a brief overview of our full year 2017 financial results, and we’ll then discuss the actions Cooper is taking to address the industry environment and opportunities we have to grow. After that, I will turn the call over to Ginger for a review of our fourth quarter and full year financial performance, the impact of tax reform and capital allocation. I'll then return to talk about our outlook, and finally we'll take your questions. Now, let's move to our 2017 results. Unit volumes were challenged in the U.S. throughout the year by industry-wide conditions including volatile pricing and promotions, higher raw material costs and softer retail demand, despite strong underlying factors such as miles driven and relatively low fuel prices. Our continued exit from some non-strategic private brand business a process which is largely behind us now also had a significant impact on our volume performance. To provide some perspective, our private brand distributor business is down almost 5 million units compared to 2012. We are in the process of replacing these units with more strategic business which is generally higher margin. We are pleased with the performance of our Asia operations which generated strong unit volume increases in the fourth quarter and the full year 2017, that nearly offset the U.S. decline. We ended the year with a small decrease in global unit volume of about 1.5% compared to 2016, despite the impact of a volatile raw material cost environment including large increases in the first half of the year and the resulting price and promotional activity in the tire industry, we were pleased to deliver full-year operating profit margin of 9.5% of net sales, which is near the high end of our previously stated mid-term target range. We have already launched several initiatives to improve unit volume in the U.S. such as expanding our early inroads into the global original equipment business outside of Asia where we already have a strong OE presence, as well as entering new sales channels and speeding the cadence of new product introductions to drive growth. We are also focused on profit margin improvement through companywide efforts to enhance efficiencies and reduce costs, including balancing production capacity within our network, automation in our plants, and a recent corporate reorganization, our efforts will take some time to fully manifest in our results, but we are encouraged with the early progress. Similar to many other companies, the adoption of the Tax Cuts and Jobs Act in December, coupled with other discrete tax items in the fourth quarter, had a significant impact on our results. In the fourth quarter, Cooper recorded discrete tax items of $68 million, primarily related to the deemed repatriation tax and remeasurement of deferred tax assets and liabilities required as part of the tax reform legislation. In the long term, the company believes tax reform will be a positive change and will benefit Cooper, especially given the significance of the company's U.S. operations. Later, Ginger will go through further details regarding the impact of tax reform on the company’s results. Our financial metrics for the year include net sales of $2.85 billion, down 2.4% from last year. This decline was driven by lower unit volume in the U.S. which more than offset volume improvement and favorable price and mix in Asia compared to 2016. Unit volume decreased by 0.5% year-over-year. As I noted earlier, unit volume declined in the U.S. while our International segment unit volume grew by nearly 22% in 2017. Operating profit was $272 million and operating profit margin was 9.5% of net sales which as I said earlier is, near the high-end of our mid-term target range. Diluted earnings per share were a $1.81. Excluding the impact of discrete tax items, earnings per share would have been $3.10 in 2017. Cooper continued to return cash to shareholders through our capital allocation plan which Ginger will discuss in more detail later on the call. Despite the challenging conditions, Cooper achieved a 12.2% return on invested capital for the year excluding the impact of unique fourth quarter tax activity. Now, let's talk about what Cooper is doing to drive improvements especially with respect to unit volume in the U.S. We've undertaken several initiatives to drive growth including first, entering additional sales channels. We are entering new channels to expand the places where Cooper products are available to consumers including e-commerce and car dealerships. Second, making inroads into the global OE market. In addition to our successful OE business in Asia, we have been making early inroads to grow our global OE business. We recently noted that Cooper Tires are original equipment on the Volkswagen T-Roc, mini SUV in Europe and we will have another OE announcement to come in North America in the future. OE will be a relatively small but strategically important part of our business as it is important to driving technology and underscoring our capability to produce high performing tires. It also enables growth in the car dealer channel when consumers come to replace their original tires and often stay with the same brand, especially for premium vehicles. Third speeding the cadence of new product introductions, the tire industry has been very active in terms of new product launches which have been coming at a faster pace. Cooper is taking action to speed up the launch of our new products as well as refreshing existing product lines more frequently. We love to be an industry leader with a continuously fresh portfolio of products in the replacement tire market and we are working more directly with our consumers integrating their input and feedback into our product offerings at multiple stages in the process to a much greater degree than we have done in the past. As noted earlier, in addition to the volume opportunity we are working to drive profit margin improvement through companywide efforts that are underway to enhance efficiencies and reduce costs including continued balancing of production capacity within our network automation in our plants and our recent corporate reorganization designed to make Cooper more efficient, effective and agile. As part of this reorganization we eliminated about 5% of U.S. salaried positions across a wide range of functional areas with most changes at our corporate headquarters. This work was done to align people, capabilities and investments to the priorities we have for our business today and in the future. As you know Cooper works to align production levels with market demand, due to a continuing significant market decline in the region, we’ve reduced headcount and capacity at our Mexico Joint Venture operation. Production was recently decreased from seven days to six days and headcount was reduced by over 400 positions. We will continue to balance and optimize our manufacturing capacity to respond to demand changes and operate our network efficiently. We are also committed to serving our customers more effectively. Cooper is investing in both the physical network and capabilities within our supply chain to address changing market dynamics. We recently announced an expansion of our product distribution network in the U.S. with a new 1 million square foot warehouse we are leasing at Byhalia, Mississippi that will open in the fall of this year. This warehouse will be dedicated to light vehicle tires will be our largest in the U.S. and will be centrally located among Copper’s three U.S. tire manufacturing plants. In addition, this spring, we are opening a 400,000 square foot facility in San Bernardino, California, that will be dedicated to TBR tires. Both warehouses will allow us to more efficiently consolidate and distribute products directly to customers as well as supply regional distribution centers improving fill rates and shortening customer lead times. With regard to our TBR business, we continue to outpace the U.S. industry unit volume growth. In fact, 2017 was the third year in a row where Cooper’s TBR shipments grew more than the industry. With this growth, we are excited to have announced a new multi-year manufacturing offtake agreement with Sailun Vietnam for the production of TBR tires. This gives Cooper a third global source of TBR tires to help meet growing customer demand. I want to thank all members of the Cooper team around the globe for their efforts throughout 2017 and for the hard work yet to come in 2018. Now, I will turn the call over to Ginger for an update on the business environment, financial results and capital allocation.

