Cooper Tire & Rubber Company
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good morning, and welcome to Cooper Tire & Rubber Company’s Third Quarter 2014 Earnings Call and Webcast. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to Christine Hanneman, Director, Investor Relations.

[Christine Hanneman:]

Good morning everyone and thank you for being with us today. This is Christine Hanneman and I am here with Roy Armes, our Chairman, CEO and President; and Brad Hughes, Senior Vice President, President - International Operations, and CFO. During our conversation today, you may hear forward-looking statements related to the future financial results from business operations of Cooper Tire & Rubber Company. Actual results may differ materially from current management forecast 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. In association with our earnings release, we will provide an overview of the company's third quarter 2014 operations and results. 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. These slides are intended to help investors and analysts quickly obtain information. They will not be used as a focus of today's call. Following our prepared remarks, we will open the call to the participants for a question-and-answer session. We will begin this morning with Roy providing an overview. Brad will then provide a detailed review of our quarterly results. We'll then wrap up with Roy providing commentary on our outlook and then, we'll take your questions. With that, I'll turn the call over to Roy Armes.

[Roy Armes:]

Thanks Christine and good morning to everyone. We posted another quarter of strong results continuing the trend of the first half. Our earnings per share was $0.77 and sales grew 11% compared with last year. Once again, we posted a strong unit volume increase as well, up 14% led by growth in the Americas. The higher volume, along with lower raw material costs, drove third quarter operating profit to $89 million or 9.7% of sales. As we discuss this year's quarterly results, keep in mind that in 2013, we had production disruptions at CCT, our Chinese joint venture. We also had some shipping inefficiencies related to the implementation of our new ERP system, and additional costs associated with the then pending merger. As a result, some of the year-over-year comparisons are not representative of our business under normal conditions. Now let me spend some time on what's happening with the ownership of CCT. We recently received notice and related documentation from the Chengshan Group, that intends to exercise its option to acquire our 65% ownership in the CCT joint venture. And after reviewing the documentation and working with the Chengshan Group, to confirm the necessary steps to move forward, we are proceeding with the proposed sale of our interest in CCT in accordance with the process set forth earlier this year. As I have stated before, China will continue to be an important part of our long term growth strategy, whether or not we own the joint venture. Should our joint venture complete the transaction and buy our share of CCT, we have offtake rights through mid 2018. We are also looking for other sources of supply, regardless of the outcome of the ultimate ownership of CCT, which could take a variety of forms, such as an agreement with another Chinese supplier, making an acquisition, adding capacity to our wholly-owned CKT plant, buying a facility and running it ourselves, or just building a new plant. We have the financial wherewithal to take any of those pads [ph] or a combination of those pads. We are focused on increasing our business in China, because it’s a market that's growing strongly in both OE and replacement tires, and it’s the largest TBR market in the world. In fact, China is expected to become the world's largest overall tire market in the next few years. The most important thing to remember, is that our Asian strategy remains intact, and we intend to have a significant presence in China, and grow our business over time, in both the replacement and OE markets, and we have proven we can be successful in those markets. Moving on, I have mentioned before that over the past few years, we have focused on strengthening our technical capabilities. In September, we introduced two new all terrain four season tires that have an optimized silica tread compound. The Discoverer ATW and the Discoverer XT-4 tires are available at Canadian and Northern U.S. dealers. Both of these tires have been engineered to provide exceptional performance, confident handling, and reliable tread wear, giving drivers the confidence of a winter tire but designed for all seasons. These introductions are also a part of our strategy to grow in markets, where we have been historically underrepresented. We also recently announced the introduction of the Discoverer SRX, a premium SUV and CUV highway tire. The SRX contains a new generation silica tread compound with up to four times more silica than the previous generation of premium all season tires. This dramatically increases its road gripping performance, and reduces rolling resistance. Both of these tire line introductions, as well as the earlier released CS5 passenger touring line are great examples of our technical capabilities, enhancing our consumer's everyday road trips through tire performance that really matters, such as wet traction, control, tread wear and stopping distance. In fact, we were recently informed that both the Discoverer ATW and the Discoverer SRX received recommended buyer ratings from a leading consumer magazine, a further indication of Cooper's exceptional product engineering to meet consumer's demands, and help our customers and dealers be even more successful. Likewise in Europe, we have introduced a new winter range under the Starfire brand. The Starfire W200 is aimed at the compact car market, and is manufactured at our plant in Serbia. This line features a high silica compound, as well as tapered alternating group technology to enhance grip in snow and wet conditions. And in Asia, we are introducing a series of ice, what they call ice tires, which are specifically designed for the winters in China. We are also beginning to test tires made with guayule. Cooper is part of a consortium that received a grant from the U.S. Department of Agriculture and the U.S. Department of Agriculture and the U.S. Department of Energy, and the purpose of the grant is to conduct research aimed at developing enhanced manufacturing processes for the production of solid rubber from the guayule plant, as a biomaterial for tire applications. The tires made with guayule are being evaluated by our technical team, using rigorous wheel, road and track test, and to-date the test suggests tire performance that is at least equal to tires made of components derived from the Hevea plant, which is the only current source of natural rubber. Now before I turn it over to Brad, let me say that I am highly confident in our future. We had a solid worldwide growth strategy that we discussed at detail at our Investor Day this past May. Innovative technologies, a highly experienced work force, and a capable management team. I think we have a strong balance sheet that will enable us to meet all of our obligations, as well as support our growth strategy, and also has allowed us to return cash to shareholders, through actions such as our accelerated share repurchase program, and our dividend. Now with that, I would like to ask Brad to give a little more detail on the reviews and a review of the third quarter performance.

