Cooper Tire & Rubber Company
Q2 2015 Earnings Call Transcript

Published: 6 Aug 2015

[Operator:]

Ladies and gentlemen, good morning and welcome to the Cooper Tire & Rubber Company’s Second Quarter Earnings Call and Webcast. At this time all participants on the call are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to turn the conference over to Ginger Jones. Please go ahead ma’am.

[Ginger Jones:]

Good morning everyone and thank you for joining the call today. This is Ginger Jones, Copper’s Chief Financial Officer and I am here with Roy Armes, our Chairman, Chief Executive Officer, and President; Brad Hughes, our Chief Operating 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 report on file with the SEC. During this call we will provide an overview of the Company’s second quarter 2015 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-Q that will be filed with the SEC later today. Following our prepared remarks we will open the call to participants for a question-and-answer session. With that I will turn the call over to Roy.

[Roy Armes:]

Yes. Thanks Ginger and good morning to everyone. This morning I’ll briefly cover our second quarter financial results and then discuss our progress in Asia as well as some of our new product development efforts then I’ll turn the call over to Brad and Ginger for a discussion of our operations and financial performance and after that I’ll return to present our outlook and then we’ll open the line for your questions. Our second quarter performance was very strong as positive trends from the first quarter continued giving Cooper a solid first half of 2015. In the second quarter we continued our strong profit performance with operating profit of $99 million or 13.2% of net sales compared to $77 million or 8.6% of net sales a year ago as shown on Page 4 of the supplemental slide deck. This was a record second quarter operating profit for the Company. Based on the results that we’ll talk about today in our outlook for the rest of the year we believe that the company’s operating margin for 2015 will be above the high end of our midterm target of 8% to 10% but below the first half 2015 results. This strong operating margin is in line with our stated long-term goal for operating profit that exceeds 10% consistent with the five year strategic plan we presented in May of 2014. Our total net-net sales in the second quarter were $752 million which represents a decrease of 15% compared to the same period a year ago and the decline is fully attributable to the absence of CCT our former joint venture in China. As you know we sold our interest in the joint venture in the fourth quarter of last year and excluding the CCT impact our second quarter sales rose 5% and unit volumes were up 9% globally. Unit volumes increased in both the Americas and international segments with double digit increases in unit volumes in China excluding CCT and Latin America. These strong results demonstrate that our efforts to grow in the rapidly expanding markets are working as we continue to execute our global strategic growth plan. In the Americas segment our team delivered outstanding performance with unit volume increasing 7% and second quarter operating profit of $109 million or 16.1% operating margins a record quarter of operating profit for the segment. Results in the Americas drove total company operating profit as I said earlier to $99 million or 13.2% of sales which was greater than 90% increase over last year's quarterly results excluding the impact of CCT. Diluted earnings per share for the quarter were $1.03 compared to $0.59 per share for the same period a year ago. We are pleased with our performance this quarter and for the first half of the year and I want to thank the Cooper employees around the world who helped deliver these results. Now let me turn my attention to our strategic focus in Asia. Establishing a larger presence in Asia remains our top priority for us as China is poised to become the world's largest tire market by 2017. Cooper's strong balance sheet and existing successful operations in China which include a highly productive wholly owned tire manufacturing plant in Kunshan called CKT as well as a state of the art technical center there give us multiple options to grow in the region. We also have replaced our offtake agreement with the former CCT to produce both passenger car tires and truck and bus radial tires or TBR tires for us. This agreement is going well and we're pleased with the supply and the quality of the tires. Now as we have talked about the last few quarters we're actively looking to expand our brand awareness and distribution in that region as well as secure additional sources of supply especially TBR tires. We're very pleased with the range of opportunities to invest and the number of companies interested in doing business with Cooper. We will continue to be selective in our approach in finding the right options and we continue our efforts to have a plan in place as soon as practical and Brad's going provide you more detail in his comments a little bit later. We continue to organically invest in China and believe we are making solid progress particularly in original equipment tire sales. If you exclude the impact of CCT from our 2014 numbers, our sales volume was up 12% in China during the second quarter of this year compared to the second quarter of 2014. The increase was driven by our continued penetration of the original equipment or OE market. Our teams in Asia have done a remarkable job of signing new OE accounts and meeting their needs with great products, excellent quality and outstanding customer service. The replacement tire market is highly competitive in China and our unit volume in the second quarter this year was essentially flat year-over-year. To help address the growth in the replacement market we’re teaming with tire dealers in the region on a new retail concept called the Cooper Superfeel Center. You may have seen our recent announcement about this Cooper branded tire sales and the service superstores. Over the past eight months Cooper and local dealer partners have opened four flagship Cooper