[Ginger Jones:]

Thank you, Brad. I'd like to start by addressing raw material costs. As noted during our third quarter call, we anticipated a modest sequential increase in our raw material index in the fourth quarter. Our actual index increased from 150.2 in the third quarter to 153.1 in the fourth quarter as shown on slide 6 of the supplemental slide deck. This is a sequential increase of just under 2%. On a year-over-year basis, the index increased by 4.1% from the fourth quarter of 2016. As we look forward we anticipate modest sequential increases in raw material costs in each quarter of 2018, but we remained cautious as this is hard to predict. Now, moving to our results, beginning with the full year. Full year sales for 2017 were $2.85 billion, a 2.4% decrease from the prior year. Net sales were impacted by lower unit volumes and unfavorable foreign currency impact, partially offset by favorable price and mix. The company's 2017 operating profit was $272 million or 9.5% of net sales. Diluted earnings were $1.81 per share. Excluding the impact of $68 million of income tax expense related to U.S. tax reform and other discreet fourth quarter events, earnings per share would have been $3.10. This compares with the operating profit of $384 million or 13.1% of net sales, and diluted earnings per share of $4.51 million in 2016. The 2016 results included non-cash pension settlement charges of $12 million. Moving to consolidated fourth quarter results, sales were $757 million, down from $784 million in 2016. This 3.4% decrease was driven primarily by the impact of lower unit volume and unfavorable price index. Primarily in the U.S. market due to heavy promotional activity to counteract softer than expected consumer demand in retail. Operating profit was $47 million or 6.2% of sales, compared with $105 million or 13.4% of sales in 2016. Fourth quarter operating profit compared with 2016 was impacted by the following factors which are summarized on page 7 of the supplemental slide deck. $32 million of unfavorable raw material costs net of price and mix, $13 million of higher manufacturing costs due to lower production volumes. This was primarily in the U.S. and with an outcome of the year-over-year decline in unit volume and the related production down days required to manage inventory levels, $11 million from lower unit volume, $2 million of higher product liability costs, and $1 million of decreased other costs. Selling, general and administrative costs increased $1 million as lower incentive compensation was more than offset by increased professional fees and $2 million of restructuring costs related to the company's corporate reorganization. Diluted loss per share was $0.82 compared with earnings of $1.28 in the fourth quarter of 2016. Excluding the impact of tax reform and other discrete fourth quarter tax items, fourth quarter earnings per share would have been $0.50. Now on to our segment performance starting with Americas Tire operation. Segment sales for the fourth quarter were $645 million, down 7.1% from $694 million in 2016, net volume was $43 million lower with negative price mix impact of $7 million, partially offset by favorable exchange rate changes of $1 million. Unit volume decreased 6.2% with unit volume declines in both North America and Latin America. Fourth quarter operating profit in the Americas declined to $61 million fourth quarter operating profit in the Americas decline to $61 million or 9.4% of net sales compared with $160 million or 16.8% of sales in 2016. The major drivers of the decrease were $27 million of unfavorable raw material cost net of price and mix, $17 million of unfavorable manufacturing costs, $12 million of lower unit volume, $2 million of higher product liability costs, and $5 million of higher other costs. These reductions were partially offset by $8 million of favorable SG&A costs primarily related to lower incentive compensation. You can see the full profit wallet for the Americas segment on slide 8 of our supplemental slide deck. Now turning to our International Tire operations segment, net sales for the fourth quarter were $162 million up 30.5% from the fourth quarter of 2016. Increased unit volumes in Asia in both the OE and replacement markets more than offset lower unit volumes in Europe, contributing $13 million to the sales increase. Improve mix and higher pricing of $24 million and $1 million of favorable foreign currency impact also contributed to the increase from 2016. Fourth quarter operating profit in our International Operations increased to $6 million compared to $1 million in 2016. The results were positively impacted by $4 million of favorable manufacturing cost $2 million of additional unit volume and $4 million of other improvements including the result of the GRT joint venture in China. These improvements were partially offset by $5 million of unfavorable raw material costs net price and mix. You can see the full profit walk for the International Operations on slide 9 of our supplemental slide deck. Shift to another note about GRT before we move on, previously we said