Cooper Tire & Rubber Company
Q3 2015 Earnings Call Transcript

Published: 2 Nov 2015

[Operator:]

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

[Ginger M. Jones:]

Good morning, everyone, and thank you for joining the call today. This is Ginger Jones, Cooper's Chief Financial Officer, and I'm here with our Chief Executive Officer, Roy Armes; as well as Brad Hughes, our Chief Operating Officer. Also with us the in the room today is Jerry Bialek, our new Director of Investor Relations and Strategic Planning. Jerry joined Cooper in May 2014 as our Director of Financial Planning and Analysis, with a background in financial and operational roles in the automotive industry. Very recently, Jerry took on the new role leading Investor Relations and Strategic Planning and will be responsible for our Investor Relations program going forward. Jerry is someone you will have the opportunity to meet and work with in the future. 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 forecast and projection. Such differences may be a result of factors over which the company has limited or no control. Information on these risk factors and additional information on forward-looking statements are included in the earnings release we issued earlier this morning and in the company's reports on file with the SEC. During this call, we will provide an overview of the company's third quarter 2015 financial and operating results, as well as the company's 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. Following our prepared remarks, we will open the call to participants for a question-and-answer session. With that, I'll turn the call over to Roy.

[Roy V. Armes:]

Thanks, Ginger, and good morning. I will start by briefly covering our third quarter financial results, and then will focus on our efforts to expand the business in Latin America. Although Latin America is a relatively small market for Cooper today, we're excited about the opportunities that exist there. I will also highlight recent successes in our new product development efforts and additional initiatives at Cooper designed to position us well for the future. After that, I'll turn the call over to Brad and Ginger for a discussion of our operations and financial performance. I'll then return to present our business outlook; and following that, we'll open up the line for your questions. I'm very pleased to report that Cooper once again turned in a very strong quarter. Our third quarter performance was a continuation of the positive trends we generated in the first half of this year; and our performance was in line with our expectations. The third quarter was another outstanding quarter for the Americas segment, and congratulations to all the employees who contributed to those results. We delivered operating profit of $82 million or 10.5% of net sales, compared with $89 million or 9.7% of net sales a year ago. This is shown on page four of the supplemental slide deck. The decline in operating profit is more than explained by our divestiture of CCT last year. In fact, excluding the impact of CCT, our former joint venture in China, operating profit increased by 25% compared to the prior year. Based on the results that we'll talk about today and our outlook for the rest of the year, we believe that the company's operating margin for full year 2015 will be above the high-end of our midterm target of 8% to 10%, but below our year-to-date 2015 results. This strong operating margin is in line with our stated long-term goal for operating profit that exceeds 10% for the five-year strategic plan we presented at our Analyst Day in May of 2014. Total net sales in the third quarter were $782 million, an increase of 4.1% sequentially and a decrease of 15% compared to the same period a year ago. The decline is fully attributable to the absence of CCT this year. Excluding the CCT impact, our third quarter sales rose 1.6% and unit volumes were up 7% on a global basis. Diluted earnings per share for the quarter were $0.93 per share, compared with $0.77 per share for the same period a year ago. And we recognize that positive results like these do not happen without dedicated employees around the world who are committed to executing our strategic initiatives and staying focused on results. I want to thank all the employees for their continued efforts in this light. Now I'd like to spend some time talking about our strategic focus in Latin America, establishing a larger presence in Latin America is a key part of our strategic plan. The tire market in the region is projected to grow to approximately 175 million units by 2020, compared with demand of approximately 140 million units in 2014. Although smaller than the markets in our other regions, we're confident that Cooper has a significant opportunity in Latin America. We're building an outstanding leadership team and have a very capable manufacturing facility near Guadalajara. In addition, we're developing products specifically for the region. This formula has already resulted in a strong position for Cooper in Mexico today, where our market share is growing quickly. In fact, we're now one of the top five tire producers for the Mexican market. I mentioned our leadership team; we began strengthening this team back in February of this year with the appointment of Luis Ceneviz as the Managing Director of Latin America Tire operations. Luis comes to Cooper with more than 35 years of tire industry experience, having held top executive positions around the globe. His significant market knowledge and expertise has already had a positive impact on the business, and Luis is building a world-class team by assembling leaders with decades of experience, deep tire industry knowledge and specific Latin American operating expertise. And a core leadership team is in place today, and now we're working to build the infrastructure in Guadalajara to even better support our customers in the region. Our manufacturing capability in Mexico was pivotal to our future growth. For background, Cooper established a presence in Mexico in 2008, with an equity investment in a tire manufacturing facility near Guadalajara, Mexico. This facility was converted to a majority owned joint venture in 2011 and produces tires for the domestic Latin American market, as well as export to the United States. On the product front, we're focusing on creating tires specifically for the Latin American market across three major brands