[Brad Hughes:]

Thanks Roy. Before I start talking about the results, let me briefly discuss what occurred in last year's third quarter, so that everyone has an understanding of the comparisons. As we have said, we had a good relationship with our JV partner in China until June 2013, when the workers at CCT, our JV facility in China went on strike, because of concerns about a merger offer we had received. Over the second half of last year, there were multiple manufacturing disruptions at CCT, which impacted our sales in a significant manner. In January of this year, we came to an agreement with our joint venture partner and the union, and the plant resumed normal production. Production has recovered well, and this recovery is contributing to the strong year-over-year unit volume and net sales increases. I will discuss details, as we go through the results. Let me now move on to total company results; our total company results for the third quarter of 2014 included earnings per share of $0.77 per share compared with breakeven last year. Operating profit of $89 million or 9.7% of net sales, compared to $28 million or 3.4% of net sales last year. The change in this quarter's operating profit was driven primarily by the following favorable factors; $86 million from lower raw material costs; $25 million from higher unit volume, including $22 million from the absence of the CCT supply issues last year; $5 million from lower products liability costs; $2 million of favorable manufacturing costs; and we also benefited by $5 million from the absence of merger related costs, which were included in our SG&A last year. These favorable items were partially offset by $57 million of unfavorable price index, partially reflecting the continued decline in raw material costs. Now moving to our segment performance, I will start by providing detail on the Americas operations. Segment sales for the third quarter were $694 million, a 10% increase compared with last year. Unit shipments rose 11%. Total light vehicle tire shipments for the U.S. were up 11% during the third quarter, compared with an estimated increase of 3% for the industry, and a slight increase of 0.3% reported by RMA numbers. In the quarter, our U.S. passenger car tire unit sales increased 11% versus last year, as a result of a number of new product introductions over the past year, that are now showing meaningful results. Much of the increase is in our house brand products, which is in line with our strategic initiative to increase our mix of higher margin house brands. Like truck unit volume in the U.S. also increased 11%, commercial truck tire sales of Roadmaster brand rose 6% in the third quarter compared with the year ago, total industry shipments within this category, as reported by the RMA, were up 12%. The supply issues I mentioned earlier, significantly impacted sales of Roadmaster tires in the second half of last year, and into early 2014. We reintroduced the Roadmaster brand in the second quarter of this year, and have regained a position with 90% of our top 30 customers. We are pleased with the progress, and look forward to continued gains with Roadmaster. We have supported our new products and our brands with increased advertising and promotion that has been well received. Perhaps you've seen the ESPN College Football Halftime report on Saturday sponsored by Cooper Tires, or our commercials on the weather channel. We plan to continue building awareness in strengthening our Cooper brand familiarity. Moving on to profitability, third quarter operating profit in the Americas rose to $76 million or 10.9% of net sales. Key drivers of the increase were $55 million from lower raw material costs; $14 million due to higher unit volume, which includes $6 million from the absence of the 2013 CCT supply issues; and $5 million in lower product liability costs. These positives were partially offset by $27 million from unfavorable pricing mix, and $6 million of higher SG&A costs, some of which is related to the brand awareness investment I mentioned earlier. Last year's quarter included $13 million of costs associated with the curtailments in the Americas segment. We did not see the full reversal of these costs in our manufacturing numbers this quarter. In response to accelerated demand for higher value, higher margin tires, the Americas segment is in the process of reconfiguring its manufacturing plans, to increase production of these products. It is expected to take until mid 2015 to better align production mix event [ph]. Until that is achieved, certain plants in North America will run at suboptimal capacity, which will affect cost efficiency as it did in the third quarter. Our raw material index was 194, which is 8% lower than the same period of 2013, and down 2% sequentially from the second quarter. We expect the fourth quarter raw material index to be down