we expected GRT to become accretive to operating profit beginning in 2018. Due to some great work by the team in China GRT was actually accretive to earnings in 2017 results which contributed to the improved operating profit year-over-year in this segment. Turning now to some corporate items, with the passage of the Tax Cuts and Jobs Act on December 22, the U.S. government enacted comprehensive tax legislation which made broad and complex changes to the U.S. tax code. In particular the transition to the new tax system resulted in a deemed repatriation tax of $35 million on undistributed earnings of foreign subsidiaries. The deemed repatriation tax will be payable over eight years, but was all recognized as expense in the fourth quarter of 2017. In addition the reduction of the U.S. corporate tax rate from 35% to 21% resulted in an adjustment to the company's U.S. deferred tax assets and liabilities to the lower base rate of 21%. The impact of the remeasurement of deferred tax assets and liabilities resulted in a non-cash charge of $20 million to the company's fourth quarter tax provision. Both the deemed repatriation tax and the tax impact on the measurement of our deferred tax assets and liabilities were recorded as provisional amounts under guidance prescribed by the SEC’s SAB 118. Additionally in the fourth quarter the company reported a non-cash valuation allowance of $90 million against its deferred tax assets in the U.K. The valuation allowance was required after the company assessed the expected realization of its deferred tax assets. The largest of which is related to pension liabilities. Also in the fourth quarter the company reversed a non-cash $7 million valuation allowance related to its Asia operations based on the expected realization of the underlying deferred tax assets primarily loss carryforwards. Excluding these discrete tax items, the effective tax rate would have been 30.7% for the quarter compared with 29.3% of last year. For the full year the effective tax rate was 32.4% excluding unusual items, compared with 31.5% last year. The increase in the effective tax rate from 2016 was caused primarily by a significant decrease in favorable U.S. Permanent book/tax differences and to a lesser extent by changes in the mix of earnings and other tax jurisdiction. We expect a full year 2018 tax rate to be in a range of 23% to 26% percent which is estimated based upon our current understanding of the Tax Act. The tax act access is complex with several unique provisions. Any changes to our preliminary analysis or changes to guidance related to the Tax Act could affect the company's estimated impact. As Brad said earlier, we believe tax reform will be a positive change and will benefit Cooper in the long run. Along with the reduction in the tax rate and the positive impact on our earnings cash flow will improve providing greater flexibility and the potential to accelerate our strategic initiatives and continue to support our capital allocation priorities. More detail on our taxes is available in our Form 10-K that will be filed with the SEC later today. And finally, the adoption of accounting standards update 207-07 2017-07 compensation for retirement benefits effective January 1, 2018 will result in the reclassification of net periodic benefits costs excluding service costs outside of operating profit. In 2018 the company expects to net periodic benefit costs classified below operating profit to be approximately $28 million. Turning now to cash flows and balance sheet for the full year cash generated by operating activities was $177 million compared to $313 million in 2016. The decrease was driven primarily by the company’s decreased earnings in 2017. Cash and cash equivalents were $372 million at December 31, 2017 $372 million at December 31, 2017 compared with $504 million at December 31, 2016. Capital expenditures in the fourth quarter were $54 million. Full-year capital expenditures were $197 million compared with $175 million in 2016. In February of 2017, the Cooper board of directors extended and increased our share repurchase program by authorizing the repurchase of up to $300 million of the company's outstanding stock through December 31, 2019. During the fourth quarter, approximately 576,000 shares were repurchased for a total of $20.7 million at an average price of $35.87 per share. As of December 31, 2017, $223 million remains of the $300 million authorization. Since share repurchases began in August 2014 through December 31, 2017, the company has repurchased a total of 14.8 million shares at an average price of $34.42 per share. As a reminder, we believe our existing cash, cash flows and potential leverage are more than sufficient to support our capital allocation priorities which we define as supporting our ongoing commitments such as maintenance capital, debt payments, dividend payments and working capital to support the business, next, capital to support organic growth and margin improvement projects, acquisitions and investments and returning cash to shareholders. I’ll now turn the call back over to Brad.

