Cooper Tire & Rubber Company
Q3 2018 Earnings Call Transcript

Published: 29 Oct 2018

[Operator:]

Good morning, and welcome to Cooper Tire & Rubber Company's Third 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.

[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 third 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'll turn the call over to Brad.

[Brad Hughes:]

Thanks, Jerry and good morning everyone. I will begin our call with a brief overview of our third quarter 2018 financial results, which Ginger will then discuss in greater detail. Then I will update you on our progress towards the strategic milestones introduced at our Investor Day in May and give you an outlook for the fourth quarter. After that we'll take your questions. Now let's talk about the third quarter 2018 results. Overall the tire industry remained challenging throughout the third quarter but began showing signs of improvement as did Cooper's results which included operating profit of $81 million and operating profit margin of 11% of net sales. While the quarter included a $31 million benefit in operating profit from a reduction to our product liability reserve model, our core profitability also improved and was a little better than the outlook that we provided to you last quarter. Consolidated net sales increased by just over 0.5% to $738 million. Consolidated unit volume was essentially flat compared to a year ago. Our U.S. light vehicle unit volume increased by 1.5%, while the USTMA increased by 0.4% and the total industry increased by 4.9%. Importantly, we ended the quarter on a strong note outperforming both the USTMA and the total industry in the month of September. Our exit from nonstrategic private brand distributor business had an impact on the third quarter unit volume comparisons. Excluding this impact we would have outperformed the total industry as well as the USTMA in the third quarter. Now Ginger will provide a deeper dive on our third quarter results.

[Ginger Jones:]

