Cooper Tire & Rubber Company
Q2 2018 Earnings Call Transcript

Published: 6 Aug 2018

[Operator:]

Good morning, and welcome to Cooper Tire & Rubber Company's Second Quarter 2018 Earnings Call and Webcast. At this time all participants on the call are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jerry Bialek. Please go ahead.

[Jerry Bialek:]

Good morning, everyone, and thank you for joining the call today. This is Jerry Bialek, Cooper’s Vice President and Treasurer, and I’m here with our Chief Executive Officer, Brad Hughes; and Ginger Jones, our Chief Financial Officer. During our conversation today, you may hear forward-looking statements related to future financial results and business operations of Cooper Tire & Rubber Company. Actual results may differ materially from current management forecasts and projections. Such differences may be a result of factors over which the Company has limited or no control. Information on these risk factors and additional information on forward-looking statements are included in the earnings release we issued earlier this morning and in the Company’s reports on file with the SEC. During this call, we will provide an overview of the Company’s second quarter 2018 financial and operating results, as well as our updated business outlook. Our earnings release includes a link to a set of slides that summarizes information included in the news release and in the 10-Q that will be filed with the SEC later today. 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 will turn the call over to Brad.

[Bradley Hughes:]

Thanks, Jerry and good morning everyone. I want to start out by thanking those of you who attended our Investor Day event in New York on May 11, it was a very good discussion and we appreciate your continued interest in Cooper. If you were not able to attend, as a reminder a replay is available on our webcast at the Cooper website, coopertire.com. Just click on Corporate then Investors and then on Events & Presentations. I will begin our call with a brief overview of our second quarter 2018 financial results, which Ginger will then discuss in greater detail along with capital allocation. Then, later in the call, I will update our outlook for the second half of the year and we will talk about the progress we are making on some of our strategic goals and priorities. We will then take your questions. Now, let’s talk about the second quarter 2018 results. As anticipated the Tire Industry remained challenging throughout the second quarter, in this environment Cooper delivered results for the period that we are in-line with the outlook we provided, including operating profit margin of 4.7% of net sales. Consolidated net sales decreased by just over 3% to $698 million. Unit volume decreased 2.1% compared to a year ago driven by a decline in the Americas segment, which was partially offset by increased volume in the international segment. Our U.S. light vehicle unit volume decreased by 3.3% while the U.S., TMA decreased by 0.6% and the total industry increased by 4.2%. A majority of our decline relates to the exit from non-strategic private brand distributor business, while we have largely completed this transition in our business, the [tail] [ph] continued[ph] this year and [had an] [ph] impact on our second quarter comparison. For Cooper, U.S. consumer sell out in the second quarter was strong with leading national retailers particularly for the Cooper brand, while we did not see strength in all regions and with all channels, the overall sell out environment appears to be improving. I will let Ginger provide a deeper dive in our second quarter results and then I will come back with our outlook for the second half of this year, an outlook which we are revising primarily due to higher projected raw material cost. I want to reiterate that despite current challenges in the industry, we are confident that Cooper has the right plan in place as we detailed on Investor Day. Now, I will turn the call over to Ginger.

[Ginger Jones:]

