Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Cooper Tire & Rubber Co (NYSE:CTB)
Q2 2018 Earnings Conference Call
Aug. 6, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Cooper Tire & Rubber Company's Second Quarter 2018 Earnings Call and Webcast. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jerry Bialek, please go ahead.

Jerry Bialek -- VP and Treasurer

Good morning everyone and thank you for joining the call today. This is Jerry Bialek, Cooper's Vice President and Treasurer and I am here with our Chief Executive Officer, Brad Hughes; and Ginger Jones, our Chief Financial Officer.

During our conversation today, you may hear forward-looking statements related to future financial results and business operations of Cooper Tire & Rubber Company. Actual results may differ materially from current management forecasts and projections. Such differences may be a result of factors over which the company has limited or no control. Information on these risk factors and additional information on forward-looking statements are included in the earnings release we issued earlier this morning and in the company's reports on file with the SEC. During this call, we will provide an overview of the company's second quarter 2018 financial and operating results as well as our updated business outlook. Our earnings release includes a link to a set of slides that summarizes information included in the news release and in the 10-Q that will be filed with the SEC later today.

Please note, 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.

Bradley Hughes -- CEO

Thanks, Jerry and good morning everyone. I want to start out by thanking those of you who attended our Investor Day event in New York on May 11th. It was a very good discussion and we appreciate your continued interest in Cooper. If you were not able to attend, as a reminder, a replay is available on webcast at the Cooper website, coopertire.com. Just click on Corporate, then Investors and then on Events and Presentations.

I will begin our call with a brief overview of our second quarter 2018 financial results, which Ginger will then discuss in greater detail along with capital allocation. Then, later in the call, I will update our outlook for the second half of the year and we'll talk about the progress we are making on some of our strategic goals and priorities. We'll then take your questions.

Now let's talk about the second quarter 2018 results. As anticipated, the tire industry remained challenging throughout the second quarter. In this environment, Cooper delivered results for the period that were in line with the outlook we provided including operating profit margin of 4.7% of net sales. Consolidated net sales decreased by just over 3% to $698 million. Unit volume decreased 2.1% compared to a year ago driven by a decline in the Americas segment, which was partially offset by increased volume in the International segment. Our US light vehicle unit volume decreased by 3.3% while the USTMA decreased by 0.6% and the total industry increased by 4.2%. A majority of our decline relates to the exit from nonstrategic private brand distributor business. While we have largely completed this transition in our business, the tail continued this year and had an impact on our second quarter comparison.

For Cooper, US consumer sell-out in the second quarter was strong with leading national retailers particularly for the Cooper brand. While we did not see strength in all regions and with all channels, the overall sell-out environment appears to be improving. I'll let Ginger provide a deeper dive on our second quarter results and then I'll come back with our outlook for the second half of this year, an outlook which we are revising primarily due to higher projected raw material costs. I want to reiterate that despite current challenges in the industry, we are confident that Cooper has the right plan in place as we detailed on Investor Day. Now, I'll turn the call over to Ginger.

Ginger Jones -- CFO

Thank you, Brad. I'll start with our second quarter financial review. Net sales were $698 million compared with $721 million in the second quarter of 2017, a decrease of 3.1%. Second quarter net sales were negatively impacted by $16 million of lower unit volume and $13 million of unfavorable price and mix, partially offset by $6 million of positive foreign currency impact.

Operating profit was $33 million or 4.7% of net sales compared with $84 million or 11.7% of net sales in 2017. Our 2017 operating profit has been restated to reclassify $9 million of other pension and postretirement benefit costs out of operating profit as a result of the adoption of Accounting Standards Update 2017-07, which changed the US GAAP accounting for pension and other postretirement benefit costs. Second quarter operating profit as compared with the same period in 2017 was impacted by the following factors, which are summarized on slide -- on page six of the supplemental slide deck: $21 million of higher manufacturing costs due primarily to lower production volumes and $20 million of unfavorability resulting from two items, $26 million of unfavorable price and mix primarily due to elevated promotional activity and competitive pricing actions, which was partially offset by $6 million of favorable raw material costs. In addition, operating profit decreased due to $4 million of lower unit volume and a $6 million increase in SG&A due to higher professional fees related to strategic initiatives and mark-to-market cost of stock based liabilities.