Thank you, Brad. I'll start with our third quarter financial review. Net sales were $738 million compared with $734 million in the third quarter of 2017 an increase of 0.5%. Third quarter net sales were favorably impacted by $5 million of favorable price and mix partially offset by $1 million of unfavorable foreign currency impact. Operating profit was $81 million or 11% of net sales compared with $111 million or 15.1% 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 changes in the U.S. GAAP accounting for pension and other postretirement benefit costs. Third 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. $14 million of net unfavorabilty resulting from $15 million of higher raw material costs which was partially offset by $1 million of favorable price and mix and $12 million of higher manufacturing costs. In addition, the operating profit was impacted by the benefit from a $4 million decrease in SG&A due to lower professional fees and reduced incentive compensation costs. This was offset by $3 million of higher product liability costs compared to the prior year and a $5 million increase in other costs which included increased distribution costs related to our new West Coast warehouse as well as higher freight costs. Now let me provide a bit more detail on the product liability costs in the quarter. As part of its regular review of product liability reserves, Cooper monitors trends and analyzes developments and variables likely to impact pending and anticipated product liability claims against the company. Based on the review completed in the third quarter the company reduced its estimate of pending and anticipated product liability claims which resulted in a benefit of $31 million during the third quarter of 2018. In 2017 a similar review was performed and Cooper recognized a benefit of $41 million in the third quarter of 2017. This adjustment as well as normal activity in product liability expenses including current case activity and legal fees resulted in product liability expense in the third quarter of 2018 that was $3 million higher than the same quarter of 2017. Moving forward, we expect an ongoing reduction in our annual product liability expense of around $5 million per year compared to our historical annual run rate excluding these adjustments. Our raw material index increased 12.4% from the third quarter of 2017, slightly more than anticipated. The raw material index increased 3.1% sequentially from 163.8 in the second quarter of 2018 to 168.8 in the third quarter of 2018 as shown on Page 7 of the supplemental slide deck. Third quarter net income was $54 million which resulted in diluted earnings per share of $1.7 compared with $62 million or $1.18 per share for the same period last year. Moving to our segment performance I'll start with the Americas tire operations. Third quarter net sales in the Americas segment increased 0.5% as a result of $8 million of favorable pricing mix partially offset by $2 million of lower unit volume and $2 million of unfavorable foreign currency impact. Segment unit volume decreased 0.3% from the prior year with a unit volume increase in North America more than offset by the decrease in Latin America, a region which continued to experience ongoing economic and political concerns. Third quarter operating profit in the Americas was $87 million or 13.9% of net sales compared with $125 million or 20% of net sales in the same period last year. Operating profit was impacted by $23 million of net unfavorability resulting from $21 million of higher raw material costs as well as $2 million of unfavorable price and mix and $9 million of higher manufacturing costs which reflects unabsorbed fixed overhead due to managing production to reduce the number of tires in inventory as well as adjusting to lower demand in Latin America. As a reminder, we have been very focused on optimizing working capital and have meaningfully reduced the number of inventory units in the Americas. In addition, operating profit decreased due to $3 million of higher product liability costs as just described 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, third quarter net sales in the International segment decreased 0.6% as a result of $7 million of lower unit volume partially offset by $5 million of favorable price and mix and $1 million of favorable foreign currency impact. Unit volume in the segment was 4.1% lower in the third quarter of 2018 compared to the prior year with decreased unit volumes in both Asia and Europe. For Asia OE volume was up 4% year-over-year but was more than offset by softness in the replacement market due to credit tightening. As we look to the fourth quarter and beyond we do see some softness in the OE tire segment driven by economic conditions that have created weakness in the OE auto market in the region. Additionally, our strong unit volume in Q4 2017 sets up a tough comparison and combined with the OE vehicle softness we will likely see a moderate headwind in our Q4 2018 OE unit volume which is reflected in our guidance. We feel good about the long-term prospects in our Asia OE business as we continue to diversify our customer base. In Europe, third-party sales continued to increase year-over-year. However, this was more than offset by lower shipments to the U.S. from Serbia as we continue to execute our near sourcing strategy. The International segment operating results improved compared with last year with an operating profit of $6 million in the third quarter compared to $2 million in the same period a year ago. These results were driven by $9 million of net favorability resulting from $7 million of lower raw material costs and $2 million of favorable price and mix. This was partially offset by $3 million of higher manufacturing costs due to lower production levels as well as $2 million of higher other costs 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, we have seen a meaningful reduction in our pension expense with year-to-date pension expense in 2018 down $7 million from the prior year. This is largely the result of decreased amortization of actuarial losses due to improved funding levels. We continue to focus on funding our pension plans where appropriate with the discretionary $25 million contribution to the U.S. plans in the third quarter of 2018. Along with more fully funding our plans this results in cash and book, tax savings of approximately $4 million as this contribution was able to be deducted on the 2017 return at the higher 35% rate. The effective tax rate was 22.6% for the third quarter compared to 33.8% in 2017. The third quarter 2018 tax rate includes the benefit of a lower blended U.S. statutory tax rate as a result of the U.S. income tax reform and approximately $1 million of net expense items recorded in the quarter. These discrete items include the benefit of approximately $4 million related to the $25 million discretionary pension contribution in the third quarter of 2018. This was more than offset by approximately $5 million of tax expense related to the through-up of the 2017 transition tax. Our effective tax rate is based on forecasted annual earnings and tax rates for the various jurisdictions in which the company operates. We continue to estimate the full-year 2018 effective tax rate will be in a range between 23% and 26%. More detail on our taxes is available on the form 10-Q that will be filed with the SEC later today. Cash and cash equivalents were $209 million at September 30, 2018 compared with $258 million at September 30, 2017. Cooper continues to focus on cash flow improvement actions including aligning production to demand, managing inventory levels, and other working capital actions. Capital expenditures in the third quarter were $46 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 in capacity to align with our global strategic growth plans. Our full-year expected capital expenditures for 2018 remain in a range between $200 million and $220 million. Return on invested capital for the trailing four quarters was 9.7% excluding the impact of unique fourth quarter 2017 tax activity. Moving to return of capital to shareholders, during the third quarter approximately 31,000 shares were repurchased for just under $1 million dollars at an average price of $26.59 per share. As of September 30, 2018, $193 million remains of the $300 million authorization. Additionally, Cooper distributed roughly $5 million in regular quarterly dividends. 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'll now turn the call back to Brad.

[Brad Hughes:]

