Cooper Tire & Rubber Company
Q4 2015 Earnings Call Transcript

Published: 23 Feb 2016

[Operator:]

Good morning and welcome to Cooper Tire & Rubber Company's Fourth Quarter and Full Year 2015 Earnings Call and Webcast. At this time, all participants on the call are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jerry Bialek.

[Jerry Bialek:]

Good morning, everyone, and thank you for joining the call today. This is Jerry Bialek, Cooper's Director of Investor Relations and Strategic Planning; and I am here with our Chief Executive Officer, Roy Armes; Brad Hughes, our Chief Operating Officer; as well as 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 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. In addition to other matters, during this call we will provide an overview of the company's fourth quarter and full year 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-K that will be filed with the SEC later today. Following our prepared remarks, we'll 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, Jerry, and good morning to everyone. As you know, Cooper issued three news releases today. The first announced our fourth quarter and full year 2015 financial performance and the second addressed an extended and increased share repurchase program, and we'll review both these topics in detail in just a few minutes. But first, I'd like to address the third release we issued today regarding the planned executive leadership transition at Cooper. This release announced my intention to retire effective August 31 of this year and the plan for Brad Hughes, our Chief Operating Officer, to succeed me as President and Chief Executive Officer upon my retirement. Brad has demonstrated in his more than six years at Cooper that he is the right choice to lead our company into the future. His many years with Ford in leadership roles around the globe and his tenure as Chief Financial Officer, President of International Operations and now Chief Operating Officer, positioned him well to succeed and I have every confidence in his leadership. In connection with this transition in August, I'll step down from our Board of Directors and my role as Chairman will be filled by our Lead Independent Director, Tom Capo, who has been on our board since 2007, and has been Lead Independent Director since 2014. Tom is a seasoned and experienced leader and insightful advisor. He has a tremendous depth of auto experience – auto industry experience with leading organizations, including serving as the former Chairman of Dollar Thrifty Automotive Group, as the Senior Vice President and Treasurer of DaimlerChrysler Corporation and a Treasurer of Chrysler Corporation. These appointments are in line with our long-term leadership succession plan and we expect it to be a smooth and orderly transition. It's been my honor and privilege to lead Cooper for nearly a decade. Today, our company is in a position of strength, with a business model that is solid, resilient and sustainable. I have nothing but the utmost confidence in our people worldwide and in our leaders to continue the success for years to come. During the coming months of transition, Cooper will operate as we always have and it will be business as usual. I'm excited about Cooper's future and want to offer my congratulations and best wishes to Brad. Cooper is, and will continue to be, in great hands. Now, let's get on to the remainder of the call. This morning I'll begin by briefly covering our full year financial results, and then we'll highlight some of our key achievements for the year. And after that, I'll turn the call over to Brad and Ginger for a discussion of our operations, our recent announcements and financial performance. I'll then return to present our business outlook for 2016. And finally, we'll open up the line for your questions. I'm happy to report excellent results for Cooper in 2015. This was a great year as we exceeded our midterm financial goal for operating profit and took numerous steps around the globe to transform and enhance our business. Now, let's start with some of the financial achievements we had in 2015. Net sales increased 3.3% to $2.97 billion, excluding CCT, our former joint venture which was divested in late 2014. We had unit volumes increase 6.8% year-over-year with increases in all regions, excluding CCT. Operating profit reached $354 million, which is a record after excluding CCT from prior years and represents 11.9% of our net sales. We achieved diluted earnings per share of $3.69. Cooper continued to return cash to shareholders through the share repurchase program and I'll discuss in more detail in a few minutes, and we achieved a solid return on invested capital of 18%. We're proud of our performance and want to thank our employees around the world for their hard work and strong execution. There's more to be proud of beyond these financial results. Cooper made significant investments in our manufacturing operations around the world in 2015 and will continue to invest in 2016. In the U.S., our plant teams focused on modernizing our facilities to support the transition to produce and sell more high-value, high-margin products and the team significantly accelerated the installation of segmented presses and supported investments toward enhancing our mixing capabilities while also continuing the process of improving automation at our facilities to enhance competitiveness. In Europe, we invested in new tire building equipment in our Serbia facility that will allow us to build larger diameter tires to support growth in Eastern Europe and the Middle East. In Asia, we continue to invest in our plant capabilities to meet the requirements of OE customers, a business that has maintained a strong upward trajectory for us in 2015, with our China operations now serving multiple OE accounts. In Latin America, we're focusing on creating tires specifically for that market across three major brands