[Bradley Hughes:]

Thanks Ginger. Looking ahead, we expect results to improve as our initiatives begin to take hold and as underlying macro conditions that favor tire industry growth have a positive impact. Management expectations for 2018 include full-year unit volume growth compared with 2017. With the reclassification of periodic benefits as described by Ginger earlier on the call, our mid-term operating profit margin target is now 9% to 11%. We expect full-year operating profit margin near the low end of this range with improvement throughout the year following a first quarter, which is expected to be below the range due to the impacts from our reductions in Mexico and a challenging U.S. tire market. An effective tax rate in the range between 23% and 26% with the decrease compared to 2017 driven by the Tax Cuts and Jobs Act and the predominance of our earnings in the U.S. And finally, we expect capital expenditures to range between $215 million and $235 million. Cooper will continue to execute on strategic priorities, including entering additional sales channels, making further inroads into global OE markets, introducing new products at a faster pace and other initiatives focused on driving growth, especially with respect to unit volume in the U.S. We have a strong record of delivering solid results on our investments and remain confident in the overall strength of the Cooper business model. We look forward to providing more detail on our strategic plans, capital allocation and updated guidance at an Investor Event planned for the middle of this year. Overall, we believe that with industry conditions improving, Cooper is well-positioned for the future. We have work to do. We are confident that Cooper will, as we have done for over 100 years, succeed in the long term. With that, let's move to your questions. Operator, will you take the first question, please?

[Operator:]

[Operator Instructions] And our first question will come from Rod Lache of Deutsche Bank.

