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#Good morning, everyone, and thank you for joining the call today.
This is <UNK> <UNK>, Cooper's Vice President and Treasurer.
And I'm here with our Chief Executive Officer, Brad <UNK>; and <UNK> <UNK>, 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 first 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.
Thanks, <UNK>, and good morning, everyone.
Before we begin, I want to quickly congratulate <UNK>.
As recently announced, she has decided to transition later this year from a full-time executive career to focus on serving on public company boards.
<UNK> is fully committed to remaining actively engaged at Cooper and helping us deliver on our plans.
She will remain in place until a successor is identified and assimilated into the company, assuring a smooth transition.
I'd like to publicly thank <UNK> for her contributions to Cooper, including playing a key role in the development of our long-term strategy and business priorities, and wish her the best in her future endeavors.
With that, I will begin our call with a brief overview of our first quarter 2018 financial results, and then provide an update on Cooper's progress towards our strategic priorities.
I will also discuss our business outlook for the remainder of the year.
After that, I'll turn the call over to <UNK> for a more detailed discussion of our first quarter performance and capital allocation.
I'll return for a few remarks before we take your questions.
Let's now talk about the first quarter 2018 results.
The first quarter was, in large part, a reflection of the U.S. tire market performance.
Our U.S. light vehicle volume performance in the first quarter was a decline of about 6% compared with the same period a year ago, which was more aligned than recent quarters with the USTMA trends, which continued to be weaker than expected, with a decline of over 5%.
Global net sales for first quarter were $601 million, down about 6.5% compared with the same period last year.
Operating profit for the first quarter was $26 million or 4.4% of net sales, which is a decrease of $32 million from the prior year.
The decrease in our first quarter operating profit, adjusted for onetime items, was more than explained by weaker volume and higher manufacturing costs, as we made production adjustments to keep our inventories in line with the current market conditions.
It is clear that the challenging industry conditions of 2017 carried forward into the first quarter of 2018 and impacted the tire business as a whole, including Cooper.
While the tire business navigates through this period of weak demand, we at Cooper are focused on what is within our control, taking actions to effectively manage our inventories and reduce costs.
For example, we restructured corporate headcount in the U.S. and reduced the production schedule and workforce in Mexico to align with market demand.
In addition, we are under way with several initiatives to drive unit volume growth and profitability, which we will detail during our Investor Day on May 11.
I can tell you that these initiatives around ---+ revolve around key strategies, such as speeding up the cadence of new product introductions and operating with a new consumer-led product development process.
One important product line developed using this new approach is the all-new A/T3, which will take industry-leading product to even greater performance.
We will begin shipping the new A/T3 in a few weeks.
We will have more product news at our upcoming Investor Day.
In addition, our strategy involves entering new channels that represent opportunity for Cooper, where our considerable brand strength can be leveraged in new ways to expand into channels such as e-commerce, auto dealerships, general merchandisers and continued OE penetration.
To accelerate our commercial initiatives, we are excited to have a new President of North America Tire Operations, Chris Ball, who joined us in mid-March.
Chris comes to Cooper following 15 years at Whirlpool Corporation, where, among other posts, he led the company's largest business unit and their KitchenAid small appliance business.
Chris is a talented global executive with significant commercial experience, and we look forward to the fresh perspectives, energy and positive change he will drive going forward.
As we have said previously, our actions will take some time to manifest in our results, but we expect our performance to improve as these efforts take hold and as the industry rebounds in the future, supported by strong macroeconomic factors.
We do not believe that current industry conditions represent a new normal for the tire business.
Ultimately, we believe that positive trends, such as employment levels, gas prices, miles driven and others, will result in an overall improvement in the industry, and we expect to participate in such a recovery in the future.
Going forward, we expect operating profit margin performance in the second quarter to be similar to the first quarter as we continue to navigate through a challenging market environment.
However, we expect industry demand to improve in the back half of the year.
We expect that this improvement, along with our actions to drive volume and reduce cost, will result in operating profit margin approaching our stated 9% to 11% range for the second half of 2018.
It is important to recognize that apart from all of the industry challenges in the light vehicle tire market, we are very pleased with the volume performance of our truck and bus radial, or TBR, tire business, which was up 25% in the first quarter, well above the industry trend.
In March, we announced a Cooper-branded TBR product line to leverage the opportunity we have, particularly in the fleet space.
This new Cooper brand complements our successful Roadmaster brand, which has provided quality products primarily to owner-operators and trailer manufacturers for more than a decade.