Thank you, Brad. I will start with our second quarter financial review. Net sales were $698 million compared with $721 million in the second quarter of 2017, a decrease of 3.1%. Second quarter net sales were negatively impacted by $16 million of lower unit volume and $13 million of unfavorable price and mix, partially offset by $6 million of positive foreign currency impact. Operating profit was $33 million or 4.7% of net sales compared with $84 million or 11.7% of net sales in 2017. Our 2017 operating profit has been restated to reclassify $9 million of other pension and postretirement benefit costs out of operating profit, as a result of the adoption of Accounting Standards Update 2017-07, which changed the U.S. GAAP accounting for pension and other postretirement benefit costs. Second quarter operating profit as compared with the same period in 2017 was impacted by the following factors, which are summarized on Page 6 of the supplemental slide deck. $21 million of higher manufacturing costs due primarily to lower production volumes and $20 million of un favorability resulting from two items, $26 million of unfavorable price and mix primarily due to elevated promotional activity and competitive pricing actions, which was partially offset by $6 million of favorable raw material cost. In addition operating profit decreased due to $4 million of lower unit volumes and a $6 million increase in SG&A due to higher professional fees related to strategic initiatives and mark-to-market cost of stock based liability. Our raw material index increased 4.6% sequentially during the second quarter from 156.6 in the first quarter of 2018 to 163.8 in the second quarter of 2018, as shown on Page 7 of the supplemental slide deck. This was 0.2% higher than our index of 163.5 for the second quarter of 2017 as raw material cost increased at a rate faster than we expected driven by oil volatility and steel tariffs. Second quarter net income was $15 million or $0.30 per share. This compares with $45 million or $0.85 per share in the second quarter of 2017. Moving to our segment performance, I'll start with the Americas tire operation. Segment sales for the second quarter were $584 million, down 5% from $615 million in 2017. This decrease was a result of $23 million of lower unit volume, $6 million of unfavorable price and mix, and $2 million of unfavorable foreign currency impact. Second quarter operating profit in the Americas was $40 million or 6.9% of net sales compared with $91 million or 14.8% of net sales in the same period last year. Operating profit was impacted by $27 million of unfavorablity resulting from $25 million of unfavorable price and mix as well as $2 million of higher raw materials cost. $17 million of higher manufacturing costs, which reflects decisions to match production volume to demand and control inventory levels. In addition, operating profit decreased due to $4 million of lower unit volume and $3 million of higher other cost in the quarter. You can see the full profit walk for the Americas on Slide 8 of our supplemental slide deck. Now turning to our International tire operations. Net sales for the second quarter were $168 million up 10.9% from the second quarter of 2017, as a result of $11 million of positive foreign currency impact, $5 million of favorable price and mix, and $1 million of high unit volume. Unit volume in the segment was 0.7% higher in the second quarter of 2018 compared to the prior year as a result of increased unit volume in Asia, which was partially offset by a slight unit volume decline in Europe. Despite some macroeconomic challenges in Asia, our business continues to perform well with the strong OE order pipeline and growing replacement business. I would also note that the European decline was due to a shift in production of some intercompany unit and third party sales in the region were strong. The international segment operating results improved compared with last year with an operating profit of $6 million in the second quarter compared to $3 million in the same period a year ago. These results were driven by $6 million of net favorability resulting from $9 million of lower raw material cost, $3 million of unfavorable price and mix as well as $4 million of higher manufacturing cost and $1 million of other lower cost in the quarter. You can see the full profit walk for the international segment on Slide 9 of our supplemental slide deck. Now turning to some corporate items, the effective tax rate was 12.6% for the second quarter compared to 32.7% in 2017. The second quarter 2018 tax rate includes the benefit of lower blended U.S. Statutory Tax Rate as a result of U.S. Income Tax Reform and approximately $1 million of net discrete items reported in this quarter. The rate is based on forecasted annual earnings and tax rates for the various jurisdiction in which the Company operates. We now estimate the full-year 2018 effective tax rate will be in a range between 23% and 26%. More detail on our taxes is available in the form 10-Q that will be filed with the SEC later today. Turning to cash flows and some balance sheet highlight. Cash and cash equivalents were $180 million at June 30, 2018, compared with $302 million at June 30, 2017. Cooper continues to focus on cash flow improvement action, including aligning production to demand and other working capital actions. Capital expenditures in the second quarter were $38 million. We continuously evaluate the appropriate level of capital spending in the current environment remaining prudent while also evaluating the capital needed to support our ongoing modernization, mix transformation and automation initiatives in addition to investments and capacity to align with our global strategic growth plan. We still anticipate our full-year capital expenditures for 2018 to be between $200 million to $220 million. Return on invested capital for the trailing four quarters was 10.3% excluding the impact of unique fourth quarter 2017 tax activity. Moving onto capital returns. In February 2017, our Board extended and increased our share repurchase program by authorizing the repurchase of $300 million of the Company’s outstanding common stock through December 30, 2019. During the second quarter, approximately 517,000 shares were repurchased for a total of $13.8 million at an average price of $26.66 per share. As of June 30, 2018, $194 million remains of the $300 million authorization. Since share repurchase begin in August 2014, the Company has repurchased a total of 15.7 million shares at an average price of $34.12 per share. Cooper believes our existing cash, cash flows and potential leverage are more than sufficient to support our capital allocation priorities. We define those priorities as supporting our ongoing commitments, capital to support organic growth and margin improvement initiatives, acquisitions and partnerships and funding our dividend and share repurchase goals. I will now turn the call back to Brad for perspective on the balance of the year.