[Rod Lache:]

I had a couple of questions. One is during the fourth quarter, we heard from some competitors that they ramped up promotional activity in the U.S. and they’ve recovered some volume. And I think Brad you mentioned that you'd take some promotional actions as well but your U.S. volumes were down. So could you just kind of characterize what's happening to pricing for Cooper Tire specifically? And when we look at the volumes how much of that loss was deliberate? How much of that is the competitive environment?

[Bradley Hughes:]

I would agree Rod, that the fourth quarter we continued to see some promotional and some pricing activity in the market and in fact it's more than some, I would say that it continued at a level that was higher than what we've seen in previous years, on although in line probably with what we saw in earlier quarters and during 2017. As we've said all along, we intend to make sure that we are market facing with our pricing and our promotional activity on - and we continue to ensure that we were competitive. Having said that, you may recall in the last call we also indicated that given the start to the year that we have and given the importance of some annual promotional programs that it's difficult to actually catch up and really recapture that without a fresh start which we now have this year with our annual programs and a better opportunity to get off to the right kind of start this year. So there was a pricing and promotional activity in the fourth quarter, we did remain market facing, and we did continue, we just noted a moment ago in the call that you know we are - while it's largely behind us now, we have continued to reduce our exposure to the private brand wholesale business that continued through the fourth quarter as well. So, there were some unique factors to Cooper, we were market facing, we're happy to be turning the page and starting off in 2018 with the new annual program that we think is going to be useful as we go forward. I guess, the last comment I'd made with regard to the fourth quarter in this area, Rod, is that you know we wanted to make sure that we had the right inventory positions, not only as a company, but in the channels as we were exiting 2017 and about to start 2018 and we did manage to do that we believe on both our own inventories and those in the channels, so that we're not coming in with an overhang from last year.

[Rod Lache:]

I see the inventory and I'd imagine that that was a bit of a drag for you towards the end of the year. But, I guess, when I think about what you're saying about the outlook, I'm just trying to reconcile the big picture, your full-year 2017 margin was 9.5%. For 2018, you're looking for the low end of 9% to 11%, but that excludes the pension costs. So, I think, correct me if I'm wrong, but on an apples to apples basis, it would have been in the 8%, so the year-over-year margins are coming down despite kind of a tight inventory picture. And I'd imagined that that would be the Americas coming down year-over-year. Is that correct? And if so, is that just a reflection of kind of the new pricing environment being more challenging for you in 2018 versus 2017?

[Bradley Hughes:]

Firstly, you’re corrected that the pension adjustment, if you - what we did is, we rolled that into the guidance going forward to increase it from 8% to 10%, to 9% to 11%. So if you went back to the old accounting, yes, it would probably be approximately 8% to 10%, as opposed to 9% to 11%. We’re coming into this year on - with a couple of things from an expectations standpoint. One is that the macro environment continues to look positive towards tire sales. Having said that, over the course of last year, we saw at times where it looked like we were going to see a pick-up in particular in sell-out demand and yet, it really never sustained itself as you look back on last year in terms of the industry and a pick-up in both the sell-out and sell-in, particularly with sell-out. As we come into this year, we see a little bit of the same, you know, it was a little bit soft in January as you would have noted from the USTMA report on the tire industry volumes. We have recently seen signs that sell-out may be improving but whether or not that sustains itself in the early part of this year in particular we're waiting to see that. So, number one is we're coming in with a longer-term perspective that's positive for the industry, but in the nearer term, we're waiting to see further signs that it will be sustainable. And then, on top of that, you note that we also are on - we've projected that material costs will be slightly up from 2017. And with that look and the competitive nature of the market right now, we're not looking for it, again especially in the early part of the year, first half of the year here on an industry that's going to be able to offset those increases if in fact they do occur.

[Ginger Jones:]

And Rod, this is Ginger I would just add if you’re thinking about 2017 to 2018 to keep in mind that we had two significant benefits during the year that we called out. In the third quarter, we had the benefit to adjusting our product liability reserves and that was nonrecurring, and then early in the year in the first quarter we had a significant benefit from the reversal of the TBR Terra. So, I would keep those both in mind as you think about the puts and takes from 2017 to 2018.