slightly, compared with the third quarter. The longer term raw material outlook is for costs to generally trend higher, with periods of volatility. As a reminder, in the U.S., we used the LIFO accounting method, charging the most recent costs against sales, which in turn impacts profits more quickly than other inventory accounting methods. Now turning to our international operations; net sales in the international segment were $313 million, up 19% from a year ago. Total international segment shipment volume, after elimination of intercompany shipments within the segment, increased 28%. European unit volume decreased slightly, as the result of lower sales of a product line we are ramping down, which will be replaced with higher margin house brand products over time. We also continue to see weakness in Russia and Eastern Europe, driven by the political environment. Volume in our Asian operations was up strongly as I mentioned earlier. However, we did not see the full benefit of the absence of the CCT labor issues, primarily due to lower demand for passenger car tires in China. This also caused us to run PCR production at suboptimal capacity at CCT, which affected cost efficiencies. Demand for PCR tires in China has been dampened as the replacement industry anticipates the potential replacing effects from continuing raw material cost declines, and the domestic China market implications from potential U.S. tariffs on PCR products imported from China. Demand for Roadmaster TBR products, which are also manufactured in our CCT facility remains strong. International segment operating profit for the third quarter rose to $23 million or 7.3% of net sales compared with $3 million or 1.2% of net sales last year. The increase was a result of $39 million from lower raw material costs, $11 million from unit volume growth, last year's third quarter included the unfavorable effect of $15 million from lower unit volume, due to the CCT labor issues. We also had favorable $2 million from lower manufacturing costs. Last year's manufacturing costs included $7 million of inefficiencies, related to the CCT labor issues. These favorable changes were partially offset by $35 million from lower pricing mix. I'd now like to cover a few other items, starting with income tax accounting. Our income tax expense in the third quarter was $27 million, and is based on forecasted annual earnings in tax rates for various tax jurisdictions. The effective tax rate, including discrete items was 32.9% for the quarter. We expect the full year effective tax rate will be in a range of 30% to 35%. More detail on our taxes is available on our Form 10-Q that will be filed with the SEC. Total selling, general, and administrative costs were $68 million or 7.4% of net sales in the quarter. This compares with $69 million or 8.3% of net sales a year ago. We expect SG&A as a percent of net sales will be in the 7% to 8% range for the full year. Cash flows and balance sheet highlights; cash and cash equivalents of $336 million at September 30, 2014, compares with $310 million of September 30, 2013 and $327 million at June 30, 2014. Cash provided by operating activities was $98 million through the third quarter. As we mentioned in our second quarter call, we implemented an accelerated share repurchase program in August. As a result, our average shares outstanding for the third quarter decreased to 61.6 million. We used $50 million of cash to fund some of the repurchase, and we also drew down $150 million from our credit facilities during the third quarter, to complete the funding for the ASR. Accounts receivable of $539 million increased from the June 30, 2014 balance of $497 million, as a result of the sales increase, extending payment terms to some international customers and because a large customer did not pay on its typical accelerated pattern during the quarter. Capital expenditures in the third quarter were $36 million. Capital expenditures for the full year are expected to be in the range of $175 million to $185 million. Our balance sheet remains strong, and we have ample liquidity. We have had several questions related to specific financial information regarding CCT. We have not shared this information for competitive and legal reasons. We plan to disclose certain specific financial information regarding the CCT transaction at the appropriate time. We would like to reiterate, that if we sell our interest in CCT, we will continue to earn the profit on CCT produced units that we sell through other Cooper business units. For example, Roadmster tires sold to Cooper U.S. We will lose the profit that CCT earns on selling tires to other Cooper business units, and on any tires sold directly to the customer by CCT. As I mentioned, we will disclose pertinent financial information related for the CCT transaction at the appropriate time. I will now turn the call back over to Roy.