[Bradley Hughes:]

Thanks, Ginger. Earlier, I talked about Cooper revising our outlook for the second half of the year based on continued challenging conditions in the tire industry. Cooper and the industry are dealing with raw material cost that have risen faster than we expected. In fact, costs have returned at a high level where they were about a year ago, and we expect a continued upward trend over time. Our latest outlook assumes our raw material index will be about 10% higher in the second half versus the same period in the prior year. Also tariffs have been enacted on certain supplies and there were proposed tariffs that represent further risk with respect to raw materials and to tire imports. As you know, the industry has historically offset raw material cost increases with pricing actions and we expect this to be the case going forward. In fact, we have recently begun to see pricing actions in certain segments end markets. Too soon to tell how rapid or widespread these will be, but this seems consistent with the historical industry reaction to rising raw material cost environment, particularly during times of improving consumer demand. As always, we will look to offset such costs through pricing while remain market facing and keeping our customers competitive. As we have discussed in the past, it takes some time for pricing to align with raw material cost increases, which can affect our business in the short-term. In addition, because we use a [LIFO] [ph] accounting method in United States, we feel the impact of these cost changes before our industry peers. As a result, Cooper has adjusted our expectations for the second half of this year, we now expect unit volume to be about flat in 2018 compared to 2017 with a modest sequential improvement in operating profit margin for the back half of the year. A lot depend on raw material cost trends and industry pricing. This compares to our prior projection for year-over-year growth in volume and operating profit margin approaching our 9% to 11% target range in the second half. Despite the short-term environment, we remain confident in our five-year financial targets which include operating profit of 10% to 14%, annual unit volume growth in the low to mid single-digits and return on invested capital of 14% to 16%. We continue to be focused on the things we can control, including executing our strategic goals and priorities. One of our key strategy is to accelerate our new product introduction cadence and increase our speed to market. Cooper is launching 18 new products over the next 24 months and introducing mid-cycle product refreshes to meet the evolving needs of our customers and consumers. Our new Discover-A/T3 line for light trucks and SUVs is a prime example, this line replaces our former A/T3 product which has been one of our most successful tires, so expectations forward are big. We are proud of the outstanding performance and industry leading mileage the new A/T3 delivers. We pull the head to trade launch of this new line up by more than year to mid-June and so far sell-in has been strong. With the performance of this line and the major marketing push that we are putting behind it to drive sell-out demand, we look forward to seeing the consumer response to this new line. Expanding within new channels is another important strategy for Cooper. We have told you about our successes with online sales channels such as Tire Rack and TireBuyer and the multiple top 10 rankings our tires are earnings on these sits. As we continue to build out our e-commerce and online presence. Cooper is very excited to have recently initiated a relationship with the leading retailers online site. This new relationship will significantly enhance our ability to reach consumers and help Cooper be where consumers want to shop for buy tires today. You have also heard us talk about the importance of digital and Cooper has been actively engaged in some comprehensive digital marketing tests that are enhancing our learning. We recently established the dedicated digital marketing team within Cooper to build on the work we have been doing in this area. In addition to these efforts, we continue to focus on actions to effectively manage our inventories and reduce cost, one of these efforts included the corporate restructuring and reorganization we effected in December of last year, this has allowed us to augment our team with some talented consumer focus leaders with the experience to help us to deliver on our strategic priorities. As we discussed it at our Investor Day, consolidation and tire distribution is disrupting the industry landscape. We continue to believe that this disruption present a growth opportunity for Cooper, in fact we have seen a very favorable response to our dealer conquest program. For example, our new dealer enrollments have more than double year-to-date and our efforts continue. Obviously, it will take some time for this to impact volume, but we are actively adding new point of sales and making Tires more available to consumers where they want to shop which is one of our strategic priorities. Cooper also continues to possess a strong brand with great consumer loyalty and attractive value proposition and exciting new products that are launching at a faster cadence. We believe that long-term Cooper will continue to be a strong global tire competitor that delivers great value to our shareholders. That is all we have for our former remarks, let’s move on to your questions. Operator, will you please take the first question?