Our raw material index increased 4.6% sequentially during the second quarter from 156.6 in the first quarter of 2018 to 163.8 in the second quarter of 2018 as shown on page seven of the supplemental slide deck. This was 0.2% higher than our index of 163.5 for the second quarter of 2017 as raw material costs increased at a rate faster than we expected driven by oil volatility and steel tariffs. Second quarter net income was $15 million or $0.30 per share. This compared with $45 million or $0.85 per share in the second quarter of 2017.

Moving to our segment performance, I will start with the Americas Tire Operations. Segment sales for the second quarter were $584 million, down 5% from $615 million in 2017. This decrease was the result of $23 million of lower unit volume, $6 million of unfavorable price and mix and $2 million of unfavorable foreign currency impact. Second quarter operating profit in the Americas was $40 million or 6.9% of net sales compared with $91 million or 14.8% of net sales in the same period last year. Operating profit was impacted by $27 million of unfavorability resulting from $25 million of unfavorable price and mix as well as $2 million of higher raw materials costs (technical difficulty) $17 million of higher manufacturing costs, which reflects decisions to match production volume to demand and control inventory levels. In addition, operating profit decreased due to $4 million of lower unit volume and $3 million of higher other costs in the quarter. You can see the full profit walk for the Americas on slide eight of our supplemental slide deck.

Now turning to our International Tire Operations. Net sales for the second quarter were $168 million, up 10.9% from the second quarter of 2017 as a result of $11 million of positive foreign currency impact, $5 million of favorable price and mix and $1 million of higher unit volume. Unit volume in this segment was 0.7% higher in the second quarter of 2018 compared to the prior year as a result of increased unit volume in Asia, which was partially offset by a slight unit volume decline in Europe. Despite some macroeconomic challenges in Asia, our business continues to perform well with a strong OE order pipeline and growing replacement business. I would also note that the European decline was due to a shift in production of some intercompany units and third-party sales in the region were strong. The International segment operating results improved compared with last year with an operating profit of $6 million in the second quarter compared to $3 million in the same period a year ago. These results were driven by $6 million of net favorability resulting from $9 million of lower raw material costs, less $3 million of unfavorable price and mix, as well as $4 million of higher manufacturing costs and $1 million of other lower costs in the quarter. You can see the full profit walk for the International segment on slide nine of our supplemental slide deck.

Now turning to some corporate items. The effective tax rate was 12.6% for the second quarter compared to 32.7% in 2017. The second quarter 2018 tax rate includes the benefit of a lower blended US statutory tax rate as a result of US income tax reform and approximately $1 million of net discrete items recorded in the quarter. The rate is based on forecasted annual earnings and tax rates for the various jurisdictions in which the company operates. We now estimate the full year 2018 effective tax rate will be in a range between 23% and 26%. More detail on our taxes is available in the Form 10-Q that will be filed with the SEC later today.

Turning to cash flows and some balance sheet highlights. Cash and cash equivalents were $180 million at June 30, 2018, compared with $302 million at June 30, 2017. Cooper continues to focus on cash flow improvement actions including aligning production to demand and other working capital actions. Capital expenditures in the second quarter were $38 million. We continuously evaluate the appropriate level of capital spending in the current environment remaining prudent while also evaluating the capital needed to support our ongoing modernization, mix transformation and automation initiatives in addition to investments in capacity to align with our global strategic growth plan. We still anticipate our full year capital expenditures for 2018 to be between $200 million and $220 million. Return on invested capital for the trailing four quarters was 10.3% excluding the impact of unique fourth quarter 2017 tax activity.

Moving on to capital returns. 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 30, 2019. During the second quarter, approximately 517,000 shares were repurchased for a total of $13.8 million at an average price of $26.66 per share. As of June 30, 2018, $194 million remains of the $300 million authorization. Since share repurchases began in August 2014, the company has repurchased a total of 15.7 million shares at an average price of $34.12 per share. Cooper believes our existing cash, cash flows and potential leverage are more than sufficient to support our capital allocation priorities. We define those priorities as supporting our ongoing commitments, capital to support organic growth and margin improvement initiatives, acquisitions and partnerships, and funding our dividend and share repurchase goals. I'll now turn the call back to Brad for a perspective on the balance of the year.

Bradley Hughes -- CEO

Thanks, Ginger. Earlier I talked about Cooper revising our outlook for the second half of the year based on continued challenging conditions in the tire industry. Cooper and the industry are dealing with raw material costs that have risen faster than we expected. In fact, costs have returned to the high level where they were about a year ago and we expect a continued upward trend over time. Our latest outlook assumes our raw material index will be about 10% higher in the second half versus the same period in the prior year. Also, tariffs have been enacted on certain supplies and there are proposed tariffs that represent further risk with respect to raw materials and to tire imports.