[Roy Armes:]

Thanks Brad. We have had a very good year thus far and our positive momentum has continued into the fourth quarter. The possible U.S. tariffs related to the imported Chinese passenger car and light truck tires are still being investigated by the ITC and the Department of Commerce, and we don't know what's going to happen or what's going to occur there, but we will keep you posted as things develop. Raw material costs continued to decline in the third quarter, and we are expecting further declines in the fourth quarter. We are monitoring this situation along with potential tariff implementation, our goal is to maintain our margin, but we also recognize the need to be competitive. We expect the tire markets to continue to grow in North America and Asia, and Western European markets have softened and we expect anyway, continued volatility in Russia and Eastern Europe. As I have noted in the past, we expect the global tire markets will remain highly competitive, even though we are seeing underlying economic conditions vary by region, our good momentum continues, and we expect to meet or exceed industry unit volume growth rates in our largest markets this year, in line with our strategic plan, house brands will be a key contributor to this growth. In addition, our focus on cost control will continue company-wide, as these programs have been very successful for us, and will continue to make us even more competitive. So with those closing comments and our prepared remarks, I'd like to now turn it over to answer some questions, so operator, if you would open up the line for our first question?

[Operator:]

(Operator Instructions). Our first question comes from Robert Higginbotham with SunTrust. Your line is now open.

[Robert Higginbotham:]

Thanks. Good morning everyone.

[Roy Armes:]

Good morning Robert.

[Robert Higginbotham:]

So I guess my key question is, what the challenges are to replacing the CCT capacity? It sounds like you got a lot of different options, but I am just wondering if you could give us some color on the challenges across -- maybe not all of them, but across some of them. The major challenges that might exist? Is it real estate location? Is it logistics? Is it finding a viable partner or target, or are there technological hurdles, given its not the CKT type of production that you're trying to replace, maybe if you could just touch on some of those?

[Roy Armes:]

Robert, it’s a good question. Obviously there are challenges any time you go up and try to replace a business that we had to hear -- had there before. But we have been very-very pleased at some of the discussions and the dialog we are having with potential partners. We are continuing to look at our different options. There is enough capacity out there, globally, that I think there is going to be some options for us to continue to grow in China, and we are in that process as we speak. I think we are going to be a little more cautious, obviously, as we start looking at these different alternatives, to make sure we pick the right one for long term, versus anything for short term. While there is challenges out there, we have been potential market can bring us.

[Robert Higginbotham:]

Great, thank you.

[Operator:]

Our next question comes from Ryan Brinkman from JPM. Your line is now open.

[Ryan Brinkman:]

Thanks for taking my question. Can you just kind of help us on how we should think about the price mix, raw mat spread here going forward? You've lapped some of these a year ago, declines, your guidance is for a sequentially raw mats in 4Q. So presumably, this will be an even more beneficial spread going forward?

[Brad Hughes:]

Well I think Ryan, obviously we will continue to monitor what's happening in the market, to make sure that we are positioned correctly competitively. But as we look at raw materials coming down, if in fact the market holds pricing, it would obviously reflect well on what will happen with margins sequentially. Having said that, it is possible that we will see some pricing actions related to the continuation of raw material decline. So we are going to monitor that. We are obviously focused on delivering our margin targets. But we need to remain competitive with regard to where our products are positioned.

[Ryan Brinkman:]

Right. Thank you. And then I don't know how effectively you can answer this, but the language in your press release talked about, I think you mentioned like, should Chengshan purchase our stake in the joint venture, and in Brad's closing remarks, I think you said something sort of similar. I am just curious, if I phrase it this way, are you essentially signaling that its still possible at this point, that Chengshan would not buyout the stake, and that there could even be a scenario in which you could still buyout their stake?