[Bradley E. Hughes:]

Thank you, Roy. First of all, I want to express how humbled and honored I am to be following in Roy's footsteps upon his planned retirement in August. He's been a trusted and supportive boss from whom I've learned a great deal. More importantly, Roy has been an extremely effective leader, who has been at the forefront of an amazing transformation of Cooper. Our company's performance during Roy's tenure speaks for itself in terms of accomplishments, such as delivering our historical best years of operating profit for the last four years, greatly improving our capital management and generating a superior 10-year total shareholder return of 12%. Of course, much more can be said, and we'll have time for that in the coming months, but suffice to say, I know I have big shoes to fill. Like Roy, I am confident in the people of Cooper around the world and I've used this announcement as an endorsement of our global teams' readiness as opposed to a single individual's. I have no doubt that we will continue to build on Roy's success for many years to come. With that, let me continue with the call, starting with an update on announcements that support our long term global growth priorities. As a reminder, we announced a letter of intent in November with Fate, Argentina's leading tire producer, that provides us with a distribution network to sell Cooper products in that country. Fate has TBR tire production capabilities as well as passenger, light truck and SUV capacity at its facility in San Fernando, Argentina, which is the largest tire production facility in that country. Over time, the two companies may also work together on a variety of potential cooperative ventures, including tire production, off-take arrangements and possible cooperation on research and development activities. Shifting to our investment in China, in early January, we announced plans to acquire a majority interest in GRT for RMB600 million. Under the proposed arrangement, Cooper will own a 65% interest in the new company. The RMB600 million, or about US$92 million at current exchange rate, includes the acquisition price as well as committed capital infusions. This joint venture will produce TBR tires for global markets. It is estimated that at full capacity the facility can produce approximately 2.5 million to 3 million TBR tires annually, with the opportunity to produce the same number of passenger car radial, or PCR, tires within the existing footprint. GRT's production level today is in the hundreds of thousands of tires annually, and this production will begin ramping up throughout 2016. Cooper will continue to make investments in the facility over time, bringing additional production online as needed. As a result, we expect GRT to be accretive to operating profit beginning in 2018. We currently expect this transaction to close late in the second quarter or in the third quarter of 2016, pending certain permits and approvals by the Chinese government. We believe this acquisition is a significant step toward our goal of finding a new source of high-quality, cost-competitive TBR tires. But as we have said previously, we are continuing to evaluate other options for additional TBR supply to serve global markets, both inside and outside of China, and that achieving all of our objectives in this regard will likely require a series of actions rather than a single step. We are obviously aware of the recently filed anti-dumping and countervailing duty petitions with the U.S. Department of Commerce and U.S. International Trade Commission regarding TBR tires imported from China into the United States. China is the world's largest producer and consumer of TBR tires and we believe our GRT investment remains prudent and timely, given our objectives in this category. Having said that, it is too early to say whether the petition will result in any tariffs. Regardless of the outcome, we remain committed to continuously deliver high-quality tires and superior value to our TBR customers. We feel good about our opportunities in the commercial truck market, particularly in the United States. Cooper has regained a position with the majority of our customers following the former supply disruptions and the planned investment in our TBR tire production capacity is a strong signal of our commitment to this market. Moving on to our performance for the fourth quarter, unit volume was strong for the period, with an increase of 6% over the prior year, excluding CCT. Cooper's total light-vehicle tire shipments for the U.S. were up 3.6% during the fourth quarter, compared with an estimated increase of 3.3% for the industry, and an increase of 3.8% reported by RMA members. You can see this detail on slide 6 of the supplemental slide deck. Commercial truck tires sales of the Roadmaster brand for the quarter were down slightly year-over-year. However, year-to-date, commercial truck tires sales are up 10.8% over the prior year, significantly outperforming the industry and the RMA. Excluding the impact of CCT, International segment units were up 14.4% in the quarter. This included increases in both Europe and Asia. Domestic unit sales in China were 60% higher year-over-year as a result of growth in both the replacement and the original equipment markets. Now, I would like to turn to the raw material pricing environment where we continue to experience favorable pricing trends. As noted during our third quarter call, we anticipated that our raw material index would be down slightly in the fourth quarter. Our actual index declined from 156.7 in the third quarter to 146.2 in the fourth quarter, as shown on slide 7 of the supplemental slide deck. To put this into context, this is down approximately 20% from the same quarter of 2014. As we look forward, we anticipate raw material costs in the first quarter of 2016 will be down in the high single digits from the fourth quarter of 2015. Commodity prices have been impacted by global events such as the market instability and reduced growth expectations in 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. This position continues to be enhanced through our capital investments and our planned acquisition. Now, I'd like to turn the call over to Ginger for an update on the financial results.