As you know, the industry has historically offset raw material cost increases with pricing actions and we expect this to be the case going forward. In fact, we have recently begun to see pricing actions in certain segments and markets. Too soon to tell how rapid or widespread these will be, but this seems consistent with the historical industry reaction to rising raw material cost environment particularly during times of improving consumer demand. As always, we will look to offset such costs through pricing while remaining market facing and keeping our customers competitive. As we have discussed in the past, it takes some time for pricing to align with raw material cost increases, which can affect our business in the short-term. In addition, because we use the LIFO accounting method in the United States, we feel the impact of these cost changes before our industry peers.

As a result, Cooper has adjusted our expectations for the second half of this year. We now expect unit volume to be about flat in 2018 compared to 2017 with a modest sequential improvement in operating profit margin for the back half of the year. A lot depends on raw material cost trends and industry pricing. This compares to our prior projection for year-over-year growth in volume and operating profit margin approaching our 9% to 11% target range in the second half. Despite the short-term environment, we remain confident in our five-year financial targets, which include operating profit of 10% to 14%, annual unit volume growth in the low-to-mid single-digits and return on invested capital of 14% to 16%.

We continue to be focused on the things we can control including executing our strategic goals and priorities. One of our key strategies is to accelerate our new product introduction cadence and increase our speed to market. Cooper is launching 18 new products over the next 24 months and introducing mid-cycle product refreshes to meet the evolving needs of our customers and consumers. Our new Discoverer AT3 line for light trucks and SUVs is a prime example. This line replaces our former AT3 product, which has been one of our most successful tires, so expectations for it are big. We are proud of the outstanding performance and industry-leading mileage the new AT3 line delivers. We pulled ahead the trade launch of this new line up by more than a year to mid-June and so far sell-in has been strong. With the performance of this new line and the major marketing push that we're putting behind it to drive sell-out demand, we look forward to seeing the consumer response to this new line.

Expanding within new channels is another important strategy for Cooper. We have told you about our successes with online sales channels such as Tire Rack and TireBuyer and the multiple Top 10 rankings our tires are earning on these sites. As we continue to build out our e-commerce and online presence, Cooper is very excited to have recently initiated a relationship with a leading retailer's online site. This new relationship will significantly enhance our ability to reach consumers and help Cooper be where consumers want to shop for and buy tires today.

You have also heard us talk about the importance of digital, and Cooper has been actively engaged in some comprehensive digital marketing tests that are enhancing our learning. We recently established a dedicated digital marketing team within Cooper to build on the work we have been doing in this area. In addition to these efforts, we continue to focus on actions to effectively manage our inventories and reduce costs. One of these efforts included the corporate restructuring and reorganization we effected in December of last year. This has allowed us to augment our team with some talented consumer-focused leaders with the experience to help us deliver on our strategic priorities.

As we discussed at our Investor Day, consolidation and tire distribution is disrupting the industry landscape. We continue to believe that this disruption presents a growth opportunity for Cooper. In fact, we have seen a very favorable response to our dealer conquest program. For example, our new dealer enrollments have more than doubled year-to-date and our efforts continue. Obviously, it will take some time for this to 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 strategic priorities.

Cooper also continues to possess 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. That's all we have for our formal remarks. Let's move on to your questions. Operator, will you please take the first question.

Questions and Answers:

Operator

Sure, we will now begin the question-and-answer session. (Operator Instructions) And our first question today comes from Christopher Van Horn with B. Riley FBR, please go ahead.

Christopher Van Horn -- B. Riley FBR -- Analyst

Good morning, thanks for taking the questions.

Bradley Hughes -- CEO

Hi, Chris.

Christopher Van Horn -- B. Riley FBR -- Analyst

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

Bradley Hughes -- CEO

On -- couple of things there, one with regard to the second half, things are beginning to come around as we thought they might. The first and most important sign are the improving signals that we see around sell-out demand. We talked a little bit about what we're seeing in our channels, but that the overall environment is improving and then we hear commentary from other corners that indicate that sell-out demand is improving and that's the important sign that we've been monitoring on because we think that it's going to create market conditions where we will see some pricing. We have begun to see some pricing, specifically where we've seen the most strength in consumer sell-out whether it's in markets outside of the United States or within certain segments within the United States, there are growing signs and frankly growing chatter about price increases for tires and we clearly will be monitoring that and making sure that we participate when appropriate for Cooper.