[Brad Hughes:]

Well at this point, as we have communicated, and there will be additional information available in the 10-Q including the full agreement that we have in place with the Chengshan Group; but they have provided notice of their intent to exercise their call option, along with the supporting documentation. And as we have reviewed that, we are in the process of moving forward with what the process laid out in the agreement, which would ultimately, if everything else falls into place, with the remaining steps in that process would end up with the Chengshan Group acquiring our share.

[Ryan Brinkman:]

Okay.

[Roy Armes:]

And Ryan we haven't, or we don't foresee any major issues at this point in time, but we are still going through the process, and it requires government agency approval, so that takes a little time to work through the process.

[Ryan Brinkman:]

Okay. That's helpful. We will look forward to the Q. And then I'd just finish with sort of a longer term strategic question. Clearly you intended, it was a big thing at your Investor Day to play in the HVA space to a much greater degree. In part I think because it helps to inflate you from some of the price competition at the lower end of the market. So can you maybe comment on what barriers you see to your low end competitors themselves entering into the HVA space? Is it they don't have the brand equity, or maybe they don't have the R&D or CapEx, or even technical knowhow. Just curious if you think that the strong pricing dynamics in HVA that we see today will continue into the future?

[Roy Armes:]

Well I think -- I guess my comment to that would be that, when you look at the technology, there still is technology gaps that are out there, that provides us an opportunity in HVA category, depending on how you want to describe that category. I think the process capability, there some gaps there as well as the quality systems. That has been our experience any way, and I think right now, we are less exposed to that lower end, but we still have an exposure there, and we are going to continue to line up with strategic partners to fulfill that segment. But I think there is still gaps there today. I think they will -- just like we are doing, we will continue to improve our technology, we have to stay ahead of that curve, and that's what part of the details of our strategy indicates.

[Ryan Brinkman:]

Okay, great. Thanks for the color.

[Operator:]

Our next question comes from David [indiscernible] with Goldman Sachs. Your line is now open.

[Unidentified Analyst:]

Great, thank you. Just a couple for me. In terms of the tariffs a couple -- you have kind of noted that Chinese tire imports were elevated during the quarter. How much did that negatively impact your volumes for 3Q 2014, and do you think it provides an additional headwind into the fourth quarter of this year, or even into the first quarter of next year? And do you believe this is more transitory and/or potentially a benefit as we move further into 2015?

[Roy Armes:]

Well I would just say that, the fact that we are less exposed, although we still have exposure there in that low end [ph], that primarily we are -- some of the prebuy has taken place in anticipation or at least speculating about some of the tariffs that are out there. At this point in time, we haven't seen a huge impact in our business, that doesn't mean it can't change going forward, but its hard to speculate what that implication is going to be. At this stage right now, we are monitoring it pretty close, to make sure that we are making the right choices in our business, to make sure that we are both competitive, as well as trading off where our margins are and keeping our volumes. So we are feeling like we are, I would say, David, we feel like we are managing the business as effective as we could, given what we know.

[Unidentified Analyst:]

Understood. So you don't think that there was a meaningful negative impact from a shift, say from your tires to potentially stockpiling lower value tires during the quarter?

[Roy Armes:]

Well there ahs been some stockpiling out there, but you can tell by our volume, that I didn't necessarily mean that we were impacted. Have we been impacted, I think that's really hard to see, at least when you look at our performance for the third quarter. Is that going to change going into the fourth quarter, that's what we are monitoring very closely to make sure that we are responding needs as quickly as we can. But clearly there is -- we hear from our customers out there, that it does appear that there has been some pre-buying in anticipation of these tariffs, but its hard to predict how much that really is and how much it really impacts us.

[Unidentified Analyst:]

Understood. And then on the medium truck tires, I am still a little bit surprised by the lack of bounce if you will -- there so far, as you kind of climb back out from last year. You've noted that you are back with 90% of your top 30 customers, but not at similar levels. Kind of just curious as to whether you expect you return to kind of previous shipment levels before the disruption and over what timeline do you get there? And then kind of along those lines, when are some of the marquee contracts with your customers kind of coming up after last year's issues?