Superfeel Centers in Shanghai, Beijing, Shan Dong, and Chengdu and Cooper plans to team with additional dealer to open two more Superfeel Centers in China before the end of this year. On Page 6 of the slide you can see a photo of this unique retail experience that was specifically what we have in Beijing. These Centers which range from 3,000 to 5,000 square feet over an expansive array of tires for passenger cars, SUVs and other vehicle types in an enhanced shopping environment that features the use of dimensional and interactive displays as well as large format video screens. In addition to the unique shopping environment Cooper Superfeel Centers also offer a host of tire related services including alignment, balancing and tire repair as well as other value added auto services provided by automotive professionals for the ultimate and consumer convenience and quality. This flagship store concept is quite a different tire shopping and service experience than what is typically offered in China where the business is highly fragmented with no major distribution channels or national retailers. These stores are intended to be a complement to our thousands of traditional distribution points in China as well as an opportunity for Cooper to build on our brand image there and to create loyalty among Chinese consumers many of whom are now buying their first replacement tires. In other efforts to build our brand in China, Cooper is highly involved in racing. We were the official off-road tire of the year 2015 Taklimakan Rally, a 13 day race in the Xinjiang province it was completed in early July. This sponsorship aligned well with our products strength in this fast growing SUV and off-road category in China and the scope of the event also provided us the opportunity to extend our race involvement into some charitable activities to support children’s literacy in the region. Now turning to the topic of our supply of tires from China, we continue to produce tires at CKT. As I said earlier this facility performs extremely well and with additional equipment investment CKT can double its capacity to produce approximately 10 million tires per year within our existing facilities. We also have land available adjacent to the CKT facility to further expand capacity when required. Of course this last increase in capacity would require a larger investment including a new building. Although this type of investment is not in our near-term plans, it is a source of capacity to support future growth and adds flexibility to our footprint in China. I’d like to shift gears now and highlight some of our recent innovation in new products as they are critical reasons that we continue to win and expand our share in outperforming the market. Cooper has an overall goal of approximately 25% of our total sales coming from new products which we define as those launched in the past two years. We exceeded that goal in 2014 and expect our innovation track record to be strong this year as well. As we’ve said many times, technology and innovation drive new products and new products drive excitement in the marketplace. For example we recently launched the next generation of our most popular off-road tire line with the new Discoverer STT PRO. The Discoverer STT PRO cutting edge technology to deliver exceptional traction in some of the harshest terrains on earth with a distinctive tread design and compound that creates great highway performance without sacrificing its serious off-road traction. The tire is geared to a wide range of the consumers including off-roaders those how enjoy hunting and fishing and even professionals who depend on their trucks from ranchers to landscapers. In late July we held a special ride drive event for news media to experience these tires first hand in the mountains of Grand Junction, Colorado. Early reviews have been highly favorable with the new Discoverer STT PRO hailed that its Cooper’s most advanced extreme tire to-date and the tire that has set a new bar in the light truck traction category, like duty truck traction category. Cooper is also expanding the size range of our Discoverer SRX line which was launched last year. We rolled out 30 new sizes covering a wide range of the most popular SUV and CUV vehicles on the market today. This tire line recently received recommended buy status from a leading national consumer ranking publication and it gained recognition among new products at the most recent Specialty Equipment Manufacturers Association Show. Finally in the second quarter we also introduced the new size to our Roadmaster truck tire line that meets the demands of severe duty applications such as logging and mining. Truck tires are an important part of our business and we are pleased to continue to expand our offering to this market rounding out our product lines to meet the needs of several specific truck applications. Before I turn the call over to Brad I want to highlight the important topic of consumer safety. Cooper is committed to helping drivers understand the proper selection use and maintenance of their tires as part of operating safely on the road. In conjunction with the National Tire Safety Week which is an industry initiative spearheaded by the Rubber Manufacturers Association, Cooper engaged in a tire safety campaign with broad national reach that resulted in more than 85 million audience impressions. Cooper team with race car driver Arie Luyendyk on a comprehensive campaign called Know Before You Go, that included a special tire safety video, tire safety guide, national media appearances, social media outreach and a host of other tactics designed to inform an engage consumers especially younger drivers. In addition to the core campaign in our headquarter state Cooper partnered with the Ohio Department of Transportation and the Ohio State Highway Patrol to distribute tire safety guides at highway rest areas throughout the state bringing important tire safety information to travelers over the Memorial Day, holiday weekend and beyond. Now with that I’d like to turn the call over to Brad to give you more detailed review of our second quarter operating performance.