[Bradley E. Hughes:]

Thank you, Roy. In my comments this morning, I will first update you on our efforts to add TBR capacity. Then I will talk about our unit sales and the raw materials environment. As we said in the second quarter earnings call, we are focused on three operational criteria as we evaluate options for additional TBR supply. One, finding a new source of high-quality, cost-competitive TBR tires for the North American market; two, finding TBR capacity and distribution for the China and Southeast Asia markets; and three, diversifying our TBR sourcing footprint to include potential production capacity both inside and outside of China to serve global tire markets. We believe that achieving all three of these criteria will likely require a series of actions rather than a single step. The efforts we mentioned in our second quarter analyst call that would provide an alternative source of TBR tires, including for the North American market, are progressing. It is still too early to provide specifics; and it is important to note that we also have other potential actions advancing. Obviously, there is the possibility that some or all of these opportunities do not come to fruition, but we remain confident that we will be able to secure alternative sources of TBR supply. Unit sales were good during the quarter with global units up 7%, excluding CCT. Total light vehicle tire shipments for the U.S. were up 1.5% during the third quarter, compared with an estimated increase of 1.7% for the industry and an increase of 6.6% reported by RMA members. You can see this detail on page six of the supplemental slide deck. We again saw strong performance in light truck and SUV tires, which outperformed the industry and the RMA. Passenger car volumes were lighter than industry-based on a very difficult comparison to Q3 2014, which was a very strong quarter for unit volume. In addition, increased sales of winter tires in the second quarter of 2015 helped our unit volume in the second quarter, but reduced in the third quarter. Year-to-date, we continue to outperform the industry by a significant margin and we continue to expect to outperform the industry. Commercial truck tire sales of the Roadmaster brand were very strong in the third quarter of 2015 compared with the same period a year ago. Commercial truck tire shipments for the U.S. were up 11.1% during the third quarter, compared with an estimated increase of 1.4% for the industry and a decrease of 3.3% reported by RMA members. For the full year, Roadmaster units are up significantly and also grew much faster than the industry. Excluding the impact of CCT, International segment units were up 6.1% with double-digit growth in European unit volume compared with the third quarter of 2014. European unit volume increased compared with the third quarter of 2014, based on high year-over-year sales of winner tires along with increased exports to the United States. Unit volume in China was slightly higher than the prior year quarter based on increased sales in the domestic China market for both replacement and OE tires, which offset the decline in exports to the U.S. due to the tariffs. Now I'd like to address the raw material pricing environment. We continue to experience a favorable pricing environment on raw materials. Consistent with our comments in the second quarter call, our raw material index was up slightly during the third quarter from 153.5 to 156.7, as shown on page seven of the supplemental slide deck. To put this into context, this was 19% lower than the 194.1 index in the same period of 2014. The trend during the quarter was up in July, then down in the months of August and September. As we look forward, we anticipate raw material costs will be down slightly in the fourth quarter of 2015 compared to the third quarter of 2015. Commodity prices have been impacted by global events such as the market instability and reduced growth expectations for China, so we remain cautious about our ability to forecast them precisely. Our global footprint gives Cooper the flexibility to produce tires in multiple locations around the globe to help our company and our customers remain competitive. That is always our overarching goal. Now I'd like to turn the call over to Ginger for an update on the third quarter financials.

[Ginger M. Jones:]