[Ginger M. Jones:]

Thank you, Brad. As Roy mentioned, the fourth quarter and full year 2015 results were very strong. Beginning with the fourth quarter, sales were $776 million, down from $820 million in 2014. Excluding CCT sales of $67 million in 2014, sales rose 3%, driven by the impact of higher unit volume. This is partially offset by unfavorable price and mix, primarily due to pricing and promotion actions related to raw material cost, as well as negative currency impact. Operating profit was $103 million or 13.2% of net sales, compared with $54 million or 6.5% of net sales in 2014. CCT contributed approximately $8 million of operating profit in the fourth quarter of 2014. Fourth quarter operating profit compared with 2014 was positively impacted by the following factors, which are summarized on page 8 of the supplemental slide deck

[Roy V. Armes:]

Thanks, Ginger. In summary, Cooper had an excellent year, putting us in a very good position as we head into 2016. Our fourth quarter performance was a 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 volumes. We have also demonstrated our commitment to delivering our strategic growth initiatives with partnerships and investments announced to support our growth plans. We expect global tire markets will remain highly competitive, and for the full year 2016, we expect unit volume growth in each of our segments, and unit volume growth in the United States at or above the industry. Our strong track record of investment, new product development and improving mix of sales to higher value, higher margin tires, gives us confidence in this outlook. Raw material costs continue to be favorable and we're expecting further declines in the first quarter of 2016, and we're monitoring these costs in each region with a continuing goal to maintain our margins while also recognizing the need to remain competitive in the market. For the full year, we expect to continue our strong operating margin performance in line with our strategic plan, and we anticipate that full company operating margin for 2016, excluding the impact of any acquisitions, will be above the high end of our mid-term target of 8% to 10%, but not likely to exceed the 2015 results. We expect the International segment to substantially improve operating profit in 2016 and approach breakeven operating profit by the fourth quarter of 2016. As we announced during our Investor Day in May of 2014, 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 was ahead of this and is aligned with our long-term goal of operating margins that's consistently exceeding 10%. Our results in 2015 gives us confidence that Cooper is making the right investments in the business to help us compete competitively in a volatile economy and industry. Our focus in 2016 continues 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. With that – and that completes our prepared remarks. Let's move to your questions, so operator, if you could take the first question, please.

[Operator:]

The first question comes from David Tamberrino with Goldman Sachs. Please go ahead.

[David Tamberrino:]

Good morning and congrats on a pretty strong quarter and a very solid year. We had a couple questions for you just as it relates to the quarter and then looking forward for the Americas segment. What took us by surprise was the positive price/mix that you guys saw on the EBIT line for the quarter. Really wondering what drove that, just because it feels like it would have to be more pure price than positive mix given the small decline you saw on your truck/bus radial tire shipments in the quarter, but really interested in what drove it in the quarter and then how that shapes up going forward?

[Bradley E. Hughes:]

So, David, this is Brad. A couple of comments. There were contributions from both mix and from price. You're right on the TBR. But we continue to see improved mix in other product categories as we have throughout the year. So there was some element of mix. Overall, the pricing environment in the United States has remained very stable, even with the raw material environment that we've been operating against. And within that, we saw at Cooper the roll-off of some incentive – volume incentive programs and consumer programs that we had in place in the third quarter that benefited the fourth quarter. So I think the biggest key is that we've continued to see a stable pricing environment in the U.S. and we've been able to navigate successfully within that. We talked about the first quarter with regard to raw material prices, where we see those declining further, and we'll continue to monitor the pricing environment to make sure that we're keeping our customers competitive. But we don't see anything that fundamentally is going to change that dynamic of having a stable price environment in the near-term.