[Rod Lache:]

Could you just tell us what your kind of high level expectation is for pricing, are you assuming pricing kind of flat, raw materials up a little bit, but pricing kind of flat or are you expecting pricing to be down, pricing mix to be down year-over-year?

[Bradley Hughes:]

Well, two things. One is I think that we believe that it's stabilizing right now even though you know there was a fair amount of activity in the fourth quarter, it seems to be a more stable pricing environment now as we come into 2018. And overall, the - as sell-out improves which we expect to occur at some point in time with the favorable macro conditions that we see for the tire industry, I think that we'll begin to see a recovery in pricing relative to raw materials. Part of that will depend on how much raw materials move, but if they do move up I do expect that over time, we'll see some recovery on the pricing side. Right now, we're expecting a relatively stable environment with regard to price.

[Operator:]

The next question comes from Christopher Van Horn of B.Riley.

[Christopher Van Horn:]

I wanted to just see if we get some additional detail on what's going on with TBR, both in China and here in the U.S. because it seems like you, with the joint venture in Vietnam as well as GRT, kind of being a little bit more accretive earlier than we thought. I just want to get a sense of the direction of that market and what you're seeing in the marketplace?

[Bradley Hughes:]

Yes, we're excited about what we're seeing in our TBR business on - just one quick correction there, Chris, the - what we've announced with Sailun Vietnam is an offtake agreement for now. So, we're happy to get that started and to build out our sourcing footprint to three sources for TBR volume. A lot of that is to support the growth that we've got going on in the North America and specifically the U.S. market. We saw very strong growth for the third year in a row last year in the U.S. market and need to expand our sourcing footprint to support what we see is continued growth in our TBR business there. We also do have some on growth in the business in China right now on as well. And as a result of the ramp up that we had at GRT, which is the joint venture that we have in China relative to the strength in demand and great work by the team over there, we were able to see that investment become accretive in 2017, which is a bit earlier than we had predicted.

[Christopher Van Horn:]

And then, looking at profitability on the international side, obviously it’s going up incrementally each quarter, could you give us a sense of how to think about it into 2018, the profitability level over there?

[Bradley Hughes:]

Yes, I think we continue to believe that we’ll see improved profitability in our international segment, we are still growing and growing our production capacity and capability in China to support that growth. And so, you’ll have that implication as we continue to invest to grow that capability, but we do expect that on - with the continued improvement in volume and growth in the International segment that we'll see improved profitability in 2018 relative to 2017.

[Christopher Van Horn:]

And then, final one from me and in the past you've given some color on the Chinese OEM volumes that you've had during the quarter, would you be able to comment on that today?

[Bradley Hughes:]

We continue to see very strong growth in the China OE market. We highlighted that in International we were up 22% compared with the prior year and that much of that is attributable to the OE growth that we had in China.

[Operator:]

And the next question comes from Ryan Brinkmann of JPMorgan.

[Ryan Brinkman:]

How should investors be thinking about free cash flow in 2018, you mentioned CapEx of $215 million to $235 million, which is a pretty material step up at the high end? Maybe you can just talk about the swing factors on that range and it’ll also be helpful if you could comment on some of the other moving pieces, like working capital in light of you know changes in raw material prices, et cetera?

[Bradley Hughes:]

I think you're highlighting one, I mean, we're not - obviously earnings are a major contributor to it, capital spending is. We are typically conservative with our capital spending guide on - guidance at the beginning of the year. And so, we provide that range and the high end of the range if you look back historically I don't think we've ever reached the high end, but we do want to ensure that within our guidance if business conditions - and this and Cooper performance support it that we're in a position that we can continue to reinvest supported that we’re in a position that we can continue to reinvest in our business, especially as we look at some investments now for example in the U.S. market that may make even more sense and they would have compared with the time period prior to the change in the tax rate environment. So, we want to make sure that we've got an opportunity to continue to invest in good returning projects for the company on if they present themselves. But I would tell you if you look back historically we're traditionally fairly conservative in the guidance that we provided on capital spending. So, that's the second lever beyond earnings. And then the third one that you highlight is one on that that I think is going to be also on a factor in 2018 which is around working capital and an opportunity to become even more efficient with the way that we're managing our working capital.