[Roy Armes:]

Well I'd answer less, and we are not going to talk about our customer's contracts and that sort of thing, but I would say that, we have -- I thought we have bounced back fairly well. What's happened is, we have got customers ahead, that go out there and make commitments when we didn't have availability of the commercial truck tires. We have seen a lot of that come back as we speak. I think its going to take some time. I don't know the time, but over the next year or two, we are looking at continuing to recover from what we lost before. But we feel pretty encouraged about the way our customers are supporting us. But they also have these agreements that they have put in place, that we get to compete for, when they become due. That's going to take some time to do that. But we are confident about where we are and what we potentially could continue to do in the commercial truck tire business.

[Unidentified Analyst:]

Okay. And then last one for me, on CCT, what type of timeline are you anticipating at this point, in order for that to be completed and received in cash? And then along those lines, what are the top priorities with that? Just given your favorable net debt position, and kind of what appears to be a long enough runway to replace that supply, either through another supplier building on your own, what are the plans with it attached [ph]?

[Brad Hughes:]

So to the first part of the question with regard to the timing, very difficult to make a projection on what that timeline is going to look like. As we have mentioned, the next step in the process would be to go through the government approval. They operate to their own timeline. I would direct you to the agreement that we filed with the 10-Q later today, which lays out some of the additional steps and the timing that's provided for in that agreement for those steps. At least it will give you, what I would call an outside timeline, as to what we would expect going forward. But within that, to provide more specific timing will be difficult. With regard to, if it ends up going to the point, where we are -- we actually do sell and receive the cash for that, which again, it appears that we are on that path. But we are going to continue to look at what the best thing to do with that cash will be for our shareholders. But certainly, part of the consideration will be looking at what we need to do in China, and for our TVR business or for investments. If those don't materialize, then we will begin to look at other investments in the near term. But as always, we will be looking at what the best returns are for our shareholders with that cash.

[Unidentified Analyst:]

Understood. Thank you gentlemen.

[Operator:]

Our next question comes from Brett Hoselton with KeyBank. Your line is now open.

[Brett Hoselton:]

Good morning.

[Roy Armes:]

Good morning Brett.

[Brett Hoselton:]

Brad, just on the timing of the CCT sale. I understand that -- it sounds like the 10-Q is going to contain some information with, maybe some deadlines possibly or something along those lines. And if that's in fact the case, can you, I don't know, just provide us a rough idea as to when they may be writing a check, like when is the deadline?

[Brad Hughes:]

Lets put it this way, when you look at the agreement and without going through the specifics, I really would suggest that you look -- it’s a full agreement that's filed along with the 10-Q, when that is filed today. The -- but it would [ph] allow in there for a certain amount of time around the government approval, and then for some of the payment activities to take place after that, and it will at least give you some idea as to how long it would take. How long its really going to take is really difficult to project. We don't have any control over how the government approval process is going to go, and then there is time built in after that for the payment process to take place.

[Brett Hoselton:]

Is there a drop-dead date?

[Brad Hughes:]

There are some limits on the timeline, that there is some overlapping, so you will have to look at the details to come up with what those look like.

[Brett Hoselton:]

Okay. And then in terms of -- I know that you're not going to -- well in terms of specifics on impact on your income, I know you have previously commented that you're not prepared to talk about that in great detail. But it sounds like to me like essentially what you're suggesting is that, the net effect of this, is that your EBITDA is going to do down by some amount. Is that a fair assessment?

[Brad Hughes:]

There is a portion of EBITDA yes, that would go away if we don't own it. There is a portion that will continue with, as I mentioned that those -- that EBITDA is generated through other Cooper business units. But the portion that's attributed to CCT, either from the sales that they make to Cooper business units, or that they make on sales directly to customers, would go away if we don't own that.

[Brett Hoselton:]

And magnitude of that, is that you're still in the process of negotiating the magnitude of that impact, and therefore you don't necessarily have a good sense of where that's going at this point in time? Or is it, you have a pretty good feel for where its going, you are just not prepared to disclose at this time?

[Brad Hughes:]

As we mentioned in the call notes, for competitive and legal reasons, we are not at an appropriate time to be sharing that information. I would stress though on, as most people are aware. We did go through evaluation process, where we had an independent third party on assessed information, provided by both partners, both historical and forward looking to determine a value for the entity, and upon which, that valuation was determined, and that will ultimately, if we end up selling, result in the amount of money that we are going to be paid for our shares of CCT. So it wasn't -- that was based on information, both historical and forward looking for that entity.