[David Tamberrino:]

Okay. That's helpful. And then can we contrast that against the comments for the full year where you don't expect margins to exceed 2015? And within that, international is supposed to improve, so that would imply that clearly North America margins – or Americas segment margins, excuse me – would be compressing? Is that the roll-off of some of the raw material benefits? Is that incremental manufacturing costs? What puts you into the camp of expecting margins to compress from 2015 to 2016?

[Bradley E. Hughes:]

I think, again, in the near term, if the market maintains the discipline that we've seen for an extended period of time in the U.S. that that will be favorable for the tire industry going into next year. We are building a business plan around the potential that we will start to see some price reductions in line with the material cost reductions as we get into next year. That's not certainly something that we would lead, and we will monitor what's happening in the industry. But we are anticipating that there could be some more competitive price activity as we get deeper into next year.

[David Tamberrino:]

Okay. But you haven't seen that near-term?

[Bradley E. Hughes:]

We have not.

[David Tamberrino:]

Okay. And then just lastly for me on the commercial vehicle tire tariffs, can you help dimension what the current level of shipments into the U.S. are from your now off-take supply agreement with, I think, it's Prinx Chengshan? And how that might impact you if you ultimately do see tariffs, and then if there's anything you can do to really mitigate the tariffs placed on imports on truck, bus radial tires?

[Bradley E. Hughes:]

So today, we import all of the TBR tires that we sell in the U.S. market on our prior joint venture, now PCT as you've noted. And obviously, if there were to be tariffs, and that still is a question given where we're at in the process, but if there were to be tariffs that would be an added cost to the tires that we're bringing into the U.S. We would highlight that this is a bit different than the PCR on tariff activity that went into place last year in that there's such a significant number of tires that are imported, not just by Cooper, but by the industry in general to the U.S. market from China. And when you look at the dynamics, when you look at the supply and demand, the capacity that's available from U.S. sources relative to the demand in the market, it's not sufficient in the U.S. to meet the TBR demand. And so there will need to continue to be imports into the U.S. market, which is slightly different from what we were seeing with the PCR market a year ago. In addition to that, the vast majority of the available capacity beyond what's required to support the local markets is in China. It isn't in other markets, which again is different from the PCR scenario we looked at a year ago. So there's a lot of things here that could play out a bit differently than that PCR tariff that was implemented a year ago, and we would think that that would likely affect the pricing environment here given the supply and demand landscape.

[Roy V. Armes:]

Yeah, David, I would only add one other thing. This is Roy. I would add one other thing, is that we're building a very good relationship with our Argentina tire manufacturer, Fate, who also manufactures TBR tires or truck and bus tires, and we're also working with them as another alternative to mitigate some of the risk that might exist here.

[David Tamberrino:]

Okay. That's very helpful. I'll hop back in the queue. Thank you.

[Roy V. Armes:]

Thank you.

[Operator:]

Our next question comes from Chris Van Horn with FBR. Please go ahead.

[Christopher Van Horn:]

Good morning. Thanks for taking the call and congrats to Roy and Brad.

[Roy V. Armes:]

Thanks, Chris.

[Bradley E. Hughes:]

Thank you.

[Christopher Van Horn:]

Could you just give us a sense of the OEM and replacement mix in the Asia markets for the quarter?

[Bradley E. Hughes:]

Well, the mix continues to change. We did see growth in both replacement and OE, but the 60% growth that we saw in the domestic market a year ago is largely driven by the OE, which is becoming a bigger part of our business over there. And we view that as very positive. It's a part of the market that's less affected by the passenger car tariffs in the U.S. and the implications that that had on where tires that are produced in China are being sold. So the OE market still demands great quality tires and a certification process that protects it to a degree from some of the excess capacity that people have in China today. So it's a bigger percentage of our business over there and is growing very fast.

[Roy V. Armes:]

Yeah. And, Chris, we don't necessarily give out those – that split, but I would tell you that from a replacement tire standpoint, with the previous tariffs that went on for PCR and light trucks, there's more of those tires that are showing up in the domestic market in China and making it very, very competitive. And as a result of that, we've seen our growth in OE and the percentage of the change quite a bit. We're growing fast enough in OE that not everybody can supply those products there, but we have a very good source where our CKT operation that we supply to that market. So it's changing as we speak as a result of some of the dynamics in the marketplace and the competitiveness with the previous tariffs that were put on the PCR tires.