[Brad Hughes:]

Thank you, Roy. This morning I will first elaborate on Roy’s comments about our efforts to add TBR capacity. Then I’ll talk about how we’re utilizing our global footprint to better position Cooper for long-term success. I will conclude by addressing the raw materials environment and the continued mix shift in response to demand for higher value and higher margin tires. As Roy mentioned we’re looking at a number of options to secure additional sources of supply especially for TBR tires. These options could include an agreement with another supplier, making an acquisition, a joint venture, a new facility or a combination of these options. With our cash on hand as well as our financing capacity which has recently been enhanced we have the financial ability to make appropriate investments to support our growth strategy. Beyond finding opportunities that will create additional value we’re focused on three operational criteria as we evaluate options. One, finding a new source of high quality cost competitive TBR tires for the North American market; two, finding TBR capacity and distribution for the China and Southeast Asia markets. And three, diversifying our TBR sourcing footprint to include potential production capacity both inside and outside of China to serve global tire markets. We believe that achieving all three of these criteria will likely require a series of actions rather than a single step. We are currently in discussions that would provide an alternative source of TBR tires including for the North American market which are progressing. It is too early to provide specifics and is important to note that we also have other potential actions advancing. Obviously there is a possibility that some or all of these opportunities will not come to full fruition but we remain confident that we'll be of the secure alternative sources of TBR supply. Moving on our existing global footprint for light vehicle tires gives us the flexibility to determine the best configuration of production and distribution to supply high quality cost competitive tires to our customers over the long-term. In addition to our wholly owned CKT facility in China we have low cost production in Serbia and in Mexico and cost competitive facilities in the U.S. We have the ability to respond to changing marketplace conditions whether it is due to the tariffs or other factors. In fact we have recently moved production of some tires from China to Serbia in response to the most recent tariffs and it began shipping some of these tires to the United States. Now I'd like to address the raw material pricing environment. We continue to experience a favorable pricing environment for raw materials consistent with our comments in the first quarter call our raw material index was down 3% during the second quarter from 159 in the first quarter to 153.5 in the second quarter. This was a 23% index reduction compared with the 198.9 for the same period in 2014. As we look forward we anticipate raw material cost will be up slightly in the second half of 2015 compared to the second quarter of 2015. We continue to see volatility in raw material prices with increases in our raw material index in June and July. Commodity prices have been impacted by global events such as the market instability in China and the Greek Financial crisis, so we remain cautious about our ability to forecast them precisely. We believe the best way to consider the raw material benefit is net of any pricing actions and we are pleased with the $49 million contribution to the second quarter 2015 results from the net priced raw materials impact. We will continue to monitor both raw material cost and the overall market with an intention of being competitive and helping our customers stay competitive. Ginger will provide more details regarding raw materials inventory and impacts from our LIFO accounting in her comments. As we have previously discussed in response to accelerated demand for higher value, higher margin tires, the Americas segment has been reconfiguring its manufacturing plants to increase production of these products. While this reconfiguration will be ongoing the accelerated phase of this reconfiguration has now been largely completed and we expect to be better aligned with customer demand. This realignment contributed to our strong second quarter results as we saw increased units sales during the quarter of higher value and higher margin tires compared to the same period a year ago. As expected manufacturing cost implications from this reconfiguration were lower this quarter than in the first quarter and should be even less in the second half of 2015. We will continue to add equipment as needed on an ongoing basis to meet demand from our customers. As Roy said earlier, our global footprint gives Cooper the flexibility to produce tires in multiple locations around the globe to help our company and our customers remain competitive. That continues to be our overarching goal. Now I'd like to turn the call over to Ginger for an update on the second quarter financials.