Thank you, Brad. As Roy mentioned, the third quarter results were strong continuing the trends from the first half of the year. Specifically, our third quarter results included earnings per share of $0.93, compared with $0.77 in the third quarter of 2014. For comparison, CCT contributed $0.19 to third quarter 2014 EPS. Strong operating performance in the Americas segment and a lower share count contributed to the improvement in EPS. Sales were $782 million, down from 2014. The decline was fully attributable to the absence of CCT. Excluding the impact of CCT, total company sales increased 1.6%. This increase was the result of higher unit volumes in both segments, which was partially offset by unfavorable price and mix related to lower raw material costs and negative currency impacts during the quarter. Operating profit was $82 million or 10.5% of sales, compared with $89 million or 9.7% of sales in 2014. CCT contributed approximately $23 million of operating profit in 2014. Third quarter operating profit, compared with 2014, was impacted by the following factors which are summarized on page eight of the supplemental slide deck. This included $55 million from lower raw material costs; and $6 million from higher unit volume. These positive factors were offset by $18 million of unfavorable price and mix, largely reflecting pricing and promotion in response to lower raw material costs. It also included increased selling, general and administrative costs of $13 million. Third quarter SG&A was $72 million, which compares with $68 million in the third quarter of 2014. The increase of $4 million in SG&A reflects the absence of CCT of $9 million, which was more than offset by higher estimated incentive cost based on the strong financial performance of the company of $5 million; increased brand and product marketing due to the timing of programs of $4 million; increased mark-to-market cost of stock-based liabilities of $3 million; and other costs of $1 million. Our SG&A spending also includes spending in China to support future growth, consistent with our strategy in the region. We also had $10 million of unfavorable manufacturing cost. As expected, this is a reduction from the $13 million in unfavorable manufacturing cost in the second quarter of 2015. The higher manufacturing cost were primarily experienced in the Americas segment, where Cooper incurred cost associated with the greater complexity of manufacturing higher value, higher margin tires, as well as increased pension expense and higher estimated incentive cost based on the strong financial performance of the company. While we've experienced increased manufacturing costs associated with producing greater quantities of higher value, higher margin tires, we are also seeing the benefit of higher margins in our improved operating margin result; and finally, $4 million of other costs. Moving on to our segment performance, I will start with the Americas tire operations. Segment sales for the third quarter were $702 million, up 1.2% from the $694 million in 2014. Unit volume increased 2.1%. Third quarter operating profit in the Americas rose to $102 million or 14.6% of net sales, compared with $76 million or 10.9% of sales in 2014. The major drivers of the increase were $49 million of lower raw material costs and $3 million of higher volume. These positives are partially offset by $9 million of unfavorable manufacturing costs. The increase was primarily cost related to manufacturing complexities, I mentioned earlier, related to higher value, higher margin tires and higher estimated incentive cost based on the strong financial performance of the company. We also had $8 million of unfavorable price and mix, as the result of pricing and promotions in response to declining raw material costs; $6 million of unfavorable SG&A costs. As we said during our second quarter call, the timing of certain brand and product marketing programs resulted in lower spending in the second quarter and a corresponding increase in the third quarter. In addition, we saw higher estimated incentive costs based on the strong financial performance of the company; and finally, $3 million of negative currency impacts and other costs. You can see the full profit walk for the Americas on slide nine of our supplemental slide deck. Now turning to our international tire operations. Net sales for the third quarter were $119 million, down from the third quarter of 2014. This decline was primarily attributable to the absence of CCT. Unit volumes were higher in both Europe and Asia, after adjusting for the absence of CCT. However, lower pricing related to lower raw material costs and currency offset the benefit from higher unit volumes. The absence of CCT reduced sales in the International segment by $183 million, compared with the third quarter 2014 sales before intercompany eliminations. Excluding the impact of CCT, unit volume in the segment was 6.1% higher in the third quarter of 2015 compared to the prior year. Excluding the impact of CCT, sales decreased $11 million as the higher unit volume of $8 million was not enough to offset $13 million of unfavorable price and mix related to lower raw material costs and $6 million of negative currency impacts. The international operations posted an operating loss of $5 million in the third quarter. The results primarily were impacted by $8 million from lower raw material costs and $3 million from additional unit volume, excluding CCT. These improvements were more than offset by $23 million from the absence of CCT; $13 million from lower price and mix, as a result of lower pricing reflecting lower raw material cost; and $3 million of other costs. You can see the full profit walk for the international operations on slide 10 of our supplemental slide deck. Turning now to some corporate items. The effective tax rate was 31.4% for the quarter, compared with 32.9% last year. Discrete items during the quarter included research and development tax credits and the release of reserves for effectively settled uncertain tax position. The tax rate is based on forecasted annual earnings and tax rates for the various tax jurisdictions in which the company operate. We expect our full year 2015 effective tax rate will be in the range of 34% to 37%. More detail on our taxes is available in our Form 10-Q that will be filed with the SEC later today. We expect SG&A expense will be in the range of $265 million to $275 million for the full year. Our pension expense in the quarter was $12 million, up from $9 million last year. We expect full year pension expense to be in the range of $45 million to $50 million. Turning now to cash flows and the balance sheet. Cash and cash equivalents were $424 million at September 30, 2015, compared with $336 million at September 30, 2014. Cash generated by operating activities were $86 million in the third quarter. Capital expenditures in the fourth quarter were $40 million. We expect full year capital expenditures to be between $195 million and $205 million. Depreciation and amortization in the third quarter was $31 million, consistent with previous quarters. We expect depreciation and amortization to be approximately $125 million in 2015. And as a reminder, we believe our existing cash, cash flows and potential leverage are more than sufficient to support our capital allocation priorities, which we define as