[Ryan Brinkman:]

And then I think in 2017 clearly a very unusual year. You know some of the metrics that would have ordinarily expected to have contributed to higher consumer replacement tire shipments in U.S. like even stronger miles driven et cetera you know did not have the impact that we'd imagined at the start of the year. Can you share what factors give you the confidence that volume can track even slightly higher in 2018?

[Bradley Hughes:]

I guess there's a few things that come to mind Ryan. And I think you're right, I think than usual was a good term. However we've seen, and I think I've been here long enough that I can start to look back and try and learn from prior lessons learned on that over the course of the last almost nine years. We've been in periods of time like last year and continuing into this year, we saw a macro environment that suggested that we would see tire especially replacement tire industry growth. And we kept saying it was coming, we kept saying it was coming and it did come eventually it just was a year or two on beyond when we initially saw the signs that the we thought suggested that we should start to see that grow. And I think that there will - there was a timing element to what we’re looking at right now with regard to when these factors begin to actually have that positive impact on the U.S. tire replacement industry. On top of that, as we will get a potential slowdown in the new vehicle market that's another trigger point that usually on trends favorably for the replacement market when people are not buying new vehicles or keeping their older vehicles longer and it's causing them to look at replacement tires depending on where they're at in terms of the ownership cycle. And so with the continuation of the factors we've been talking about and the potential for an additional factor which is a bit of a slowdown in the new vehicle industry on again we think that there will be some positive impact from that coming it's just difficult to say exactly what.

[Ryan Brinkman:]

And just my last question is on the tax rate s the 23% to 26% effective in 2018. Is that a decent proxy beyond 2018 or is there some potential for it to track closer to the new statutory rate over time?

[Ginger Jones:]

Well, Ryan I think it's a reasonable estimate I need to caution there are some parts of the Tax Act that we're still getting our arms around like a lot of companies, but don't forget that in addition to the statutory U.S. rate there is a state tax rate in the U.S. and then we blend that rate for all of the tax jurisdictions we're in. So I think 23% to 26% is our best estimate for now and we'll update that as we understand some of the more complex components of the tax act across 2018.

[Operator:]

And the next question comes from Bret Jordan of Jefferies.

[Bret Jordan:]

On the discussion of our new channels like as e-commerce and maybe some of the discussion of our new channels I guess e-commerce and maybe some of the - dealership business in the U.S., is there any difference in the margin profile on those channels versus your existing?

[Bradley Hughes:]

Well, I think as we look at the various channels that you sell into, I think it's worth noting that over time the comments that we've been making about reducing our exposure to the private brand wholesale business and the fact that that is just generally lower margin business is important. And as we begin to put some of this new business onto the books we would expect that to be better margin business in terms of replacing some of that business that has reduced over time. And beyond that it varies by specific channel and customer and it's difficult to put a generic label on the overall other than if you added up on, it's likely to be better than the majority of the business that has gone away over the last five years or six years in the private brand wholesale space.

[Bret Jordan:]

So it’s better than private brands and it’s maybe similar to or slightly less than your core branded product distribution now?

[Bradley Hughes:]

Maybe, I mean - the first part of your statement general is definitely true to the second part and we'll have to see and we'll have to see you know how we balance across those new channels to make a statement like that.

[Bret Jordan:]

And then as far as balancing production capacity you talked about taking a day out of production out of Mexico, are you pretty much done with that process or are we balanced now given your outlook for the matter?

[Bradley Hughes:]

We’ll continue to look at it, I think in the near-term on - that that’s the action that we're focused on implementing right now - I probably should draw a little bit of attention to the - if you look at our manufacturing cost last year in 2017 relative to 2016, we did have a fair amount of overhead, that we weren’t absorbing because we weren’t running our plants full out. And so, we are continuing to look at how we can optimize on the scheduling of the tires that we do need to build for this year. But the big item on the board right now is what we've been doing in Mexico.