Thank you, Ginger. I'm going to provide an update on some of the strategic initiatives and milestones we introduced at our Investor Day in May. First, you may recall we discussed the importance of optimizing our global production capabilities and that we were conducting a review of our footprint to ensure that we have the right technology and capabilities, a competitive cost structure, and the right production capacity in the right locations. At that time we had completed the Asia component of this assessment and confirm that we are in line with our needs. We also said that we were well underway with the analysis of our European footprint. We have completed this analysis and the outcome is that Cooper Tire Europe or CTE has entered a consultation process which will explore ceasing light vehicle tire production in Melksham, England and sourcing these tires from other Cooper plants to meet CTE's needs. CTE presently manufactures just under $1 million light vehicle tires per year in Melksham. The goal of the proposed change is to ensure Cooper Tire Europe is best placed for future success in a global cost competitive environment. The Melksham tire production facility in its present form is not competitive within Cooper's global manufacturing network or the tire industry at large. It is Cooper's highest cost production site and it is Cooper Tire Europe's card view subject to consultation that it is not economically feasible to expand or update the facility to meet its light vehicle tire needs. Subject to employee consultation, ceasing light vehicle tire production and related changes could result in approximately 300 positions being phased out across CTE over a period of 10 months. This does not mean CTE is leaving Melksham. In fact, under the proposal CTE intends to continue motorsports and motorcycle tire production there and Melksham is home to Cooper Tire Europe's headquarters, sales and marketing offices, European Technical Center, and materials business. For background, consultation is a required process in the UK that calls for companies contemplating a significant workforce reduction to consult with employee representatives. During the consultation the company must ensure all information has been shared and explore ways of avoiding or reducing compulsory workforce reductions, minimizing the number of employees affected and mitigating the consequences of any job eliminations. CTE is of course following this process. There is a 45-day minimum statutory consultation period, but it could take longer, typically a total of two to three months. When the consultation process and analysis is complete, we will provide more details. In addition to the footprint review we provided milestones to track. The first was new highly attractive product launches. Our new Discoverer AT3 line for light trucks and SUVs is a prime example. This line replaces our former the AT3 product which has been one of our most successful tires. We are proud of the outstanding performance and the industry leading mileage the new AT3 line delivers. We pulled ahead the planned launch date of this new product family by more than a year to mid-June and so far selling has been very strong. We are beginning to see the consumer response to this new line and the product has been receiving great feedback. Our light truck category overall saw strong momentum during the quarter and part of this was the success of our AT3 launch. We look forward to seeing continued growth in this segment of the market. Another great example of the success of our tractor product launches is our Discoverer True North premium winter tire. The True North was created using our consumer lead product development process. This product was recently ranked by Consumer Reports magazine and we encourage you to view that ranking. Another milestone we told you to look for was the performance of our Cooper brand truck and bus radial line which was launched around the time of our Investor Day. Since launching we have seen very strong reception including the recent announcement that our Cooper brand truck and bus radial tires have been selected as standard equipment on Blue Bird school buses. Both Cooper and Blue Bird have great brands and a long history of producing exceptional products and we are thrilled to be working together in this new partnership. While we are not in a position yet to share more details about our OE strategy in North America, we feel very good about the way our relationship is progressing with a premium European automaker and continue to explore additional opportunities. Finally, we also talked at Investor Day about improving operating margins from our international business. Year-to-date our international operating profits have more than doubled and margins have improved by over 200 basis points when compared to last year. As we take advantage of economies of scale and identify and implement new process improvements, we are confident that we can continue to drive higher operating performance in our international business. This is a good time to highlight some organizational changes to our leadership team in the International segment. Luis Ceneviz has been promoted to the position of Senior Vice President and President International. In this role, he has oversight of operations in Europe, Latin America and Asia. Luis has demonstrated he is a leader who focuses on results and employee engagement to drive business performance. We also want to welcome back Alan Yang. Alan has been named Vice President and General Manager of Asia. Alan is a highly experienced tire industry executive including with experience at Cooper and is an effective leader as well. We look forward to the contributions he will make as we continue to grow our business in Asia. His appointment coincides with the planned retirement of Allen Tsaur, who is has been with Cooper for 11 years. We sincerely want to thank Allen for all of his contributions. He was instrumental in leading the growth of the Asia business with an extensive, original equipment OE business. He is staying on through the transition and then beyond his retirement as a part-time special advisor to me. Additionally, you may have seen our press release announcing that Katy Dickson and Brian Walker have been named to our Board of Directors. Both are exceptional leaders who have built strong brands and will bring unique experiences and insights to Cooper. We are grateful to have had many talented executives express an interest in joining our Board and are delighted to have Katy and Brian on our team as we address opportunities in our business along with refreshment of our Board. Now let’s shift gears and talk about our outlook for the fourth quarter. Cooper and the industry are still dealing with raw materials that have risen somewhat more than expected. In fact costs have returned to near peak levels of 2017, although we expect them to level out for the fourth quarter. Our latest outlook assumes our raw material index to be about 10% higher in the fourth quarter compared with the same quarter a year ago. Also tariffs have been enacted on certain materials and tire imports from China and they are proposed tariffs that represent full potential risk. We along with several industry peers have implemented price increases in certain segments and markets to partially offset some of these higher costs. Cooper announced a price increase of up to 4% on light vehicle tires in the U.S. which is in line with other increases in the industry. As we discussed at our Investor Day, consolidation in tire distribution is disrupting the industry landscape. We continue to believe that this disruption represents a growth opportunity for Cooper. In fact, we have seen a very favorable response to our dealer conquest program. Our new dealer enrollments have more than doubled year-to-date and our efforts continue. Obviously, it will take some time for this to fully impact volume, but we are actively adding new points of sale and making tires more available to consumers where they want to shop which is one of our key strategic goals. Cooper has a strong brand with great consumer loyalty, an 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. For the fourth quarter, we expect unit volume growth in the U.S., but this growth is expected to be offset by continuation of the volume declines in our other regions driven by economic and political challenges. We continue to expect an impact from higher raw material costs in tariffs which I just discussed. We have implemented price increases to partially offset some of these higher costs. As a result, we would expect fourth quarter operating margin to be close to what we achieved in the third quarter excluding the benefit from lower product liability costs. We remain committed to 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%. That’s all we have for our formal remarks. Let’s move onto your questions. Operator, will you please take the first question?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Rod Lache with Wolfe Research. Please go ahead.