[Roy V. Armes:]

Just one point of clarification on Ginger's comments. The third quarter CapEx spend was $40 million in the third quarter. She may have said fourth quarter there. Thanks, Ginger. In summary, Cooper delivered a very solid third quarter, putting us in a very good position as we head into the final quarter of the year. Our third quarter performance was the result of continued great results in the Americas segment from both a volume and operating profit perspective. Despite difficult end markets, in some of our international regions, we continue to see encouraging trends in our international unit volume. Our new products and improving mix of sales focused on higher value, higher margin tires positions us well in a highly competitive market. And for the full year, we expect to exceed the industry unit volume growth of the U.S. and continue unit volume growth in the international markets. As we've discussed, we anticipate slightly lower raw material cost globally and some normal seasonally higher cost in the Americas in the fourth quarter. We anticipate that profitability will improve in the fourth quarter of 2015 in our International segment, while still generating an operating loss for the full year. Full company operating margin for 2015 is expected to be above the high end of our midterm target of 8% to 10%, but below the year-to-date result because of the normal seasonally lower volumes and expected cost increases in the fourth quarter. And as we said during our Investor Day last May and have continued to emphasize, our midterm goal is to consistently deliver operating margin of 8% to 10%. And as we've reported, our actual performance in 2015 is ahead of this and is aligned with our long-term goal for operating margins that consistently exceed 10%. This gives us confidence that Cooper is making the right investments in the business to help us compete well in a volatile economy and industry; and our focus in 2015 continuous to be guided by our strategic plan, which calls for driving top line profitable growth, continuing to improve our global cost structure and improving profitability while also strengthening our organizational capabilities. Now that's all for our prepared remarks, I think I'd like to the move to the questions – Q&A session. So, operator, if you'll take the first question, please.

[Operator:]

Sure. And our first question will come from Rod Lache of Deutsche Bank.

[Patrick E. Nolan:]

Good morning, everyone. It's actually Pat Nolan on for Rod.

[Bradley E. Hughes:]

Hi, Pat.

[Patrick E. Nolan:]

A couple of questions. Just first on the guidance for Q4, do you think international can actually post the profitability or even breakeven in Q4, or you still expect that to post a loss?

[Bradley E. Hughes:]

I think, Pat, at this point the comments that Roy made are what we're prepared to say, which is that it's going to improve from what we saw in the third quarter. And we expect to see that improvement continue into next year without declaring whether it's going to be breakeven or beyond in the fourth quarter specifically.

[Patrick E. Nolan:]

Okay. That's helpful. And can you expand a little bit on the M&A process. I know originally you were hoping to be able to announce something by year end. It sounds like that's a little less certain at this point. Is it a matter of negotiations and pricing at this point or just what you see as the kind of the key hurdle to getting something announced between now and year-end?

[Roy V. Armes:]

Yeah. Pat, we're still in discussions with this and there is some negotiations. There are some negotiations going on at this point in time. We're not in a position to announce. We're still hoping that we have something to communicate by the end of the year, but we feel we are encouraged on where we are and what the opportunities and possibilities could be there.

[Patrick E. Nolan:]

Got it. And if I could just sneak one more in. There has been some M&A in this space on the retailer side; most notably Bridgestone bought Pep Boys. Can you just let us know, I think Pep Boys was a large customer at one point for you, is that still the case? And just how do you see this kind of change in the distribution network affecting you going forward?

[Bradley E. Hughes:]

Pat, it's Brad. As you, I think, likely know we don't talk about specific customers, but we have seen consolidation in the distribution channels. We expect that that's probably going to continue as we look forward. In some cases, those consolidation activities can result in opportunities for Cooper; and others, not so much on. But we're very confident that with our product portfolio and the way we deliver value to our customers that we're going to continue to succeed.