[Christopher Van Horn:]

Okay. Got it. And you talked about a series of actions for other investments maybe internationally. And can you give us a sense, is that – do you have a goal on timing, or are you kind of open-ended there and are going to look for more opportunistic investments? And just how you're thinking about those series of actions?

[Roy V. Armes:]

Well, at this point in time, it's more open-ended. We know what it took to get to an agreement or find a good quality source like we did in GRT. I don't think we're in a big hurry to do that. On the same token, we think we need to still continue to look at ways to mitigate our risk, and that's why we continue to look out there. And I think as Brad mentioned in his scripted notes, basically we feel very good about GRT. And while the tariffs or potential tariffs could be out there for the TBR tires coming to the U.S., our long-term strategy is to be very strong in the largest manufacturer and marketer or sales of TBR tires, and that's in China. And GRT being right there can be of good help for us to continue our growth. But I think we still need to continue to look for other opportunities that would mitigate that risk and it's tougher with the TBR tires to be able to find everything that you need out there that we're willing to invest in.

[Bradley E. Hughes:]

And I'd just put a final point on that. We continue to look at other opportunities for investment that are consistent with our growth strategy around the globe. So there is a focus on TBR and growing and supporting that business, but it's not limited to that. And if we see an opportunity that we think fits with our long-term strategy and is going to provide the right level of return, it's certainly something that we'll consider.

[Roy V. Armes:]

We feel confident being able to do that and still have the stock repurchase program that we have out there as well.

[Christopher Van Horn:]

Okay. And then along those lines, do you see strategic opportunities within North America? I know in our channel checks, there's some regions where maybe you're less penetrated and certainly seem like a good opportunity for you all, and is that something you're thinking about and would there be a need to be an investment in order to do that?

[Bradley E. Hughes:]

We definitely see opportunities in certain parts of the U.S. We're pleased with the way the business is performing today and clearly the North American business is contributing substantially to the overall results. But within that, the good news is we still see opportunities. Not all of which would require investments. We still see a lot of opportunity through our organic activity, the great products that we're introducing to the market, new ways that we're reaching new customers through different channels. We still see a lot of opportunity there. If the right thing came along from an investment opportunity perspective, we would certainly consider it there as well. But we think we've got opportunity with organic growth within the North American and U.S. market.

[Roy V. Armes:]

And I think, Chris, maybe some of your underlying – underlying your question there may be we have not ruled out investing in a new facility some place that makes sense for us. That has not been our focus, but we're certainly not ruling that out to be able to support the demand of our products.

[Christopher Van Horn:]

Okay, great. Thanks again and congrats.

[Roy V. Armes:]

Thank you.

[Operator:]

Our next question comes from Patrick Nolan with Deutsche Bank. Please go ahead.

[Patrick E. Nolan:]

Good morning, everyone, and congratulations both to Brad and Roy.

[Roy V. Armes:]

Thanks, Pat.

[Bradley E. Hughes:]

Thanks, Pat.

[Patrick E. Nolan:]

I just wanted to follow up on the commentary about the price/mix assumptions. So it sounds like you're assuming that price/mix could moderate given the decline in raw materials, but you haven't seen any signs of it yet. Could you maybe just discuss some of the drivers of why you think that can materialize over the next year? It sounds like conditions are pretty tight. Chinese tariffs, if they exit where Q4 was, that'll be another decline this year. Can you maybe just discuss what could actually drive some of that moderation in pricing in North America?

[Bradley E. Hughes:]

Well, I think there were a number of things that could end up driving it, Pat. I think right now, though, in the near term, as we look at what happened in the fourth quarter and we look into what we've seen so far in the first quarter, we aren't seeing any of those things start to emerge. Now, it's a very competitive industry, it's competitive globally. There's new capacity coming online around the globe and in the United States, as well as in other places around the world. And so as we look at the long-term, we see that there's a potential that there could be additional price competitive activity in the United States. Again, as you noted, we didn't see that in the fourth quarter and we haven't seen anything thus far in the first quarter emerging in terms of real activity there. But in terms of the comments that we've made around our operating profit margins for the full year, that is something that we took into account when we were looking at those numbers.