[Rod Lache:]

Good morning everybody. I had a couple of questions. One is, I was hoping you can help us understand what’s happening in the U.S. vis-à-vis market share and mix, so it sounds like you got out of some private label business in the quarter which was a headwind, but on the positive side ATD reported an $89 million payable to you in their bankruptcy and up until now they’ve been alluding to some increases that Cooper Tire has been seeing as you guys are filling in for some other brands that they’ve lost and it looks like that depending on the payable base for them that that $89 million is quite a big number. So I was hoping maybe you can quantify some of the positives and negatives that you saw, how meaningful was ATD a year ago, how big a deal is that for you?

[Brad Hughes:]

Well, let me start at the beginning of the question I think which was around the overall market share and mix performance during the quarter and then we'll move on to the ATD portion of the question. But just overall as we said earlier in the prepared remarks that we had a - we felt like we had a very good quarter in the third quarter from a volume perspective in the U.S. In September, we were ahead of both the USTMA and the total industry with regard to our volume performance. And again, as you alluded to we have continued to exit on some non-strategic private label business with some wholesale distributors taking that on year-over-year performance out of the equation we are actually ahead of both the USTMA and the total industry for the full quarter. So we feel like some of the changes that we've been making to our product portfolio, to the way that we're going to the market, and to the last point you made around ATD, again we've been looking at the changes in the market and the wholesale distribution landscape as an opportunity for us to come in and gain market share and we believe that we're starting to see the benefits of that. The conquest program that we put in place, certainly has contributed to the improvements that we're seeing and we've seen strong improvements at ATD to be very specific as part of that overall conquest program, but it's not just ATD. Along with that just one other note, you mentioned mix, I would say that during the third quarter we saw a nice move on mix. We had the introduction of the AT3. If you look at our performance in some of the key segments that we've historically done very well in, in part because of the strength of the AT3, the previous and now the new. We're beginning to see that strength again relative to the market from a share perspective, so we felt good about the third quarter.

[Rod Lache:]

Can you just tell us was ATD like a single digit percentage business or customer of yours a year ago, it seems like this is the pretty big move?

[Brad Hughes:]

ATD has been a good customer for us for a few years at least, and so I wouldn't, we're not going to provide specifics on a customer as you know, but they’ve been a good customer for several years and it is strengthening. There's no doubt that the disruption that's taken place at ATD has proven to be an opportunity for us, but I don't want it to be too focused on the ATD given the broader conquest opportunity that we're taking advantage of.

[Rod Lache:]

Got it and just secondly, maybe if you could provide a little bit more color on the balance of price, mix and commodities, actually and tariffs as you look into the fourth quarter, a lot of moving parts? And related to this, is the tariff in your opinion a net positive or net a negative? Presumably it's also affecting some of the competition that you're seeing in private label as well as affecting your imports on the light commercial vehicles side.