[Ginger Jones:]

Thank you, Brad. As Roy mentioned the second quarter results were strong and helped us achieve a solid first half. Specifically our second quarter results included earnings per share of $1.03 compared with $0.59 in the second quarter of 2014. For comparison CCT contributed $0.19 to second quarter of 2014 EPS. Strong operating performance in the Americas segment and a lower share count contributed to the improvement in EPS. Sales were 752 million down from 2014. The sales decline was fully attributable to the absence of CCT. Excluding the impact of CCT total company sales increased 5%. This increase was the result of higher unit volumes in both segments which was partially offset by unfavorable pricing mix related to lower raw material cost and negative currency impacts during this quarter. Operating profit was 99 million or 13.2% of sales compared with 77 million or 8.6% of sales in 2014. CCT contributed approximately $25 million of operating profit in the second quarter of 2014. As Roy highlighted excluding CCT operating profit almost doubled from the second quarter of last year. Second quarter operating profit compared with 2014 was impacted by the following favorable factors which are summarized on slide, Page 8 of the supplemental slide deck. 76 million from lower raw material costs, 14 million from higher unit volume and 5 million from lower product liability and SG&A costs. These positive factors were partially offset by 27 million of unfavorable pricing mix largely reflecting pricing and promotions in response to lower raw material costs. $13 million of unfavorable manufacturing cost partially due to the previously discussed reconfiguration of our U.S. manufacturing plants to increase production of higher value, higher margin products. As expected this is a reduction from the 16 million in unfavorable manufacturing cost in the first quarter of 2015. I will discuss these costs in more detail when I'll talk about the specific segments and finally $7 million of currency impact and other costs. Moving to our segment performance I’ll start with the Americas tire operations. Segment sales for the second quarter were 673 million a 5% increase compared with 2014. Unit shipments rose 7%. Total light vehicle tire shipments for the U.S. were up 8.2% during the second quarter with an estimated increase of 4.8% for the industry and an increase of 5.3% reported by RMA members. You can see this detail on Page 9 of the supplemental slide deck. Much of this increase was a result of strong performance in light truck and SUV tires. Commercial truck tire sales of the Roadmaster brand declined in the second quarter 2015 compared with the same period a year ago. For the full year Roadmaster units are up significantly and grew faster than the industry. As a reminder we experienced supply issues with this product in the first quarter of 2014 and we reintroduced the Roadmaster brand in the second quarter of 2014. So the strong volume in last year’s quarter created by the backlog of orders resulted in a difficult comparison for the second quarter of 2015. We have regained our position with all of our top customers and we continue to focus on this important category. Moving on to profitability, second quarter operating profit in the Americas rose to 109 million or 16.1% of net sales compared with 65 million or 10.1% of sales in 2014. The major drivers of the increase were 68 million of lower raw material cost and $10 million of higher volume. These positives were partially offset by $19 million of unfavorable price mix as a result of pricing and promotions in response to declining raw material cost. We also saw $10 million of unfavorable manufacturing cost, this included 3 million of manufacturing inefficiencies related to the plant reconfiguration. As expected this is lower than the 7 million in the first quarter of 2015 and should be further reduced in the second half of 2015. The remaining increase was largely result of investments in technical capabilities and increased pension expense. We also saw $4 million of increased SG&A costs. A majority of the increase in SG&A for the quarter came from higher estimated incentive cost based on strong financial performance during the first half of the year partially offset by reduced brand and product marketing spending due to the timing of programs. You can see the full profit log for the Americas on Slide 10 of our supplemental slide deck. For the second half of the year we expect the Americas SG&A cost to be higher than in the first half as brand and product marketing spending will be higher in the second half of the year based on the timing of programs. Now turning to our international tire operations, net sales in our international businesses were $125 million down from the second quarter of 2014. This decline was primarily attributable to the absence of CCT. Unit volumes were higher in both Europe and Asia after adjusting for the absence of CCT however, currency and lower pricing related to lower raw material cost offset the benefit from higher unit volumes. The absence of CCT reduced sales in the international segment by $198 million compared with the second quarter 2014 sales before inter-company eliminations. Excluding the impact of CCT unit volume in the segment was 13% higher in the second quarter compared to the prior year driven by an increase