[Patrick E. Nolan:]

That's very helpful. And could you maybe talk about the demand side that you're seeing in North America? So it looked like you underperformed a little bit in passenger vehicle this year. Where are you seeing the demand growth as you look into 2016? Which segments of the market? And was that passenger underperformance mostly a capacity-related issue or was it a demand-side issue?

[Bradley E. Hughes:]

When we look at our opportunities in the U.S., I think they're across the board. We certainly have capacity tightness in certain segments and are addressing that in terms of some of the investments that we're making in our facilities to break that open. We're also looking at, again, new ways to reach new customers, whether it's in bigger cities and the activity that we have in place with new channels and customers that are going to help us to reach those customers in a better way. Certain geographies around the U.S., we feel like we still have additional opportunities to reach that. And then underpinning all of that is the continual new introduction of great new products. We continue – every time we introduce a new product, we really think that we're taking our game up a notch and that it's going to end up showing up in terms of better volumes and prices.

[Patrick E. Nolan:]

Are most of those new products going to be continued to be focused on the higher end of the market?

[Bradley E. Hughes:]

I would say that we're going to continue to support the entire portfolio with our investments, but the activity in the near term will be more targeted towards the upper end of that scale.

[Patrick E. Nolan:]

Thanks. Congrats again on a good quarter.

[Roy V. Armes:]

Yeah. Thanks, Pat.

[Bradley E. Hughes:]

Thanks, Pat.

[Operator:]

Our next question comes from Ryan Brinkman with JPMorgan. Please go ahead.

[Ryan J. Brinkman:]

Thanks for taking my call. Congrats on the quarter.

[Roy V. Armes:]

Thanks, Ryan.

[Ryan J. Brinkman:]

I think your business would prove much more resilient in a downturn than almost any other in the auto industry, given your lack of exposure to OEMs, et cetera, but this is something that investors that I talk to are currently very focused on, unduly or not. So could you kind of help us there in terms of how you think your own profitability would be impacted if there were a normal-ish recession in the United States? How does that impact mix, pricing and volumes and how have they generally performed in previous downturns?

[Roy V. Armes:]

Well, I think first of all, Ryan, that if you look at our – we've done a lot over the last several years to get our footprint right from a manufacturing standpoint to give us flexibility to get to the lowest cost that we can to take to market. And we've continued to focus on reducing our cost to make sure that when we get into a downturn that we are able to have something that's a business model and margins that are more sustainable. Now, there's no guarantee in that you can't anticipate all that's going on in the market or could go on in the marketplace but we feel very confident about the sustainability and the resilience that we have in our business model right now that we could withstand at least as well or better than most in our industry during a downturn. So, I think we built a foundation that between our manufacturing network and also managing our costs as well as making sure the right products are out there to grow our business. So those are probably some of the bigger things that we think that makes our model a lot more attractive today than we've been in the past.

[Bradley E. Hughes:]

Yeah. I think just to embellish a couple of points there that Roy was making. Obviously, the cost side of that is very important and I continue to believe that we're amongst the most efficient. But also on the capital side of the equation and on the way that we develop our new products with our global platforms, we believe that both of those are differentiators for us in terms of our capital and investment efficiency to first of all develop the products and then to produce them. And we still have capacity available within our existing footprint in support of our major markets around the world so that we can add capacity without having to make significant new investments outside the walls, the brick and mortar that we have in place. So, I think all of those things basically support your initial supposition there, Ryan.

[Ryan J. Brinkman:]

Okay. That's great color, thanks. Then just last question on the increase in CapEx from, I think, it was $182 million in 2105 to the 2016 range of $240 million to $260 million. You mentioned this was primarily in North America. Can you just talk about what's driving that increase in North America? Is this the ongoing transition toward HVA or was some of the spending pushed into 2016 from 2015 which I think came in a little bit below guidance?

[Roy V. Armes:]

Yeah. In 2015, Ryan, we did a lot in our mix transformation in our factories. Also, investing to get our costs down, which is more in the automation realm. A lot of that was, I'll say, appropriated, if you would, in 2015, which is showing because of the way we pay on our capital, a lot of that carries over into the following year just like we're doing in 2016. So some of this was things that were put in place last year that were going to be paid for this year as you look at those numbers.