[Brett Hoselton:]

And then, as we think about kind of the go forward on this -- this is currently, as I understand, the only source of truck and bus tires that is in the Cooper Tire system at present? Am I correct on that?

[Roy Armes:]

Yes.

[Brett Hoselton:]

And how does the Chinese tariff potentially impact that kind of going forward? In other words, do you see the truck and bus tire business being impacted by the potential Chinese tariff that could be coming down the pike here?

[Roy Armes:]

Well there is no tariffs on the TBR, the commercial truck tires, Brett. So we can't speculate on that. We don't know anything at this point in time, that would have any impact on that. But if you have commented because of the tariffs on passenger car tires and light truck tires, is it going to have an impact on the commercial truck tires, we are not seeing that.

[Brett Hoselton:]

Okay. I guess my question was, do you see the tariff coming down -- tariff is going to be impacting us, let's say later on this year, early next year, you don't see that impacting the truck and bus business at all? You think that's limited to the passenger car and the light truck that you're understanding, is that correct?

[Roy Armes:]

That's our understanding Brett. We don't have any reason to feel any different than that, other than just people speculating possibly on that. But we don't see that.

[Brett Hoselton:]

Okay. And then finally just a quick housekeeping; Brad, how do we think about the share count in the fourth quarter?

[Brad Hughes:]

We saw a partial effect in this quarter, and we will see the full effect of the initial tranche of shares next quarter. We saw roughly 50% of that effect this quarter in terms of the number of shares, because of the timing of when the program started, and you will see the benefit of -- the other half of that benefit, that's not the ultimate benefit, because there will still be additional shares like we purchased beyond that, but you will see -- we saw about 50% of it this quarter, you will see the balance next quarter.

[Brett Hoselton:]

Excellent. Thank you very much gentlemen.

[Roy Armes:]

Thanks Brett.

[Operator:]

Our next question comes from Bret Jordan with BB&T Capital. Your line is now open.

[Bret Jordan:]

Good morning.

[Roy Armes:]

Good morning Bret.

[Bret Jordan:]

Could you give a little more color on your comment about the passenger tire demand in China? And I guess to some extent, is this replacement demand softness you're seeing versus OE, and then maybe some color both in China and North America, sort of your outlook on OE potential?

[Brad Hughes:]

With regard to China, the kind that was specifically to related to-- the replacement market from our perspective, and what we are seeing is that customers in China and we believe this is an industry, just a Cooper phenomenon; is that as they are watching raw material costs continue to decline, and they are anticipating what might be the effects from the potential tariff in the U.S. on PCR tires coming from China, and potentially resulting in some of those tires staying in China for sale, that they are thinking that that could have implications on the pricing for tires, so they're reluctant to build inventories of tires right now, until they have a better feel for how that's going to work itself through.

[Bret Jordan:]

Okay. And then as far as your outlook on OE, is there anything in the pipe that's of note?

[Brad Hughes:]

Nothing specific to comment on. Again, our big emphasis right now for OE is really focused on China, and that's the place that we are working most aggressively on, but nothing specific that we would talk about at this point.

[Bret Jordan:]

Okay. Is Great Wall your primary relationship over there? Or have your diversified into other manufacturers in Mainland China?

[Brad Hughes:]

We don't talk a lot about specific customers. We do have some diversification in our customer base for OE.

[Bret Jordan:]

Okay, great. Thank you. And actually one last question; your discussion on realigning production in North America at a higher price point in margin product; is the inefficiency just related to production, as you are retooling and shifting some lines?

[Brad Hughes:]

It’s a combination of that, along with -- we have got more demand than we could meet for those type of tires right now, and that signals less demand for the tires that we are going to displace as we are converting over to those different types of tires. But you're right, a lot of it is around the conversion process and what does to our productivity in the plant.

[Bret Jordan:]

Okay, great. Thank you.

[Roy Armes:]

Thanks Bret.

[Operator:]

Our next question comes from Daniel Aaronson with DLD Asset Management. Your line is now open.

[Daniel Aaronson:]

Hi there. Hi guys. Thanks for taking the call. Just a quick one on CCT, and just trying to understand the impact. I know you guys don't want to talk about it yet. Two part question; is it safe to assume, if I look at sort of a public equity valuation of your stock here. Their earnings from CCT were sold at a cheaper sort of market valuation than the stock trades?