In addition to our success in the TBR segment, we are highly encouraged by profitability within our International segment, which more than doubled versus the same period a year ago.
This growth continues to demonstrate the value of our strong global footprint.
Now I will turn the call over to <UNK> for an update on the financial results and capital allocation.
Thank you, Brad.
I'll start with our first quarter financial review.
Net sales were $601 million compared with $643 million in the first quarter of 2017, a decrease of 6.5%.
First quarter net sales were negatively impacted by $39 million of lower unit volume and $20 million of unfavorable price and mix, partially offset by $17 million of positive foreign currency impact.
Operating profit was $26 million or 4.4% of sales compared with $58 million or 9% of sales in 2017.
Our 2017 operating profit has been restated to reclassify $9 million of other pension and postretirement benefit costs out of operating profits 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.
First 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: $12 million of higher manufacturing costs, due primarily to lower production volumes; and $11 million of lower unit volume.
This was partially offset by $6 million of favorability resulting from, first, $14 million of favorable raw material costs, partially offset by $8 million of unfavorable price and mix.
As expected, our raw material index sequentially increased during the first quarter from 153.1 in the fourth quarter of 2017 to 156.7 in the first quarter of 2018, as shown on Page 5 of the supplemental slide deck.
While up sequentially, this was 5.8% lower than our index of 166.4 for the first quarter of 2017.
There were also multiple unique items that impacted the quarter: $22 million of unfavorable variance related to the reversal of preliminary TBR tariffs, which were incurred in 2016 and reversed in Q1 of 2017.
This was partially offset by $7 million of costs related to tornado damage at a North American distribution center in 2017 and $3 million of net insurance recoveries in the first quarter of 2018 related to the same event.
In addition, there were $3 million of higher other costs related to restructuring in the U.S. and reduction in the manufacturing workforce in Mexico, where we went from a 7- to 6-day operating pattern as well as start-up costs related to 2 new U.S. distribution warehouses, both of which will be operational later in 2018.
We delivered earnings per share of $0.16 compared with $0.57 in the first quarter of 2017.
Moving to our segment performance, I'll start with the Americas Tire Operations.
Segment sales for the first quarter were $485 million, down 8.7% from $531 million in 2017.
This decrease was a result of $30 million of lower unit volume, $19 million of unfavorable price and mix, which was partially offset by $3 million of favorable foreign currency impact.
Operating profit in the Americas was $31 million or 6.4% of net sales compared with $71 million or 13.3% of sales in the same period last year.
Operating profit was impacted by $10 million of lower unit volume; $12 million of higher manufacturing costs, which reflects our decisions to match production volume to demand and control inventory levels; and $14 million of favorable raw material costs; offset by $14 million of unfavorable price and mix.
As mentioned previously, there were multiple unique items that impacted the quarter in this segment: the $22 million unfavorable variance related to the reversal of preliminary TBR tariffs, which were incurred in 2016 and reversed in Q1 of 2017.
This was partially offset by $7 million of costs related to tornado damage at a North American distribution center in 2017 and the $3 million of net insurance recoveries in the first quarter of 2017 (sic) [2018] related to the same event.
In addition, there were $6 million of higher other costs, which include expenses related to workforce actions in Mexico as well as start-up costs related to 2 new U.S. distribution warehouses, which will be operational later in 2018.
You can see the full profit walk for the Americas on Slide 7 of our supplemental slide deck.
Now turning to our International Tire Operations.
Net sales for the first quarter were $161 million, up 13.6% from the first quarter of 2017 as a result of $13 million of favorable price and mix and $14 million of positive foreign currency impact, partially offset by $8 million of lower unit volume.
Unit volume in the segment was 5.4% lower in the first quarter of 2018 compared to the prior year as a result of decreased volume in Europe, which more than offset a slight increase in unit volumes in Asia.
In Europe, we had a difficult comparison as the first quarter of 2017 had significant buying ahead of announced price increases.
Our Asia business remains strong, and we still expect double-digit domestic unit volume growth for the balance of the year.
The International segment operating results increased compared with last year with an operating profit of $7 million in the first quarter compared to $3 million in the same period a year ago.
These results were driven by $6 million of favorable price and mix, which were partially offset by $1 million of lower unit volume and $1 million of unfavorable other costs.
You can see the full profit walk for the International operations segment on Slide 8 of our supplemental slide deck.
Now turning to some corporate items.
The effective tax rate was 27.8% for the first quarter compared to 30.7% in 2017.