[Brad Hughes:]

Yes, I think it's a little early to declare whether or not it's a net positive or neutral or negative in the longer term, especially given there's only one component of the tariff that's in place right now, the 10% that went in place in September that could trigger to 25 at January 1, if things don't change, and then separately from that you've got the 232 automotive components tariff on as a potential incremental tariff out there. So you're right, there's a lot of things going on. As we look forward into the fourth quarter, we have the 10% clearly is already in place. We have raw materials that we think are stabilizing as we move from the third quarter into the fourth quarter although will be a headwind relative to the fourth quarter a year ago and as an industry we will see the first pricing come into the market that looks like it's been pretty successful in terms of sticking. So and it's certainly from our perspective, our price increase seems to have been successful and we're going to see that in the fourth quarter as a partial offset to some of these costs on headwinds and risks that we're seeing in the fourth quarter. And frankly with where the industry is right now, if costs including tariffs continue we still believe that the industry is in a position that it can respond to cost increases with incremental price increases as we look forward. And so we'll continue to monitor for opportunities to do that and we will be market facing, but the industry still is in a position from a supply and demand perspective to be disciplined around price.

[Rod Lache:]

Great, thank you.

[Operator:]

Okay, the next question comes from Anthony Deem with Longbow Research. Please go ahead.

[Anthony Deem:]

Hi, good morning everybody.

[Brad Hughes:]

Good morning, Anthony.

[Anthony Deem:]

Thanks for taking my questions here. Couple questions around raw materials and price mix. Raw materials to me it looks like a $50 million, $60 million headwind in the next four quarters. When we assume you might gain half of that 4% price increase you announced you know I'm calculating as much as a $140 million price mix benefit over the next four quarters, so that's pretty close to the price mix overall headwind Cooper has seen since the first quarter of 2017. So I'm just wondering, first if these estimates sound reasonable to you and if that's the case Cooper is trying to recoup the 2017 headwinds and the fact we get as other manufacturers might be looking to only cover the 2018 and the 2019 impacts here from recent raw material, so do you see any negative market share consequences to Cooper, particularly in the Americas with that as a backdrop?

[Brad Hughes:]

Yes, I will address a few pieces of that but I'll start at the end of that and say, no. It's a very competitive market there's no doubt about that. We believe that we've remained market facing with our pricing and plan to continue to do that going forward. And with that market facing pricing the momentum that we started to see in the third quarter, we feel like we're going to continue to see growth in our U.S. volumes as we said in the fourth quarter, so we feel like we're well positioned at this point in time. We do feel like, we do we have - our mix has been a tailwind for us. We still think there's opportunity there for us as we move forward in terms of looking at the margin part of the discussion here, price and mix relative to raw material cost. And so I think mix can continue to be an incremental offset to some of those raw material price increases or tariffs that we just described.

[Anthony Deem:]

Okay. So is it fair to say that your view of the current raw material cycle and the price mix dynamics you can successfully offset maybe some of the prior year headwinds with this recent round of price increases it appears you’re pretty confident there?

[Brad Hughes:]

Well, I'm not sure that I'm saying that we're going to offset all of it. I mean, I would say that the up to 4% we've had that was a very, the way we approached the implementation of that was quite - you can compare that to what we've done historically in terms of the way that it's been implemented and that it's sticking and that we've got opportunity on mix. Whether or not given the unknown around we said that we think raw materials for the fourth quarter are going to stabilize, that's accurate. Tariffs are still a big unknown. So to be very prescriptive saying that we're going to be able to offset all of that given a lot of the unknown out there, I think is a little bit premature.

[Anthony Deem:]

Okay, that’s very helpful, thank you. And then, so the accrual expectations for product liability and playing I think beyond, let's call it $50 million or so, I guess what's the risk you see to product liability going forward? We've been settling and it seems like $25 million range in 2017 and 2018 and last year you guys said maybe better to send higher quality product and such were helping, so I’m just wondering why the $25 million run rate is not a reasonable expectation for 2019 and beyond?

[Ginger Jones:]

Hi, Anthony it’s Ginger. As you said we have had some very good trends in our product liability accrual based on the factors we've talked about including improving quality of the tires and over time. We each year and on ongoing basis look at that product liability. We adjusted as appropriate and we've had as you said in the last two years, two pretty significant adjustments. We have guided for you that we think the ongoing costs will be down $5 million as you think about from 2018 to 2019 and that's our best estimate as of today. Of course that's going to move up and down based on cases and the severity of cases, but we think we're appropriately accrued for product liability today and we've given what we think is our best guidance for the expense going forward.

[Anthony Deem:]

Got it and then just one last question from me. If at all possible, can you talk about the cadence of volume throughout the quarter, July, August, and September. September seems like it stood out positively. Your price increases October 1, the announcement was the first week of September. I'm wondering if there might have been a little bit of pre-buy in September or not or really feel like the improvements versus July and August was more based on a normalized run rate in terms of sellout, sell in? Thank you very much for taking my questions.