[Operator:]

Sure. We will now begin the question-and-answer session [Operator Instructions] And our first question today comes from Christopher Van Horn with B. Riley FBR. Please go ahead.

[Christopher Van Horn:]

Good morning. Thanks for taking the questions.

[Bradley Hughes:]

Hi, Chris.

[Christopher Van Horn:]

I was wondering if you could get - I know you had some commentary around the pricing environment and obviously the guidance implies some volume increases in the back half. I was just wondering if you could comment on how you see it playing out in the third quarter versus the fourth quarter and then any sort of additional commentary around what you are seeing in pricing?

[Bradley Hughes:]

Couple of things there. One, with regard to the second half, things are beginning to come around as we thought they might. The first and most important sign are being improving signals that we see around sell-out demand, we talked a little bit about what we are seeing in our channels, but that the overall environment is improving and that we hear commentary from other corners that indicate that sell-out demand is improving and that is the important sign that we have been monitoring because we think that it’s going to create market conditions where we will see some pricing. We have begun to see some pricing specifically where we have seen the most strength in consumer sell-out whether it’s in markets outside of the United States or within certain segments within the United States, there are growing signs and frankly growing chatter about price increases for tires. And we clearly will be monitoring that and making sure that we participate when appropriate for Cooper. The other part of it is, as we look at raw materials and fact that they - from our perspective that increased a little bit faster and to levels that are a little bit higher than what we have been anticipating. Again, we think that that is something that the industry will respond to as it has historically and we are starting to see those signs especially with higher levels of raw material that we have seen more recently. So calling exactly when that is going to happen is going to be a little bit challenging, it will, it always takes a little bit of time for increases to be announced and then implemented into the market and different players will act at different points in time, but the good sign is that we are actually starting to see some real actions out there and hearing even about potentially even some more actions.

[Christopher Van Horn:]

Okay, great thanks for that color. And then, you know obviously the new sales channels is a big part of the strategic plan. Wondering if you could give us any sort of trajectory when you see progress or you know you obviously had some progress during the quarter, but is there a timeframe that you really see this expansion and any kind of customers that you would be willing to highlight where you are going to see the most traction in the near-term.

[Bradley Hughes:]

We will stay away from talking about particular customers as we typically do, but again we are seeing as we put these new - taking the online e-commerce example that we've been talking about here recently the more of those that come on and the more reach that they have to consumers who are buying more and more in that space and doing more and more research in that space, we expect to begin to see improvements coming from those channels as we move into the second half of the year. There will be more that builds on that over time and we continue to think that we are going to see the improvements coming from these new channels, not only in the second half of this year, but moving into next year. Now balancing against that we have talked about the exit that we are managing from the non strategic private brand wholesale business that we have, which we really are reaching the tail end of that process, but it could have an impact in any particular quarter as we go forward and complete that process. Again in large part behind us, but something that is balancing off against some of these new channels, and also with regard to these new channels that when you look at the structure of the industry as these new channels are growing some of the more traditional channels are declining a little bit at the same time. So, while we see improvements and contributions from these new channels that to some degree will be balanced off against the traditional channels, which are becoming a bit smaller at the same time, hence our guidance for the second half of flat volume before we get into the longer term outlook for global growth in the mid to low single-digits.