[Patrick E. Nolan:]

Got it. I'll get back in the queue. Thanks.

[Roy V. Armes:]

Right. Thanks, Pat.

[Operator:]

And our next question comes from David Tamberrino of Goldman Sachs.

[David J. Tamberrino:]

Thanks. Good morning, and thanks for taking my questions. On the International segment, just following up there, what volume do you think you need to become breakeven? And how long kind of given the current operational size does it take for the company to organically grow that segment into being a more meaningful earnings contributor?

[Bradley E. Hughes:]

So with regard to the volume, without providing a specific volume number, we're approaching that number again. I didn't give any specific guidance intentionally to Pat a moment ago, but we are approaching that volume level where we should be in a position to, at a minimum, breakeven in those markets. When exactly that happens, we won't project at this point, but we're approaching those volume levels now. Beyond that, as we look at introducing new products, particularly in Europe right now we've got a very strong slate of new products that are coming to market right now, many of which are going to be produced in our new facility in Serbia, which continues to help our cost position. Those elements are going to also help us to move in that same direction. In Asia, we're continuing to see very good progress in our OE presence, which is, as we've declared many times, a very important piece of the strategy; and that continues to move forward with good success. So things are moving in the right direction in the key markets of international, and we're getting there soon.

[Roy V. Armes:]

David, I would just add. This is Roy. I would just add related to this, we did make the conscious decision before knowing that we were going to move down to some M&A possibilities to maintain a higher cost structure there that we thought we were going to need when we got in these M&A. I would tell you the team over there has done a lot to really aggressively manage their cost recognizing where we are and what we need to do in that business. But a lot of this breakeven that you're asking about is going to depend a lot on the kind of M&A that we make and what we have to invest in another operation to be able to longer term grow the volume and the profitability in that region.

[David J. Tamberrino:]

That's fair. And then just on that second subject, I think you guys received somewhere to the tune of $200 million plus net from the sale of your CCT JV last year. Is that still kind of what is being earmarked as you think going forward for a potential new partnership or maybe building your own, or how do we quantify kind of what do you think is going to take that to bring the levels back up to where they previously were?

[Roy V. Armes:]

Well, I think at this point in time I wouldn't like to characterize it as earmarking that money for that. Well, I think we want to make smart investments here. And it may or may not be bigger or less than that. But as long as we know we can get the kind of payback that we're looking for which when we sold off our 65% CCT, that was really a very good value creating proposition for our shareholders. So we're looking at the same thing there. We weren't necessarily earmarking that money for just the M&A. But we also, as we've done in the past year, we announced another $200 million worth of share repurchase here earlier this year. And we're going to continue to look at our capital allocation process and what really makes sense for, not only what we have to invest in the business, but are there still opportunities to give back to the shareholders.

[David J. Tamberrino:]

Okay. That's fair. I guess, we'll wait for more as that continues to progress. And just lastly from me, in the Americas segment we saw the final implementation of the tariffs on China imports come to fruition and go into place in early August. I'm wondering if there's been any significant shift or meaningful shift in competition or disruption of supply lines as we've seen those imports really decline significantly year-over-year and just how that's affected the pricing environment?

[Roy V. Armes:]

Well, I would say, I'm not sure where you get your numbers from, there's been a significant decrease in the Chinese imports, I think, as the result of some of these tariffs. But, overall, the imports are still down from the last numbers I saw, David, is down, but not to the same level as just the – coming in from China. I think there's been a shift to other countries, some manufacturing going on in other countries, other countries finding an opportunity without the Chinese imports to be able to import into the U.S. So while it's down, it's not down significantly from the last numbers that we saw. It is down significantly coming from China. But the other countries have picked up some of that slack. So we expect the competition to still be highly competitive over the next several years, and we're positioned to deal with that.

[David J. Tamberrino:]

Okay. And just clarifying, I had have seen imports down, but China is significantly down. But that hasn't necessarily helped to alleviate any pricing competition?

[Bradley E. Hughes:]

I mean, I think that the market continues to be competitive. But having said that, through the third quarter we continue to see pretty good price discipline within the industry. Raw materials continue to be very low and there has been some response to that. But overall there has been, from our perspective, good discipline in the industry.