in OE unit volumes in China. The increased OE unit volumes offset tariff related declines in exports to the U.S. Excluding the impact of CCT sales decreased $4 million as the higher unit volume of 17 million was not enough to offset 13 million of unfavorable price and mix related to lower raw material costs and $8 million of negative foreign exchange. The international operations posted an operating loss of $4 million in the second quarter. The results primarily were impacted by $12 million from lower raw material cost and $3 million from additional unit volume excluding CCT. These improvements were more than offset by $25 million from the absence of CCT. $12 million from lower price and mix as a result of lower pricing reflecting lower raw material cost. $3 million from manufacturing and efficiencies and $4 million related to currency and other costs. You can see the full profit log for the international operations on Slide 11 of our supplemental slide deck. Turning now to some corporate items, the effective tax rate was 36.5% for the quarter compared with 36.6% last year. We expect our 2015 effective tax rate will be in the range of 33% to 37%. More detail on our taxes is available in our Form 10-Q that will be filed with SEC later today. Total selling, general and administrative cost were $60 million or 8% of net sales in the quarter. This is down 11 million from the prior year SG&A of 71 million which was also 8% of net sales. SG&A in the second quarter of 2015 was positively impacted by lower mark-to-market costs of stock based liabilities of 8 million and $7 million due to the absence of CCT. These decreases were partially offset by higher estimated incentive costs based on the strong financial performance during the first half of the year. We expect SG&A expense will be in the range of $265 million to $275 million for the full year. This increase is from anticipated higher incentive compensation cost in the second half of the year based on the expected strong financial performance. Our pension expense in the quarter was $12 million up from $9 million last year and we expect full year pension expense to be in the range of 45 million to 50 million. Turning now to cash flows and the balance sheet, cash and cash equivalents were 408 million at June 30, 2015 compared with 327 million at June 30, 2014. Cash generated by operations was $55 million in the second quarter. Accounts receivable of $400 million increased from the June 30, 2014 balance of 394 million excluding the impact of CCT. The change is reflective of the increased sales of the ongoing operations year-over-year. Capital expenditures in the second quarter were 41 million. We expect full year capital expenditures to be between 205 million and 215 million. Depreciation and amortization in the second quarter was $30 million consistent with the first quarter. We expect depreciation and amortization to be approximately $125 million in 2015. 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 first, supporting our ongoing commitments such as maintenance capital, debt payments, dividend payments and working capitals towards the business. Next, capital to support organic growth and margin improvement projects, acquisitions and investments, including those to expand our footprint in Asia and returning excess cash to shareholders. In February 2015, we announced a new $200 million share repurchase program to be completed by December 2016. In the second quarter we repurchased $1.2 million shares under this program at a cost of 47.7 million. Through June 30, 2015 we repurchased a total of 1.5 million shares at a cost of $60 million or $39.49 per share under the new authorization. Since we began the share repurchases in July 2014, Cooper has purchased $7.8 million shares at an average price of $33.03 per share, this is 12.4% of the outstanding shares as of July 2014. During the second quarter we expanded our borrowing capability. We renewed an accounts receivable securitization facility for 150 million and replaced our ABL facility with a larger $400 million revolving credit facility. Our balance sheet remains strong and we have ample liquidity. We remain confident in our business model and committed to our overarching goal of delivering value to our shareholders. Looking forward to the second half of 2015, it's important to keep in mind some seasonal trends in our business. On the top line the third quarter of the year is generally the strongest unit volume quarter followed by a decrease in the fourth quarter. This decrease in unit volume and normal increased cost in the fourth quarter generally leads to sequentially lower fourth quarter operating profits. Increased cost includes mix changes due to winter tire seasonality, scheduled planned downtime and discretionary contributions to our employee benefit plan. As Brad mentioned we expect a slight increase in raw material pricing in the second half of 2015 compared to the second quarter of 2015. Cost are expected to be higher in the Americas segment in the second half of 2015 compared to the first half of the year primarily in the fourth quarter. In addition to normal seasonality expected increased cost include the timing of brand and product marketing programs this year and adjustments to our LIFO inventory valuation due to lower projected inventory levels. I'll now turn the call back to Roy.