[Brad Hughes:]

Sure Anthony, I would sequentially, clearly September we exited with a very strong month. Now I will say that I - as we look at it and the way that we implemented that price reduction and frankly the order book that we've continued to see in October, we're not looking at September as being strongly affected by pull ahead. It's always a little bit difficult to discern exactly what would have come and what may have come because of a price increase, but if I look at it with regard to the exit rate of that month and as we've moved into September, we still feel good about the momentum of our order book moving into the fourth quarter.

[Anthony Deem:]

Alright, thank you.

[Operator:]

[Operator Instructions] The next question comes from Chris Van Horn with B. Riley, FBR. Please go ahead.

[Christopher Van Horn:]

Good morning, thanks for taking my call and congrats on the solid execution.

[Brad Hughes:]

Thanks Chris.

[Christopher Van Horn:]

So could you highlight where we're at in terms of your shift kind of away from private label and the timing of that over the coming months or quarters however you see that play now?

[Brad Hughes:]

Yes and in full transparency we have indicated in prior quarters that we're about through and we really are largely through the exit from the private, the non-strategic component of the private brand wholesale business. As we get into next year on comparisons back quarter-by-quarter should be well diminished from what we've been working our way through the last couple of years. So I think we're largely through it Chris and that it's something that we shouldn't be spending much time on as we get into next year.

[Christopher Van Horn:]

Okay, great sounds good and then, you're taking share and winning new business and I imagine the Blue Bird win was a conquest win, how is the pipeline looking for Roadmaster and the Cooper branded tires from a heavy truck market perspective?

[Brad Hughes:]

It looks good. The Roadmaster is still competing very successfully in the segment of the market that it competes in, lot owner-operators and folks like that and their trailers, and then with the new segments of the truck and bus radial market that we can compete in with the Cooper brand meaning the fleets and some of the OE, it's doing what we had hoped it was going to do and so we are looking to build on that.

[Christopher Van Horn:]

Okay, got it and so just a follow on, how did Blue Bird kind of come about and again was that a conquest win and how competitive was it?

[Brad Hughes:]

Well, first of all we've got a great product to offer. We've got a team that backs that product up in terms of the way that they service the accounts and the way that we will be able to service that account going forward and that caused Blue Bird to select us and I'll say it this way, over the incumbent and so it was the yet it's - we're very happy about the business relationship and the ongoing business outcome of that contract as well.

[Christopher Van Horn:]

Okay, got it. Thank you very much. And then the new Board members, it seems like they've got a lot of branded product experience and I just was wondering, you guys have traditionally been very strategic about how you market yourselves. I'm just curious how we think about marketing spend going forward, are we going to see a little bit more advertising or more aggressive marketing campaigns or is it going to be just continued execution of what you've been doing in the past?

[Brad Hughes:]

Well, I think there is a transition going on in our organization as we become more focused on the consumer given the way the consumer is becoming and owning the decision making process for buying tires as they are in many industries. That doesn't necessarily translate into significant increases in advertising spend for us and we are clearly focusing a lot of our investments in the digital area because we think it's very effective and it's effective in finding consumers that are in the tire buying process. And so you'll see some shift over time, you may see some strategic investments but I'm not anticipating that you're going to see anything that's going to be a surprise to anybody with regard, will still be- we will still make sure that we've got the right business model including with our selling, general, and administrative expenses.

[Christopher Van Horn:]

Okay and just last one from me on that last comment, how is the online channel progressing and then we're seeing you show up more and more in searches on things like Tire Rack and other online channels, just curious how that is progressing from a - if you can quantify percent of sales or just from a general perspective?

[Brad Hughes:]

General perspective, we feel very good about on our increasing online presence working through on some key, on customers out there. We're seeing from a relatively small base as I think it is for a lot of the industry, but from a relatively small base we're seeing very good growth and we're extremely pleased with the average selling point of those products and the mix of the products.

[Christopher Van Horn:]

Okay, great. Thanks for the time.

[Brad Hughes:]

Thanks Chris.

[Operator:]

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

[Brad Hughes:]

Okay, not much for a close today. We want to thank you for being on the call on - the level of excitement at Cooper is continuing to grow as we execute our strategy and we look forward to updating you with the progress that we anticipate in the coming months. As always, please reach out to Jerry with any further questions or comments. Thank you very much.

[Operator:]

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