[Roy V. Armes:]

No. I think there's a couple of things that we're looking at. One, the raw materials, but there is also a currency impact as well that we've got to stay close to make sure that we can see how pricing is changing. But to Brad's point, it has been fairly disciplined.

[David J. Tamberrino:]

All right. Thank you. That's helpful.

[Operator:]

And the next question comes from Bret Jordan of Jefferies.

[Bret Jordan:]

Hey. Good morning.

[Roy V. Armes:]

Good morning, Bret.

[Bradley E. Hughes:]

Hey, Bret.

[Bret Jordan:]

A question on the Asian OE versus replacement mix. Could you give us a feeling for what the ratings are in both of those buckets and maybe the growth rates that we're seeing in both of them?

[Bradley E. Hughes:]

They're becoming closer. The OE part of the business is growing faster than the replacement. Replacement is still a bit bigger than the OE. But as we continue to have success in OE and the growth rates are a bit higher in OE, they're going to come closer together as we look forward. So, at this point, replacement is still a bit larger than OE, but OE is moving up on replacement given the growth rates there.

[Bret Jordan:]

Okay, great. And then I guess as we look at where the Chinese tires that maybe aren't being sold as deep discount in the U.S. today with the tariff, where do they get diverted to? Is it a market that is now particularly more competitive, i.e., Europe or did they stay in Asia, where is that production being dislocated to?

[Bradley E. Hughes:]

I'm sure there's a little of it going to a number of markets. Clearly, there have been implications on the China market, both in terms of tires that are remaining there that might have been targeted for export at a point in time, but also I think that capacity – the production of tires is being affected by that in China as well. So the supply of those tires is probably lower than what it would have been if there hadn't been a tariff in place, those out of China.

[Bret Jordan:]

Okay.

[Roy V. Armes:]

And, Bret, we're not seeing as much impact in Europe as some people might think. I think we're seeing a little more impact in the Middle East and Africa and other countries outside – to Brad's point though, there is a lot of domestic – some of this are being are diverted into the domestic market in China. We've also at the same time seen some capacity coming offline with Chinese manufacturers, some are going bankrupt, some being turned over to other entrepreneurs. So there is that consolidation that's taken place as well in China. So we haven't seen as much in the U.S., obviously it's down significantly. We haven't seen as much in Europe and they're being diverted to other markets including domestic market.

[Bret Jordan:]

Okay. All right. And a big picture question, on the guayule, that's the rubber alternative, at what point do you see that being commercially viable? And I guess to some extent, given the visibility you have on it, is there a point where you can source that at an equivalent price per pound as natural rubber today?

[Roy V. Armes:]

Well, I think right now we're probably closer to this becoming commercially available than we think. We said that by 2017 we think we can get guayule and replace all the rubber and synthetic rubber that we have in the tire on a pilot trial basis, but I think within this decade you can see some commercialization of that. Now in terms of the cost, initially obviously it's a little bit higher cost to start with, but it's got some great properties. And I think as the volume increases, you'll see a highly competitive market take place there in our minds anyway that should be comparable to current rubber today may be even better.

[Bret Jordan:]

Yeah. Thank you.

[Bradley E. Hughes:]

I think a complete tire, as Roy was saying, a prototype tire that substitutes guayule for all of the natural and synthetic rubber, we'll be looking at within the next few years. But commercially, I think, we could see it in components of the tire in the reasonably near future.

[Bret Jordan:]

Okay. You're saying as in before the complete tire that you might actually be having this on a commercial volume prior-2017 or post-2017?

[Bradley E. Hughes:]

Well, we're going to be looking at where we can introduce it effectively, which may be at a component level versus the entire tire. We'll be targeting it at certain components before we do the whole tire, was the main point.

[Roy V. Armes:]

Which is what we've already done in the drive testing at our test facility, Ride & Drive and we were really encouraged by that.

[Bret Jordan:]

Okay. Thank you.

[Operator:]

And the next question will come from the line of Ryan Brinkman of JPMorgan.

[Ryan J. Brinkman:]

Hi. Good morning. Thanks for taking my questions.

[Roy V. Armes:]

Hey, Ryan.

[Ryan J. Brinkman:]

You provided an indication on raw mat costs for 4Q, do you have the sense yet for how raw mats might track in 2016 versus 2015, it seems that you were to just sort of straight lined the current spot prices, it could be a benefit at least in the first half of the year?