[Roy Armes:]

Thanks Ginger. In summary Cooper delivered a strong second quarter that helped us in the first half of the year in a very good position as we head into the back half of this year. Our strong second quarter was a result of record results in the Americas segment and encouraging trends in our international unit volumes again Cooper's committed to making the appropriate investments to support our strategic growth plans. We expect global tire markets will remain highly competitive and our new products and improving mix of sales, focused on higher value and higher margin tires, positions us well in such an environment. And for the full year, we expect to exceed industry unit volume growth in the U.S. and continue strong unit volume growth in the international markets. As we look ahead to the second half of 2015, we anticipate slightly higher raw material cost which will somewhat moderate the strong operating profit performance we had in the first half of 2015 and reduce our traditionally stronger second half results. We also expect higher cost in the Americas from the timing of the brand and product marketing this year and potential adjustments to our LIFO inventory valuation. We anticipate that profitability will improve in the second half of 2015 in our international segment while still generating a small operating loss for the full year. Full company operating margin for 2015 is expected to be above the high end of our mid-term target of 8% to 10% but below the results of the first half of this year. Now having said that, we do expect a positive second half that will be led by solid third quarter. As we said during our Investor Day in 2014, and have continued to emphasize our midterm goal is to consistently deliver operating margin of 8% to 10% and we can perform better than that as evidenced by our results in the first half of 2015 and our performance in 2015 is in line with our long-term goal for operating margins that consistently exceed 10%. Our transformed business model resulting in a record of success gives us confidence that we can compete well in a volatile economic or economy and industry and our focus in 2015 continues to be guided by our strategic plan which calls for driving top line profitable growth continuing to improve our global cost structure and improving profitability and strengthening our organizational capabilities. Now with that, why don’t we move to the questions, so operator if you would can we begin taking questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Rod Lache of Deutsche Bank. Please go ahead.

[Rod Lache:]

I had a couple of questions on international and North America -- international, could you tell us what the volumes did including CCT, what the percentage change was? And any color on the profitability of Europe versus Asia. And then lastly on international, it sounds like you’re closing in on some on acquisitions that could really move the needle internationally, any thoughts on timing and magnitude?

[Brad Hughes:]

Rod, let me it’s Brad. Let me address those and then if Roy or Ginger want to add I will invite their comments. But with regard to your first question about the volume comparison with CCT, frankly we stopped looking at it that way internally we’re focused on the business adjusted to remove those results from last years. But we can get that to you separately after the call. With regard to profitability in the international business units Europe and Asia, the comment I’d make is we’ve talked about Asia right now is -- we’re continuing to carry the fixed cost structure that we largely had in place when we did have CCT in anticipation of the growth both organic and potentially inorganically in that business and as a result the profitability is affected in that market. Europe in addition to what I just described for Asia they have -- it’s just a very challenging market there and we’ve been affected although our business is smaller there. We’ve been affected by the same factors they’re affecting a number of industries which include the currency environment and the strong dollar versus the euro and the strong pound versus the euro and a very competitive pricing environment. So there isn’t a market difference between the two units right now and as we look forward we do as Roy mentioned expect that the profitability will improve in the second half of this year but we still result in a small loss for the full year. And then lastly with regard, yes, we are indicating that there is a -- there are projects advancing around our intent to replace volumes particularly in TBR that had been coming and continue to come from CCT. It’s too early to speculate on the exact timing. But we’re feeling good about the way that they’re progressing.

[Roy Armes:]

Well one of your questions Rod, this is Roy. One of your questions around the timing it’s similar to what we’ve said before and that is we are targeting to have a plan in place by the end of the year. We still see that as being possible because -- and also I’d make a comment that while we’re in discussions right now it’s going to take a multiple we are going to have to pursue multiple avenues not just one to continue grow our business there. But we’re encouraged and optimistic about getting this put in place.

[Rod Lache:]

And a few things on North America, how should we be thinking about the volume and contribution margin outlook? You outperformed the market by about 300 basis points this quarter, do you have visibility on that continuing into the second quarter. And can you size up that when you say raw materials move up a bit for you in back half, at this point given where spot prices are what is the magnitude of the compression there, from raw materials?

[Brad Hughes:]

So taking the second part of the question first Rod with regard to material cost. It’s a modest and a slight increase relative to what we had in the second quarter based on what we’re seeing right now. Again I’m sure you’re monitoring. There is a quite a bit of volatility in raw materials these days, but what we’re planning for is a very modest uptick in the second half of the year relative to the second quarter, so not a big one.

[Rod Lache:]

So are you thinking that pricing compresses and what would be the source then of the compression in margins?

[Brad Hughes:]

We’re thinking that right now what we’re seeing is a pretty stable pricing environment of continued discipline in the industry and I don’t think that we’re expecting to see a big change to that. So as we’re looking into the second half of the year what Ginger highlighted on some of the fixed cost the seasonality around some of our spending, some of our advertising programs which even compared with prior years is more heavily weighted towards the second half of the year in 2015 and some other normal seasonal spending patterns they are more on the fixed side. There is the potential that there could be some LIFO related cost activity and material cost as our inventories reduce based on our projections for the second half of the year. The price of raw material again that’s what we think you should focus on and we think there is a pretty steady pricing environment right now in the industry and we think that raw materials are only going to move slightly.