[Brad Hughes:]

Again, without commenting on anything specific, I don't know how to comment on that without specificity. But again I would tell you that, the whole reason that we entered into the agreement that we entered into, was to bring in a third party to determine a fair value for the entity based on inputs on both sides. And we did that, so that regardless of the outcome we were going to receive or pay on a fair market value for the shares.

[Daniel Aaronson:]

Okay. I mean I just -- I want to ask a third question now, a new question if its okay? Its just -- the likelihood is probably, a U.S. listed public company gets a better valuation than a Chinese company, that's all I am saying. The third question I have is, the offtake agreement, which is great. It allows you to keep some of the profits from the CCT business. Do you anticipate over the next three years, having to basically reinvest those profits, through either the OpEx line or through capital expenditures to sort of replace that business, come 2018?

[Roy Armes:]

Well, it is going to cost us to replace that business and reinvest, but that's why we are getting the value out of the joint venture, of what 65%, to be able to find other alternatives. I mean, that's really -- our primary focus is to find an alternative for the TBR tires, so that when our supply agreement does run out, that we have got some other options. And that doesn't mean we have to truncate our supply agreement at that point in time, but we need other options, and that's what we are looking for. We were going to do that with or without this CCT joint venture. We needed other options and not have just one supply for that particular product.

[Daniel Aaronson:]

Okay. I am going to let you guys go, but do you want to emphasize, as a shareholder, I appreciate the valuation here. I do like the color that we have gotten. I would love to know, I think the market would love to know what the true earnings picture looks like. So I encourage you expediting that process, I think its only fair.

[Roy Armes:]

Okay. Thanks.

[Operator:]

Our next question comes from Robert Higginbotham with SunTrust. Your line is now open.

[Robert Higginbotham:]

Hi thanks. A quick follow-up here on the conversion activity. So it sounds like your conversion, HVA conversion activity is going to be pretty heavy through the middle of next year. So does that mean that, at that point, you will be done with that kind of activity for a while, and you will have call it full capacity to meet your HVA demand, and has that under capacity, if you will, in holding back sales at all to this point?

[Brad Hughes:]

By the middle of 2015, based on our projections, the trajectory of demand for those types of products, we think we are going to be, at that point aligned with what we can produce. However, we also project that the demand for those types of tires will continue to grow. So there will be an ongoing process. But the big part of it, and what I will call the catch-up portion of that conversion to where demand is and is projected to be in the near term, should be accomplished by about the middle of 2015. So it will continue to be an ongoing process. So the second part of your question, yeah, we probably could have sold more of those types of tires if we had them, at this point. But we didn't; and so we are actively and aggressively converting.

[Robert Higginbotham:]

Okay. And then lastly, how should we think about CapEx looking forward into next year, given that -- what sounds like accelerated conversion activity, excluding whatever capital you have to spend on replacing CCT?

[Roy Armes:]

So we will comment on that when we get to our year end call. This year, we set $175 million to $185 million. We are going to continue to invest in the business and so I think it will be around the levels that you have seen over the last few years, where I think we have comped out at around, a little over $200 million, I think would be within a range of that, as we look forward. But we won't be sharing the specifics of details of our projections until we get to February, when we are covering the year end results.

[Robert Higginbotham:]

Fair enough. Thanks a lot.

[Operator:]

I am not showing any further questions at this time. I would now like to hand the call back to Roy Armes for further remarks.

[Roy Armes:]

Well thanks everyone for being on the call with us today. As you can see, we are focused on implementing our growth strategy across the world, while reeking the target operating margin range of 8% to 10%; and I am very pleased with the progress that we made this year, and our ability to operate in the midst of change and uncertainty in these past few years. And I think it’s a testament to the robustness of our enhanced business model. And I also understand the desires of our shareholders to have more detailed information on CCT financials. At this stage, we do have a process that we are respecting, and we have got agreements that we are respecting, and we are going to provide you with as much information as we possibly can and the details at the details at the appropriate time. But rest assured, we would like to get through this process as quickly as we can as well, and still make sure that we are doing the right things for the overall business and the value in this business. So with that, appreciate your interest in Cooper tire and we look forward to seeing many of you in person, as we participate in this financial conferences over the next few quarters. So thanks again.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.