[Bradley E. Hughes:]

Yeah. As you know, Ryan, we provide specific guidance only one quarter out; and we've indicated we think it's going to be slightly lower in the fourth than the third. Having said that, when we look at the macro environment, we don't see anything specific that would change the environment that we're going to be looking at in the fourth quarter. Now you're always subject to an event here or an event there that might affect that, but the macro environment as we look at, we don't see anything on the horizon that would significantly change what we're expecting to see in the fourth quarter as we get into 2016.

[Ryan J. Brinkman:]

Okay. That's helpful. Just a follow-up, I'm curious if you think that the raw mats are the primary factor that is allowing you to operate above your 8% to 10% target range, and so should we think about you trending back toward that range once raw material prices are no longer declining year-over-year? Or do you think that some other factor like the tariff which is expected to last longer is a more important factor enabling you to track above the range, and so perhaps you could remain above the range for longer?

[Roy V. Armes:]

Ryan, one thing that we've seen over the last few years with – our business model has been tested a lot; and we've been very successful getting through a record year in 2012, the Apollo merger attempt in 2013, a recovery of our business in 2014, and very strong performance in 2015. And there's been a lot of volatility over that period of time that we've been able to sustain based on our business model. And I think our core business model is pretty solid going forward. Will there be some lapses from quarter to quarter depending on how fast things change? That's always a possibility, but I think we've got a very good core business model that can help us withstand these ups and downs in the market.

[Bradley E. Hughes:]

So we continue to be focused on cost reduction opportunities, improving the mix of the products that we're selling. We've got a great product portfolio. Now that just continues to get better. All of those things we think will also contribute to our results as we go forward, in addition to the fact as we've talked about a couple of times already, the improvement that we'd expect to see in our International segment.

[Ryan J. Brinkman:]

Okay, great. And then just last one, a quick one on the mix in North America. I'm curious if you're finding that the tariff is encouraging a positive mix shift in the industry or for you given that it's increased tire prices more at the low end than the high end, so the consumer doesn't really face as much of an obstacle, as much of an increase in cost to step into a better tire.

[Bradley E. Hughes:]

I think, I don't know that we've seen any specific change as a result of the introduction of the tariff. The industry and certainly Cooper have been moving in that direction for a while. And I don't see anything that is slowing that by any means, but I'm not sure if there's anything I would say is directly related to the tariff. I think it's just a continuation of what we've seen in the industry and as we talked about before, we at Cooper have seen an even faster acceleration in terms of our move into those types of products.

[Roy V. Armes:]

Ryan, to Brad's point there, we started a lot of this well before these tariffs came out. And does the tariff have some impact on driving that mix? There may be something there, but we were already moving down this path. I'm not so sure that it's that big of an impact at this stage anyway.

[Ryan J. Brinkman:]

Okay, great. Thanks for all the color.

[Operator:]

And next we have a question from Tony Cristello of BB&T Capital Markets.

[Anthony F. Cristello:]

Hey. Good morning. Thanks for taking my call.

[Roy V. Armes:]

Hey, Tony. Welcome back.

[Anthony F. Cristello:]

Thank you. I appreciate that. Glad to be back. A couple of questions and maybe a bigger picture question here. As you do your forecast, and I'm sure you're out touching base with your customers, is there any color or commentary you can add about how maybe they feel in general about the replacement cycle today? And maybe where your thoughts perhaps would be, where you think it should be, or are we in a good spot, should it get better at the end of this year as the deferral rate continue to put some pressure in the general trends?

[Bradley E. Hughes:]

I think that if – this is Brad. When you look at it in aggregate that they have some of the same feelings that we do that many of the factors that we look at that should influence replacement tire volume are trending in a positive direction. So you look at the vehicle park, the age of the vehicle park, both of those continue to move in a direction that should be positive for replacement tires. You look at the raw material environment which allows for very appropriate pricing for these, good value for our customers, and you look at where gas prices are today, which is affecting a number of factors here. One it's affecting miles driven, which is up and has been all year. So people are using their vehicles and wearing their tires more rapidly, but also the lower cost of gasoline allows them to have more money in their pocket to spend on items like tires. So as we talk to our customers, they seem to reinforce that as we look at the landscape, our expectation is that it should be generally positive for replacement tires.

[Anthony F. Cristello:]

Okay. And the favorable long-tier environment, have you looked at extending or changing how you hedge based on where prices are today or are you just going to remain disciplined in spite of what seem to be pretty favorable pricing?