[Rod Lache:]

Okay and the volume, outlook is you have visibility on this outperformance continuing?

[Brad Hughes:]

We feel very good about our product line up right now, introductions that we just recently made, introductions that are coming it's going continue to be a competitive market and as we said for the full year we expect that we will outperform both the industry and the RMA and so we feel good about where we are at right now, whether or not it's 300 basis points in the second half of the year, and I'm not prepared to say that right now but we do, we are confident that for the full year we will outperform the industry and the RMA.

[Roy Armes:]

We think, this momentum will continue into the third quarter. We are expecting to have a very solid third quarter. I think it's the fourth quarter and some of these expenses that Brad and Ginger alluded to are the impact more than just a market expansion from market pricing.

[Operator:]

Our next question is from Ryan Brinkman of JPMorgan. Please go ahead.

[David Karnovsky:]

This is David Karnovsky in for Ryan. We were just hoping you could provide some insight into the radius of the China tariffs, we have some reports that the ITC is delaying its public calling and the final ruling until the end of August, so relative to your understanding to the supplier delay in collecting the tariffs and could also mean that some of the rates are being raised on it?

[Roy Armes:]

Yes in fact we have just got notification that they finalized the tariffs and there has been some change in some of those tariffs but as of today it's being implemented on a permanent basis and that’s just developing news there David, so what our expectations are now it is implemented as of today and it will become, it will start being in force at all the ports around the U.S. probably immediately.

[Brad Hughes:]

And the change in the rate David was relatively small and just over 50 basis points for the majority of the effective parties including Coopers so relative to what we had known going into this week it's a relatively small change and now it's actually become effective as of today as Roy mentioned.

[Roy Armes:]

And I think what's your concern with is there is a bit of ambiguity in this because it's been other comments like it's on again, off again tariffs and I think this solidifies that puts it there permanently and it takes that ambiguity and confusion out of there at this stage.

[David Karnovsky:]

And then just shifting to China, I know you guys have called out strong sales to automakers there. Do you kind of see this growth as sustainable just given the -- possible slowdown in auto sales there and can you just give us a real sense to your exposure, are you guys more with the domestic automakers or with the foreign JVs?

[Roy Armes:]

I'll start at the back end of the those questions David the -- we have a pretty balanced portfolio that has customers from all those categories that you are describing and we will continue to try and build the diversified customer base over there. We definitely see growth for Cooper going forward however you are right, I mean the vehicle market over there right now is softening a little bit but as you look at -- as we look at what our ability to penetrate the OE business, we still see a lot of growth opportunity for Cooper.

[David Karnovsky:]

And then just one last one on the Cooper Superfeel Centers, I know in the past you told us that Chinese consumers chose their tires primarily based on what's the car when they purchase it and for a second, third and even fourth instance has there been any shift in buying dynamics there the profit you develop in the centers?

[Brad Hughes:]

I don’t think it was driven by a dramatic shift in the buying patterns. It is still as we've described it before David, where there are -- the first consideration is strongly towards the tire that was on the vehicle when they purchased the vehicle. However that doesn’t mean that isn’t important for us to continue to in addition to what we are doing in the OE market, continue to build our brand awareness and to make sure that we're prominently displayed in some of the major markets over there and these Superfeel Centers not only with the physical appearance but also with the overall experience that it provides to consumers we think will continue to help us do that.

[Roy Armes:]

And I would just say to that, David our distribution network is evolving in China like it is for most in the industry and we've gone through several iterations of distribution network, retails centers and that sort of thing and we have experimented with this and it's been highly successful for us, so I think what we are doing is trying to take advantage to that and expand in some of the bigger markets but it continues to evolve and we continue to deploy changes or enhancements to our distribution network.

[Operator:]

[Operator Instructions] Our next question is from David Tamberrino of Goldman Sachs. Please go ahead.

[David Tamberrino:]

A couple of question from our end just with your 2015 margins set to above your 8% to 10% midterm range if you will -- how does that give you a better confidence going into 2016 as you kind of maintain the top end of that or how do you think of it heading into next year with the rising raw material environment and what are some of the puts and takes that might have you back within that range in the medium term?