The other part of it is we look at raw materials and the fact that they -- from our perspective they have increased a little bit faster and to levels that are little bit higher than what we've been anticipating. Again, we think that that's something that the industry will respond to as it has historically and we're starting to see those signs especially with the higher levels of raw materials that we've seen more recently. So calling exactly when that's going to happen is going to be a little bit challenging on, it will -- it always takes a little bit of time for increases to be announced and then implemented into the market and different players will act at different points in time, but the good sign is that we're actually starting to see some real actions out there on and hearing even about potentially even some more actions.

Christopher Van Horn -- B. Riley FBR -- Analyst

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

Bradley Hughes -- CEO

We'll stay away from talking about particular customers as we typically do, but the on -- again, we're seeing as we put these new -- taking the online on e-commerce example that we've been talking about here recently on, the more of those that come on and the more reach that they have to consumers who are buying more and more in that space and doing more and more research in that space, we expect to begin to see improvements coming from those channels as we move into the second half of the year. There will be more that builds on that over time and we continue to think that we're going to see the improvements coming from these new channels, not only in the second half of this year but moving into next year.

Now balancing against that, we've talked about the exit that we are managing from the nonstrategic private brand wholesale business that we have, which we really are reaching the tail-end of that process, but it could have an impact in any particular quarter as we go forward and complete that process. Again in March, part (ph) behind us, but something that's balancing off against some of these new channels and also with regard to these new channels that, when you look at the structure of the industry as these new channels are growing, some of the more traditional channels are declining a little bit at the same time. So while we see improvement and contributions from these new channels that to some degree will be balanced off against the traditional channels, which are becoming a bit smaller at the same time. Hence, our guidance for the second half of flat volume before we get into the longer-term outlook for global growth in the mid-to-low single-digits.

Christopher Van Horn -- B. Riley FBR -- Analyst

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

Bradley Hughes -- CEO

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

Christopher Van Horn -- B. Riley FBR -- Analyst

Okay, great, thanks for the time.

Bradley Hughes -- CEO

Thank you.

Operator

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

Anthony Deem -- Longbow Research -- Analyst

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

Bradley Hughes -- CEO

Well, the challenge as always is trying to project the magnitude and the pace at which raw materials are going to move and then similarly the timing and the response with the pricing that will come, but it's a matter of when and what that lag looks like. In our second half, we've talked about what our raw material guidance is. I would say that we've been relatively more conservative at this point with what we've included in our outlook around pricing. However, you don't know what that timing is going to -- how it's going to roll out and we need to, as we've learned a couple of times, be very prudent about when it's appropriate for Cooper to come into the market with its pricing. We will and we'll be there, but we want to do it in a way that is going to be competitive against other actions that are taking place and that it's going to support our customers being market faced and competitive.

So the timing is a little bit still uncertain. We've talked about what our second half outlook is and if we were to see faster responses in pricing, then maybe there's some opportunity there, but we've guided to modest sequential improvement with regard to our margins. As we get into next year, if in fact the pricing is in place, before we get to the end of the year, I do think that we could be looking at a stronger year next year than some had been projecting, but again, I hate to get too far ahead of this because we're just starting to see the pricing activity that we've been waiting for and that's great, but the timing of how that's going to actually impact the market and the industry margins including Cooper is a little challenging to project.

Anthony Deem -- Longbow Research -- Analyst

That's helpful and yes, my back-of-the-envelope math suggests your second half 2018 margin guidance does not factor in price mix offsetting higher raw material costs. Obviously, the tier 1s haven't introduced anything in the US to my knowledge in terms of price increases, but I'm just wondering if that's an upside driver potentially to your back half guidance, do you view it as conservative and am I sort of thinking about dimensioning your guidance properly here in suggesting that there is no price mix offset in the back half?

Bradley Hughes -- CEO

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

Anthony Deem -- Longbow Research -- Analyst

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

Bradley Hughes -- CEO

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

Operator

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

Bret Jordan -- Jefferies -- Analyst

Hey, good morning guys.

Bradley Hughes -- CEO

Hi Bret.

Ginger Jones -- CFO

Good morning.

Bret Jordan -- Jefferies -- Analyst

Just on the volume guidance for the second half and it sounds like bullishly sell-out is improving and you're seeing some positive trends, but you are going to a flat guide. Is that, as you're selling more through the Amazon and ATD and Tire Rack type folks that you're seeing the volumes through your traditional channels decline to get to the (ph) flat or I guess -- how do I see the -- reconcile sort of positive color on sell-through and reduction in units?