[Christopher Van Horn:]

Okay got it. And last for me, could you comment on the TBR volume during the quarter and any sort of areas of strength you saw there?

[Bradley Hughes:]

Yes. We continue to be very, very pleased with what is going on in our TBR business. Now in the quarter, one of the things that we did experience is we put a new warehouse online out on the West Coast specifically to support our TBR business. We had an impact on of having a bunch of units - tires that were being shipped by sea and taking a little while to moving those inventories into that new warehouse which will change the timing of when our consumers need to order and be delivered those tires. And so we had a little bit of an impact from that in the second quarter, but overall, the order strength that we have got for the product and the reception to the new Cooper brand continues to be very positive.

[Christopher Van Horn:]

Okay great. Thanks for the time.

[Bradley Hughes:]

Thank you.

[Operator:]

Next question comes from Anthony Deem with Longbow Research. Please go ahead.

[Anthony Deem:]

Good morning Brad, Ginger and Jerry. And so few questions for me. So there is some hope in the market here that margins hit trough levels, I’m wondering if you can give us any insight based on current visibility you have into 2019. At this point in time, is it more prudent to forecast modest sequential improvements going forward or maybe can we anticipate a material step up to the low end of your long-term range at some point in 2019?

[Bradley Hughes:]

Well the challenge as always is trying to project the magnitude and the pace at which raw materials are going to move and then similarly the timing and response with the pricing that will come, but it’s a matter of when and what that lag will looks like. In our second half, we have talked about what our raw material guidance is, I would say that we have been relatively more conservative at this point with what we have included in our outlook around pricing. However, you don’t know what that timing is going to, how it’s going to roll out and we need to as we have learned a couple of times be very prudent about when it’s appropriate for Cooper to come into the market with its pricing. We will and we will be there, but we want to do it in a way that is going to be competitive against other actions that are taking place and that it’s going to support our customers being market face and competitive. So, the timing is a little bit still uncertain, we have talked about what our second half outlook is and if we were to see faster responses in pricing then maybe there are some opportunity there, but we have guided to modest sequential improvement with regard to our margins. As we get into next year, if in fact the pricing is in place before we get to the end of the year. I do think that we could be looking at a stronger year next year than some had been projecting. But again, I hate to get too far ahead of this, because we are just starting to see the pricing activities that we have been waiting for and that is great, but the timing of how that is going to actually impact the market and the industry margins including Cooper’s is a little challenging to project.

[Anthony Deem:]

That is helpful. And yes, back to the envelope math suggest your second half 2018 margin guidance does not factor in price mix offsetting higher raw material costs. Obviously the Tier-ones haven’t introduce anything in the U.S. to my knowledge in terms of price increases. But, I’m just wondering if that is an upside driver potentially to your back half guidance, do you view it as conservative. And am I sort of thinking about dimensioning your guidance properly here and suggesting that there is no price mix offset in the back half?

[Bradley Hughes:]

Anthony that sounds reasonable in terms of what you are looking at in your model and again the timing of the way that the pricing is going to come into the market and the specifics around that are going to be the key determinate in any opportunity to the outlook that we have provided at this point. So, we are ready to act, I will describe our position is back and we will see how it unfolds.