The first quarter 2018 tax rate includes discrete items related to the accrual of additional uncertain tax positions relating to previous years.
The rate is based on forecasted annual earnings and tax rates for the various jurisdictions in which the company operates.
We 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.
Moving to cash flows and the balance sheet.
Cash and cash equivalents were $213 million at March 31, 2018, compared with $365 million at March 31, 2017.
Capital expenditures in the first quarter were $60 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.
As a result, we are lowering our full year capital expenditure projection for 2018 to between $200 million and $220 million.
We continue to earn solid returns on our investments, delivering a 12.3% return on invested capital for the trailing 4 quarters, excluding the impact of unique fourth quarter 2017 tax activities.
Moving to capital allocation.
In February 2017, our board extended and increased our share repurchase program by authorizing the repurchase of up to $300 million of the company's outstanding common stock through December 31, 2019.
During the first quarter, approximately 470,000 shares were repurchased for a total of $15.6 million at an average price of $33.15 per share.
As of March 31, 2018, $208 million remains of the $300 million authorization.
Since share repurchases began in August 2014, the company has repurchased a total of 15.2 million shares at an average price of $34.38 per share.
Of note during the quarter, we extended the maturity dates of both our revolving credit and accounts receivable securitization facilities to maintain our strong financial flexibility.
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.
We believe our long-term operating performance, our sustained high level of ROIC, and our demonstrated commitment to delivering on our strategic plan, including our balanced approach to capital allocation, delivers long-term value to our shareholders.
I'll now turn the call back to Brad for perspective on the balance of the year.
Thanks, <UNK>.
Before we take your questions, I want to say that despite tough times in the tire industry and for Cooper, we are optimistic about Cooper's future.
In the near term, we expect operating profit margin performance in the second quarter to be similar to the first quarter as we continue to navigate through a turbulent market environment.
However, we do expect industry demand to improve in the back half of the year.
We expect that with this improvement, our actions to drive volume and to reduce costs will result in operating profit margin approaching our stated 9% to 11% range for the second half of 2018.
We have a strong brand with great consumer loyalty, an attractive value proposition and exciting new products that will be coming out at a faster cadence.
We believe that long term, Cooper will continue to be a strong global tire competitor that delivers value to our shareholders.
That's all we have for our formal remarks.
Let's move on to your questions.
Operator, will you take the first question please.
Thank you, Chris.
Sure.
Thanks, Chris.
I think that the way that we would describe the environment in North America right now is, frankly, similar to what we saw in the second half of last year.
You'll recall in the first part of last year, especially in the first quarter, raw material prices began to increase rather sharply.
There were some market pricing events that took place starting in the first quarter.
We announced our increase in March and into the second quarter.
And then as the industry softened through the year, or continued to be relatively soft, especially in the second half of the year, we did see a pickup in promotional activity.
I don't think that we've seen an increase in that level of activity as we get into the first quarter, but we certainly have seen a continuation of it.
So I'd say it's relatively consistent with what we were experiencing in the second half of last year on ---+ I know we are very focused on making sure we keep ourselves in an inventory position where we're not forced into doing things that we don't want to do on the promotional or price side.
You see that coming through the results in the first quarter in our manufacturing costs on ---+ and in general, as we look at the market, I ---+ again, I'd say that it's relatively similar to what we were experiencing in the second half of last year.
Well, I think there are many factors, but there are certainly a few that I'd highlight within that, Chris.
We do expect that industry demand in the U.S., which is obviously extremely important for us, is going to pick up in the second half of the year.
All signs point to that, and we believe that, that will be the case.
We believe that we're extremely well positioned to take advantage of that right now.
In particular, I mentioned in the comments earlier that we're coming out with our new A/T3, which is an extremely important ---+ and has been very successful for us over time.
And yet, we're positioned to take even more advantage of the market with this new and improved A/T3 coming online.
So we do expect volume and Cooper's performance relative to the market to be a contributor in the second half of the year.
We also do believe ---+ we did ---+ we took some actions.
We talk about the things that we can control, and we can control costs.
We took actions beginning in the fourth quarter and continuing into the first quarter of this year to restructure our corporate headcount and SG&A.
So we've reduced costs there, and we'll begin to see more on contribution from that as we move forward.
And importantly in the manufacturing footprint, we've downsized specifically in Mexico on our capacity in order to make sure that we're aligned to demand.
And we had costs associated with that in the first quarter this year, both of those events, and we should see benefits from those as we move into the second half of the year.