Bradley Hughes -- CEO

Well, again you're right. One of the important signals here that we and others have been waiting for and we're starting to see more evidence that it's coming to fruition is with the sell-out and so that's a very good sign for the industry and we feel good about where Cooper is positioned to participate in that especially as we begin to add some of these new channels. Certainly, that work is not complete and we have other work to do there. I think the biggest factor that we've seen as an offset to that and this is over a much longer period of time, but we've seen it even recently, is the exit from the nonstrategic private brand wholesale business that we've had on the books for a period of time and again, these don't always happen simultaneously. If you lose, for example, a line of 50,000 or 100,000 units with one of those nonstrategic private brand segments of business, it may take several months or even three quarters in order to rebuild that through some of the new channels, which build over time more at the consumer level than it does in those bigger buys, but we are seeing it. We are also very enthusiastic about what we're seeing in response to our associate dealer conquest program. I mentioned earlier that at this point of 2018 we've signed up more than double the number of partners that we had signed up through the first half of last year, so we think that's working. We also think that that's very well supported by the new products that we're introducing including that new AT3 which we're really excited about the reception that we've had from our customers and we really look forward to seeing how the consumer responds to it over the next several weeks and months.

Bret Jordan -- Jefferies -- Analyst

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

Bradley Hughes -- CEO

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

Bret Jordan -- Jefferies -- Analyst

Okay, great. Thank you.

Operator

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

John Healy -- Northcoast Research -- Analyst

Thank you. Brad, the comment you made about 18 new products being launched over the next 24 months and a number of refreshes really kind of struck me as a good thing for volumes and I'm just wondering if you could put that in parameters of maybe the last 4 years or 5 years, how that new product launch catalog compares to what you've seen in the past and on the refresh side and as you maybe think about the volume opportunity associated with the new product launch, are we talking millions of units that this could be potentially generating on top of what you already sell and just trying to help understand the parameters of the refresh and the new launch in terms of what that really does mean to Cooper?

Bradley Hughes -- CEO

Yes, thank you for the question, and we're excited about this. It is a significant step up in the cadence of product introductions relative to what we've done historically. Having said this, most of these new products are replacing an existing product and so while we would expect, every time that we introduce a new product, our objective is to make it on (ph) -- to improve the performance and frankly improve the things that matter to the consumer relative even to the outgoing product. The AT3, I think, is an outstanding example of this where in response to what we were told by consumers, we've actually taken that product line and segmented it a bit, so that there was one that specifically for people that are driving SUVs -- large SUVs and are looking for a tire that's going to perform in all seasons including the winter season, so we've called it the 4S for all four seasons and that compares to the light truck for both the lighter and the heavier duty applications on that light truck segment to make sure that it performs well on the work sites that those customers are driving our tires on and really resistance to cut and chip. That along with the more aggressive styling that both have on, really seems to be resonating positively with our customers and with the consumers that have had a chance to experience it and we're looking forward to the full adoption by it. But the point is, we would expect that these are going to improve our competitiveness in every segment that we're introducing one of these new products and so we'd anticipate that, that's going to help with volumes and/or price and/or mix, but they are replacing other products and so how much further it's going to take us in these individual segments we'll see, but we clearly think that this is going to be a contributor to the volume outlook that we provided.

John Healy -- Northcoast Research -- Analyst

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

Bradley Hughes -- CEO

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

John Healy -- Northcoast Research -- Analyst

Great and then just one final question along this in line of thinking on raw materials. Your raw material price index, that doesn't include the impact of currency and thinking about Raws (ph), you're probably going to have almost a double negative in the third quarter with FX impacting the Raws just from a transactional based standpoint, right?

Bradley Hughes -- CEO

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

John Healy -- Northcoast Research -- Analyst

Much appreciated. Thank you.

Bradley Hughes -- CEO

Thank you.

Operator

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

Bradley Hughes -- CEO

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

Operator

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

Duration: 40 minutes

Call participants:

Jerry Bialek -- VP and Treasurer

Bradley Hughes -- CEO

Ginger Jones -- CFO

Christopher Van Horn -- B. Riley FBR -- Analyst

Anthony Deem -- Longbow Research -- Analyst

Bret Jordan -- Jefferies -- Analyst

John Healy -- Northcoast Research -- Analyst

More CTB analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.