[Anthony Deem:]

Got you. And then just last question for me. So, it looks like about 4% volume growth in the back half here to get the flat volume for the full-year. I’m just wondering if this includes on your any assumptions around pre-buy activity or if that is also an upside driver. And also can you help us understand if most of your volume growth guidance is in Americas or international division and thank you for taking my questions

[Bradley Hughes:]

Yes. Thank you. I wouldn’t suggested that we have tried to factor in any pre-buy into what we are including in our outlook for the second half of the year and again as we look at where that volume improvement is going to come from. We continue to feel very good about what is happening in our international segments and what volume growth we are going to see from that group, both Asia importantly, but also Europe third-party sales increasing in Europe that Ginger alluded to what we saw in the second quarter. So those are both positives and sequentially, we have continued to see stronger performance out of our U.S. business relative to the market and I would think that we are going to continue to see that trend when we get into the second half of the year.

[Anthony Deem:]

Thank you.

[Operator:]

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

[Bret Jordan:]

Hey good morning guys.

[Bradley Hughes:]

Hey Brett.

[Ginger Jones:]

Good morning.

[Bret Jordan:]

Hey, just on the volume guidance for the second half and it sounds like bullishly sellout is improving, and you are seeing some positive trends, but you are going to a flat guide, is that as your selling more through the Amazon and [ATD] [ph] and Tire Rack type folks that you are seeing the volumes that your traditional channels declines to get you to the flat or I guess how do I see the reconciles sort of positive color on sell through and reduction in units.

[Bradley Hughes:]

Well again, one of the important signals here that we and others have been waiting for and we are starting to see more evidence that its coming to fruition is with the sell-out and so that is very good sign for the industry and we feel good about where Cooper is positioned to participate in that, especially as we begin to add some of these new channel, certainly that work is not complete and we have other work to do there. I think the biggest factor that we have seen as an offset to that and this is all very much longer period of time, but we've seen it even recently is the exit from the non-strategic private brand wholesale at business that we have had on the books for a period of time. And again these don’t always happen simultaneously if you lose, for example, a line of 50 or hundred thousand units with one of those nonstrategic private brand segment of business. It may take several months or even three quarters in order to rebuild that through some of the new channels, which build overtime more at the consumer level then it does in those bigger buys. But we are seeing, we are also very enthusiastic about what we're seeing in response to our associate dealer, Conquest Program, I mentioned earlier that at this point of 2018 we have signed up more than double the number of partners that we had signed up through the first half of last year, so we think that working. We also think that is very well supported by the new products that we are introducing including that new A/T3, which we are really excited about the reception that we have from our customers and we really look forward to seeing how the consumer responds to it over the next several weeks and months.

[Bret Jordan:]

Great, okay and then I guess a question on pricing. I mean obviously you are doing more business with ATD and Tire Rack and Amazon is now getting into the business more aggressively. As you look at taking price in the future, do the online retailers push back harder than your traditional retailers, because they obviously sell more aggressively on price?

[Bradley Hughes:]

I’m not sure I described it more as a negotiated pricing environment. Clearly there is that element to it, but lot of it is set up by where we are positioned versus competition and the way that the consumer views our product relative to competition which frankly is a positive point for us in terms of the way that we go about on pricing our product and the way that it’s a perceived by some of those new channels. And so I think that that is one area that should be included in the way that you think about it. The other one that we have seen is especially in the online and e-commerce activity that the mix of business that we see again driven by the consumer directly is better than what we have in our base business. And we have seen that through, I think almost unanimously through all of the new channels that we have signed up with online, which again that is a good thing going forward.

[Bret Jordan:]

Okay, great. Thank you.

[Operator:]

Next question comes from John Healy with Northcoast Research. Please go ahead.

[John Healy:]

Thank you. Brad, the comment you made about 18 new products being launched over the next 24 months in a number of refresh is really kind of struck me as a good thing for volumes. And I was just wondering if you could put that in parameters of maybe the last four or five years. How that new product launch catalog compares to what you have seen in the past and on the refresh side. And as you maybe think about the volume opportunity associated with the new product launch. Are we talking millions of units of this could be potentially generating on top of what you already sell. And just try to help understand the parameters of the refresh and the new launch in terms of what that really does mean to Cooper?