[Ginger M. Jones:]

Tony, this is Ginger. We're going to continue down our hedging path which, as we've said, we generally hedge or lock in prices for about two-thirds of our demand about a year out. And we found that with the moves in the market, that consistent hedging strategy makes the most sense to us. So we're not considering any changes to that at this point.

[Anthony F. Cristello:]

Okay. And if I can ask one more. Just in the general International side of the business, when you look at the competitive, I guess, in Europe, per se, I mean what sort of going to be the trigger to change what's going on over there? I mean, I see you had year-over-year increases in winter tires, which, one, is that seasonal or did something happened this year that they had sort of destocked and now they are increasing in stock? So just trying to get a better feel for your comfort level of general improvement?

[Bradley E. Hughes:]

Well, I think, I'm going to talk about Cooper specifically. European market is going to continue to be a competitive market. It always has been, and we expect that that's going to continue. We're seeing good signs of what's going on at Cooper with regard to the product portfolio. We talked about some specific introductions that are coming, but you referenced the winter tire on improvement year-over-year. That was largely the result of the introduction of a new product that is carrying the load there with that year-over-year improvement in terms of winter tire performance against the backdrop of another relatively warm season so far this year for winter tires in Europe. So we look at the products that we're bringing to the market, we're looking at being focused in the markets where we think we can succeed, and we're looking at making sure that we've got the right cost base; and a lot of that is based on ramping up our production at Serbia, which continues. So when we look at that, we feel like we're moving in the right direction in Europe.

[Anthony F. Cristello:]

Okay. That's helpful. Thank you. I appreciate your time.

[Roy V. Armes:]

All right, Tony.

[Operator:]

And we do have one final question from Christopher Van Horn of FBR & Company.

[Dan Drawbaugh:]

Hi, guys. This is Dan Drawbaugh on for Chris. If I could just go really quickly to the international capital deployment, can you talk in any way about the timing that we should think of between Latin America and China? I mean, you guys talked a lot about Latin America just on this call, not quite so much about China. So should we start looking at Latin America as the sooner of the two or is there anything else you can say along those lines?

[Bradley E. Hughes:]

I think Latin America, it actually was just the timing of when we were going to highlight it during the call to make sure that we were providing additional color on what we think is a very exciting market. Now it did happen to correspond to some very good things going on in that market, but it wasn't intended to signal anything with regard to a change or anything specific around the timing of our capital expenditures. As Ginger noted, we've got some very specific priorities with regard to capital allocation. Clearly, we continue to talk about some of the things that we're planning to do in China. And again we hope to be able to talk maybe with more specifics before the end of the year, but there wasn't anything that we were trying to signal with the emphasis on the good things that are going on in Latin America earlier in the call.

[Dan Drawbaugh:]

Okay. Understood. So as one more follow-up, if I could just get one more in before I finish up here. In terms of the medium truck market, 11% growth in your Roadmaster brand versus the 1.4% in the industry, is there any way that we can think about the sustainability of that sort of double-digit growth. I understand it's probably coming from lot of share capture, but can you fill a little more color around sort of what we should see Roadmaster doing through 2016?

[Bradley E. Hughes:]

So, Dan, to go back a little bit, we had some ups and downs in our TBR business as a result of what happened with our former partner at CCT and the availability of product. Now, by the second half of last year, we were back up and running and we were delivering tires, and so those comps are reasonable. What we said up until this point is that we're back in with a vast, vast majority of our customers and we're beginning to grow positions there. But we think that we've got even more opportunity as we look forward. Now, again, we're coming off of what was a little bit lower base in 2014 overall, as a result of what happened with CCT, but we feel good about the direction of TBR and we think there is still this growth opportunity there.

[Dan Drawbaugh:]

All right. Thanks for taking my questions.

[Roy V. Armes:]

Okay. Thanks a lot, Dan.

[Roy V. Armes:]

Let me just close here by thanking everybody for being on the call. And I'd like to reiterate that I'm confident in our strategy and believe that our results today, I think demonstrate the resilience and the strength of our business model. So we continue to appreciate the interest you have in Cooper Tire. But we're looking forward to seeing many of you in the future conferences and one-on-ones and that sort of thing. Also, if you have other questions you want to take offline or follow-up on, Jerry Bialek will be the person that you can call and answer as many questions as we can for you. But again, I appreciate the interest and thanks a lot for being on the call.

[Operator:]

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