Yes.
The real rationale there is Roadmaster has been, and will continue to be, a fantastic product for us on ---+ it competes in specific segments within the TBR industry.
So the owner-operators and the trailer OEs have been a space that has driven that success for Roadmaster.
On Cooper, it's going to allow us to enter other segments of the TBR market, specifically the fleet portion of that market, which right now is a terrific place.
The timing of this introduction of the Cooper brand couldn't be better with what's going on in the TBR industry in the U.S. And our entry into that part of the market, we really look forward to seeing the results from that moving forward.
So clearly, the sell-in is soft for the industry.
And we were in line with USTMA, but it was with a weaker industry for sell-in.
Anecdotally, we are hearing that there has been some evidence of stronger sell-out.
And frankly, with some important customers of ours, we've heard that Cooper sell-out has been good within some of those improvements that they've seen.
On looking back on the first quarter in whole and then carrying back even into the second half of last year, the trend that we have seen and believe has existed through the second half of last year and at least into the first part of the first quarter, were weaker sell-out trends.
Whether ---+ we are hearing anecdotally that there may be a turn in that right now, we'll see.
Yes, I think it's a bit of both, <UNK>.
I do believe that there has ---+ there had ---+ the macro environment suggests that people are utilizing their tires.
And at some point, that means they're going to need to replace those tires on ---+ as we move forward on ---+ we're ---+ and I don't think we're alone believing that, that time is coming sooner rather than later.
And we're talking about it in the context of the second half of this year.
I'd also say that there are some newer contributors to that when you look at the implications from the reduced tax environment in the U.S., which should put more money into people's pocket, paycheck to paycheck, and also coming through the first round of tax filings this year.
We didn't see it in the first quarter.
You see the same numbers we do, where consumer durables were down a bit in the first quarter and savings levels were up.
But eventually, as people are utilizing their tires, they're going to need to replace them, and they should be in a better position to do so financially.
So without commenting specifically on some of the recent announcements or specific customers on ---+ to put it into context for Cooper, our distribution ---+ the wholly owned part of our distribution is largely to service into our wholesale distribution customer network.
So we're partnered with wholesale distributors of all sizes, from the very large national representatives, to large regional representatives, down to smaller independent wholesalers and distributors.
And we believe going forward that that's still the right model for Cooper to continue on, to work with our customers as our fulfillment arm to deliver customers if ---+ when they want them, where they want them and at the value they want them going forward; that we're better off taking our capital and investing it in new products and plants and our people and leaving the fulfillment part of our business to our customers who we have strong relationships with.
Having said that, we also believe that with the changes and the disruption that it's bringing to the market in the U.S., that it provides unique opportunities for Cooper.
We're looking at that more holistically.
We think we're really well positioned right now with the strength of the Cooper brand and where we're at with ---+ on the freshness of our product portfolio as we stand today, and as we introduce the new A/T3 that I've been talking about, that there are opportunities that will present themselves to Cooper as a result of some of the changes that are happening in the U.S. market right now.
Yes, that's a restatement related to the implementation of the revenue recognition standard.
And so there will be ---+ there is some more detail about that in the Form 10-Q that will be filed today.
We may see ---+ we've seen a little bit ---+ or we've had a little bit of an increase, and we may continue to increase our R&D resources.
Having said that, part of the reason that we went through the restructuring that we did at the end of last year was to ensure that we could keep SG&A levels, in total, and cost of good levels to the extent that ---+ on the fixed part of that, in line with what we've been spending historically but to be in a position to invest in some of the things that we need to invest more in, like R&D capability to support our product cadence and to support the part of our business, of OE, which is beginning to flourish.
Well, I'm not ---+ you're going to get me on those words.
I'm not sure which ones we used.
But frankly, it was about flat, just up slightly in the first quarter.
But that is a little bit of a timing thing.
We are still expecting double-digit growth in third-party sales in Asia this year.
It's a little bit of that.
It's a little bit of when the new year fell this year relative to the way that OEs order.
So it was really more timing than anything.
Again, without commenting specifically on any of the announcements that have come out at the beginning part of this year, we really believe that this is an opportunity for Cooper, Cooper's brand to take even a bigger position in some parts of the market.
And we're actively working on those right now.
Related to the timing, the second quarter versus the second half, it is a little bit driven by our expectation about the market rebound.
And again, we have also received anecdotal comments and evidence that there might be some turn in the sell-out volume, which could impact the sell-in.