[Bradley Hughes:]

Yes. Thank you for the question and the, we are excited about this, it is a significant step-up in the cadence of product into our introductions relative to what we have done historically. Having said this, most of these new products are replacing an existing and so while we would expect every time that we introduce a new product, our objective is to make it on to improve the performance and frankly improve the things that matter to the consumer relative even to the outgoing product. The A/T3, I think is an outstanding example of this, we are in response to what we were told by consumers with actually taking that product line and segmented of that so that there was one that specifically for people that are driving SUVs, large SUVs and are looking for a tire that is going to perform in all seasons, including the winter season, so we called it the 4S, for all four seasons. And that compares to the light truck for both the lighter and the heavier duty applications on that lag truck segment to make sure that it performs well on the work site that those customers are driving our tires on and really resistance to cut and chip. That along with the more aggressive styling that both have really seems to be resonating positively with our customers and with the consumers that have a chance to experience it and we are looking forward to the forward adoption by. But the point is, we would expect that these are going to improve our competitiveness in every segment that we are introducing one of these new products and so we would anticipate that that is going to help with volumes and or price and or mix, but they are replacing other products. And so, how much further it’s going to take us in these individual segments we will see, but we clearly think that this is going to be a contributor to the volume outlook that we have provided.

[John Healy:]

Great and I was just hoping to get a little bit more color on the margin cadence for the rest of the year. I feel like 3Q is typically one or your better margin quarters throughout the year. So is it likely to see a bigger step up in 3Q and then 4Q like we have normally seen and then secondly when I look at the manufacturing cost of the unabsorbed overhead, is it reasonable to think that you guys kept the factories pretty muted in the second quarter. So, we may expect that manufacturing costs are kind of heavy in the third quarter even with the volumes picking up.

[Bradley Hughes:]

So sequentially you are right I mean historically the third quarter is one of the stronger quarters on four industry performance including or especially in the U.S. in North American market and part of that is driven by winter tires many of which are delivered to customers in the third quarter and that will be there again. The one comment that I would make about the third quarter is around raw material costs and our expectation that they are going to remain high and maybe even move up a little bit sequentially in the third quarter relative to the second quarter, and again while there are some positive signs around consumer sell-out and then what that might do for pricing environment here in the U.S. in North America, the timing of that is unknown. So that maybe a partial offset to the typical seasonal pattern that you see for the third quarter.

[John Healy:]

Great and then just one final question along the line of thinking on raw material. Your raw material pricing index, that doesn’t include the impact of currency and thinking about raw, you are probably going to have almost a double negative in the third quarter with FX impacting the raw just from a transactional base standpoint right?

[Bradley Hughes:]

I don’t know that I would say that it’s going to be a that magnitude and to some degree on some of the global commodities we are capturing an element to the degree that we can of anticipate changes in currency and raw material index. So, we have intended to try and guide that to be again its fairly near-term so we are primarily about the third quarter on what we are anticipating. And again I think you and most folks on the line will recall that we are on LIFO, so we have been seeing this in our results already and while there is on some sequential increase anticipated in the third quarter, we already taken a chunk of this into the results that we see in the second quarter.

[John Healy:]

Much appreciated. Thank you.

[Bradley Hughes:]

Thank you.

[Operator:]

At this time, this will conclude today's question-and-answer session. So with that I would like to turn the conference back over to Brad Hughes for any closing remarks.

[Bradley Hughes:]

Okay, I want to thank you all for being on the call with us today and I will close by saying that the level of excitement in Cooper about the efforts we have underway within our strategic goals and priorities is growing as we make progress, and we look forward to keeping you updated with regard to those efforts in the coming months. As always, if you have additional questions please reach out to Jerry and he will be happy to help you as well as he can. Thank you very much.

[Operator:]

The conference has now concluded. We want to thank you for attending today's presentation. You may now disconnect.