[Roy Armes:]

I think the caveat with raw material David is one that we have got to keep a close eye on but having said that and what we’re anticipating now we’re feeling more and more confident as we go through the year that this momentum can carry into 2016. I think as you know there is certain volatility for example on oil about 65% of our raw materials is derived from oil in some form or fashion and that is something that we have got to continue to watch that would dampen the momentum possibly. But we don’t see that happening significantly or dramatically here in the second half which would leave us confidence with our new product lines and our distribution that they are going into 2016 could be very good for us. I would also add that our business in China as we have talked about before double-digit volume growth particularly in the OE side. We’re also double-digit volume growth in South America which just a couple of years ago we weren’t there, we didn’t have any -- we really didn’t have any business in South America and that’s growing. Those are also giving us confidence that we can continue to grow this business going into 2016.

[David Tamberrino:]

And then as we watch the import data we’ve seen a rotational away obviously from China but have some of the other Southeastern Asian countries, Indonesia, The Philippines, Thailand what are you seeing from a competitive standpoint with that reduction but kind of being backfilled those other countries if you will in the U.S.?

[Roy Armes:]

You are right there has been a rotation and it’s not dissimilar maybe not all of the same as sourcing countries as we saw with the last round of tariffs on tires coming out of China but as we said in the past these tariffs end up being disrupted to the market and then people begin to respond and react on I think that again from what we’ve seen so far the pricing in the market has stabilized and continues to be disciplined. We don’t see anything that will significantly change that in the near-term and we continue to have a great deal of confidence about the capability in the locations of our sourcing footprint, our manufacturing footprint so that we can respond and provide high quality cost competitive tires to remain competitive.

[Brad Hughes:]

Yes I would just add on that one David as well that I think we’ve got watch this pretty closer, as now with the permanent tariffs going in place it may shift that a little bit. We haven’t seen a big impact to that at this point in time but now that these tariffs are permanent I think it is something we’ve got to closely monitor and see how it develops.

[David Tamberrino:]

And then just for yourself specifically I guess reading through the lines it sound as if you turned some of your production in the CKT facility which I think is about 5 million passenger car tires right now annually away from being export to the U.S. and into the region for sales, how much of that have you kind of turned away from export to the U.S. really into the Asia market at this time?

[Brad Hughes:]

Well as a total David it’s less than 10% because what we’re doing with our CKT facility is using that more and more for supplying OE product into the domestic market. So it’s really minimal but it’s been helpful for us to have that flexibility to be able to shift production to another low cost location and still bring them into the U.S. on a competitive rate.

[David Tamberrino:]

Okay. And do you see that percentage increasing over the next six months materially?

[Brad Hughes:]

Not materially, I think we’re going to see we are going to continue to look at this footprint continuing to make those choices on where we move product, but right now where we are is very manageable. But we continue to look at our sourcing options.

[Roy Armes:]

But over the long-term David and even the medium term we will continue to sell more of the product that we product at CKT in the domestic market that has been the plan and will continue to be the plan.

[David Tamberrino:]

Okay. And then just lastly from us the international segment you -- it’s been in trouble for the first half of the year obviously two higher fixed cost, what really gives you the confidence that I think what your guide implies is that there is going to be profitable quarters in the third and fourth quarter just back second half of this year, are there any specific call outs that you can really point us to that would really get you to positive for 3Q, 4Q and kind of just slight loss for the year?

[Brad Hughes:]

Well yes we’re looking for improved results out of international and the biggest contributor is going to end up being from volume. We continue to believe that the growth that we’ve seen in both of those markets is going to continue, not only into the second half of this year but beyond and that’s what’s allowed us to keep some of the fixed cost in place based on what we have been able to achieve which is generally in line with the growth of that we’re expecting. There is a couple of headwinds particularly in Europe with the currency and a very competitive pricing environment over there that are a little bit more challenging than what we originally anticipated. But overall we’re still confident in the direction we’re going.

[Operator:]

There are no further questions at this time. Mr. Armes would you like to make some closing comments.

[Roy Armes:]

Yes I’d like to thank everybody for being on the call. And I just like to reiterate that I’m confident in our worldwide growth strategy and I’m confident in the management team that’s in place to direct that growth and the teams in our facilities worldwide who are really effectively executing this strategy and our strong performance in the first half of 2015 demonstrates the resilience and the strength of the Cooper business model and we do would like to reiterate that we do expect a positive second that is led by solid third quarter. We also -- our strong balance sheet has been a powerful tool for us it enables us to meet all of our obligations as well as support our growth and it allows to continue to return cash to shareholders. So we appreciate the interest in Cooper Tire look forward to seeing many of you in person during the year. Thanks again and for being with us and have a great day.

[Operator:]

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