Part of this though, while our inventories may be in a good position, it doesn't necessarily mean that all the channel inventories are in good position and that there might need to be on ---+ there may be some time required in order to fix that in the channel in general, that could impact the timing of when we all begin to see the benefits of a stronger market in the U.S. in particular.
So the volume part of that is really the biggest contributor to the comments related to the second half versus the second quarter.
As we do move into the second half of the year, beyond the expectations that we'd have for a stronger market in the U.S., we do believe that that's when we're going to begin to see benefits from some ---+ from the A/T3 product launch.
While we'll begin shipments of that in this quarter, that will really begin to impact our sell-in on ---+ more so in the third quarter and for the balance of the year.
And we believe that we're going to be in a much better position on ---+ with regard to our manufacturing situation and filling that back up when we get into the second half of the year.
Those are the, really, the 2 biggest contributors to what our expectations are for the second half.
We haven't provided specific guidance on that, and we will see some benefit.
And I would also reinforce that we'll take up ---+ on the SG&A side of that, in particular, we will be reinvesting a portion of that into some skill sets and capabilities that we need to deliver the strategy that we have going forward.
So it'll be a little bit partially offset.
But we do expect that there will be improvements from that as we get into the second quarter and beyond.
Well, first of all, the inventory is on ---+ and I'll let <UNK> provide some more specifics on this ---+ but it's an increase in the dollar level of inventory that we have.
Actually, the unit level of inventory we have is down in the quarter, even with some important events like the prebuild of the stock for the A/T3 launch and the transition that we're making with our TBR warehousing approach in the United States to better service our customers on ---+ but <UNK> may ---+ you want to comment on that.
Yes, I will.
So the dollar value of inventory is up year-over-year, although units are down.
Tire inventories are down year-over-year.
And as Brad said, really, that's about building some inventory of high-value items for the A/T3 launch and the TBR inventory that we're stocking into some of our new mixing warehouses.
But, <UNK>, I think was your question also about margins in the second half and what's driving our assumption around margin.
So we certainly do continue to balance the production levels with inventory.
And assuming that we see the pickup that we think we'll see in the second half of the year, I think our hope is that we will have less manufacturing costs.
I think it also goes back to the point Brad made a couple of minutes ago, with our planned launch of the A/T3 and our hopes that the market picks up in the second half of the year; and finally, the programs that we're driving internally, the cost savings and some of the actions we've already taken.
Those are the big drivers of what's going to impact our margin in the second half.
Brad, anything else you want to add.
Yes, the thing that I should add on ---+ because it relates to the first part of your question, is some of the areas where we're expecting volume growth around the A/T3 and around TBR are ---+ that will be favorable to mix as well as we get to the second half of the year.
It richens the mix of the products that we'll be selling.
It will begin in the second quarter, but you're going to really see a bigger impact from that in the third and the fourth quarter.
Well, we believe that, that time is near.
And there's a couple of things to highlight here, and I appreciate the question because it will allow us to do that.
One is ---+ and we've mentioned this in our last call and stopped because we're largely through it, but over the last few years, we have dramatically reduced our exposure to private brand wholesale on sales in the United States in particular, over 5 million units.
Again, we're largely through that transition now, and we have opportunities to grow in the other parts of our business.
In the other parts of our business, the areas that we've highlighted that ---+ where we don't have an appropriate share of the market for Cooper, is ---+ are in e-commerce, it's in auto dealerships, it's in general merchandisers among others.
But those are 3 areas that we really are emphasizing right now that we need to increase our exposure.
That will be helped by some of the OE relationships that are developing for us right now and that we'll be able to talk about more as we actually begin to supply those starting later this year.
Yes, I ---+ well, we're going to ---+ we do continue to have a strong balance sheet on ---+ and are pleased to be in that position.
We will continue to balance on what we're investing in the business to deliver our strategic priorities versus other ways that we can return to shareholders.
Obviously, we'll be looking at share price, among other variables, to make those decisions.
We do plan on having a more thorough conversation around capital allocation at our Investor Day on May 11, so I'd leave it there for the moment.
Okay.
Thank you, operator, and thank you all for being with us on the call today.
As I said earlier in the call, we do not expect that the current industry challenges represent a new norm for the tire industry.
Macro trends do remain positive and should ultimately drive improvement.
The programs that we have already started, combined with our strong business model and global footprint, position us well to benefit over the longer term.
We look forward to speaking to you soon at our Investor Day on May 11.
And as always, please reach out to <UNK> with any further questions or comments.
Thank you.