[Bret Jordan:]

And then, just a housekeeping on your guidance. I think you said near the low end of the 9% to 11% range, is that expected to be within the 9% to 11% range or could it - is near the low end potentially below the 9%?

[Bradley Hughes:]

Trying to remember the exact words that we used. But, we were suggesting in the range for the full year towards the low end of the range.

[Bret Jordan:]

All right, the exact word was near the lower end of the range. I didn’t know if that was in the range down though. Thank you. That's great.

[Operator:]

And our next question comes from Anthony Beem of Longbow.

[Anthony Beem:]

So, few questions from me. You're guiding a positive unit volume growth in 2018, are you able to give us a range for that assumption you know 1% to 2%, 2% to 4% or greater? And also can you help us appreciate how the Americas region growth is expected to trend within this guidance?

[Bradley Hughes:]

At this point we are guiding on our global unit volume, and frankly until we get a better sense of how the markets themselves - so, we're talking specifically about Cooper there. And until we get a better sense of how the individual markets that are key for us globally, including the Americas and the U.S. market get started this year, we're sticking with the more global approach that we’re confident we can grow on a global basis, breaking it down by market at this point, I think we need to see a little bit more of the start in 2018 in some of those key markets.

[Anthony Beem:]

And then on the first quarter that that tariff benefit last year was very material, so I'm curious from the commentary in the press release. Can you add to the magnitude of the first quarter margin shortfall relative to the low end of that mid-term target so below the 9%. So I mean the tariff was might have been 300 basis points I'm calculating. So, how big of a shortfall should we expect for the first quarter if you can provide that?

[Bradley Hughes:]

Again at this point we're providing the guidance that we provided during the commentary earlier about being below the low end of the range on - there is no doubt that as you're describing that one of the impacts will be the non-recurrence of the tariff benefit that we had in the first quarter of year ago.

[Anthony Beem:]

And then just two more from me. The pension reclassification was there any benefit in the fourth quarter as well that that maybe we should take into account for the earnings range for 2018 or is it all strictly 2018?

[Bradley Hughes:]

Anthony that's all perspective. So we'll begin to see that in 2018 and there was no impact on the fourth quarter of 2017.

[Anthony Beem:]

Then just last one for me and thanks for taking my question. So the new offtake rights agreement with Vietnam Sailun, can you give us the rationale for that agreement given that DRT has excess capacity. I mean a few thoughts maybe diversify your sourcing Vietnam could be a strategic location for exports of TVR two additional countries or maybe to mitigate risk from if Chinese tariffs resurface here in the U.S. So any additional color there is helpful? Thank you.

[Bradley Hughes:]

Maybe just real quickly on the pension, one quick comment, then I’ll get to the GRT and Sailun Vietnam question is that, I think, it's worth recognizing that the $28 million that we talk about going forward would actually have been a lower expense relative to what we incurred in 2017. So, that's the only change when you move from fourth quarter to the full year maybe worth noting that, that that's lower than what it was in 2017. With regard specifically, a couple of comments on TBR, GRT, we are not at our full capacity there. We're continuing to ramp up as fast as we can to support the volume growth. So, there's definitely, we have talked about a larger capacity available at that facility and we're still working towards that higher capacity, but we're not there yet. We're still ramping up to that and we'll continue to do so. So, that's one part of the comment in question that you asked earlier. The other one is, we have continued to say that we want to build out a sourcing footprint for our TBR business that's a bit more diversified than what we had a few years ago. And that's to diversify against many risks, including the potential risk that at some point in time there may be tariffs that pop up in another part of the world, that we’ll be better off for having diversified our source and footprint. So, that is definitely another major factor and it is a fantastic facility and we think that it could give us opportunities to sell those tires not only in the U.S., but potentially other markets. So, we're very happy about it. And that was the logic behind it, Anthony.

[Operator:]

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

[Bradley Hughes:]

Again I want to thank you for taking the time to be on the call with us this morning. If you begin to look through what we've talked about today, if you've got any additional questions please reach out to Jerry on for further comment. And with that we'll sign off. And again thank you everybody.

[Operator:]

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