[Bradley E. Hughes:]

So the – with regard to the transformation of what we're building in the plants on the – what I'd call, from last year the accelerated or the catch-up investment related to that is largely behind us. But that continues to be a trend for us in terms of that ongoing transformation within the plants. And there will be some investment there. We are continuing to invest in our facilities in – with regard to automation, which we think is going to help with that on cost equation that we talked about previously. I'd also like though – while we did say the majority of it was in North America, we are continuing to invest in our capacity and in our capability in our plants in other parts of the world, both in Europe, primarily focused on Serbia, and in China at our CKT facility. And without leaving them out, our production operation, the joint venture that we have in Mexico. All of those we're making investments in to increase capacity and improve capability.

[Ryan J. Brinkman:]

I see. Thanks. Congrats today on the well deserved promotion and retirements.

[Roy V. Armes:]

Yeah. Thanks, Ryan.

[Bradley E. Hughes:]

Thanks, Ryan.

[Operator:]

Our next question comes from Tony Cristello with BB&T Capital Markets. Please go ahead.

[Anthony F. Cristello:]

Thank you. Good morning and congrats as well, guys.

[Roy V. Armes:]

Thanks, Tony.

[Anthony F. Cristello:]

I guess the first question I wanted to ask a little bit about is on these modernizations of facilities and automation and such, do you feel like you've realized the majority of benefits from those capital investments? And how should we look at, on a go-forward basis, what would be left in terms of being able to either improve costs or efficiencies as we look down the road?

[Bradley E. Hughes:]

There's certainly, Tony, more to come in terms of the benefits from those investments, some of it coming from new investments that haven't been made yet. But even with the investments that we've put in place, I would suggest that we're probably in the middle innings in terms of what we're seeing from the investments that we've put in place to date. Now, we've also mentioned at the same time that as we're changing and transforming what we're building in the plants, those tires are more complex and can take more time to produce. So there're some offsetting factors. But the specifics of the investments that we're making to improve the efficiency of the plants, we still have some more room to go in terms of the improvements that we expect to see from the investments we've made, and there are ongoing investments there.

[Anthony F. Cristello:]

Okay. That's helpful. And as we look then at the international piece and sort of the move to breakeven as we progress through the year, if you were to sort of bucket what the biggest opportunities or the levers could get you where you need to be, and then on a go-forward basis to improve the profitability, it doesn't sound like it's putting a lot of money to work from a capital standpoint. But can you talk a little bit about how I should be thinking about those – international segment?

[Bradley E. Hughes:]

Yeah, that's I think a good point that you're raising there, Tony. In Asia, it really is about continuing the growth that we are achieving and seeing occur right now. We left in place, you'll recall, we knew that we had more structure in place than was required after we divested our ownership of our joint venture there. But it was based on our confidence that we were going to be able to grow that business and we are. We're seeing that growth of unit volume occur in Asia, and that is the principal contributor to the improvements that we expect to see there. In Europe, it's twofold, but we do expect – we've got a lot of great new products hitting the market right now; we expect those to contribute to improved unit volume performance. At the same time, more and more of those products are being produced at our Serbia facility, which is amongst our lowest cost facilities in the world. And the combination of those two factors, the improved volumes, but also lower production costs of those products, will contribute in Europe.

[Anthony F. Cristello:]

Great. That's very helpful, and congrats again. Thanks, guys.

[Roy V. Armes:]

Thanks, Tony.

[Ginger M. Jones:]

Thank you. Operator, we're going to take one more call and then Roy will have a few wrap-up comments.

[Operator:]

Okay. No problem. Our last question comes from Brett Hoselton with KeyBanc. Please go ahead.

[Brett D. Hoselton:]

Hello, everybody. How are you?

[Roy V. Armes:]

Hi, Brett.

[Bradley E. Hughes:]

Hi, Brett.

[Brett D. Hoselton:]

And so, Roy, what are you going to do with your free time? Fishing?

[Roy V. Armes:]

Well, I'm going to have to plan a little bit better, Brett, over the next six months.

[Brett D. Hoselton:]

Well, look, Findley Lake is a really nice lake to fish in. You could spend hours there. And of course, you've got about 20 years left or whatever.

[Roy V. Armes:]

If you've seen my golf game, you'd see that I need a lot of improvement in that area as well.

[Brett D. Hoselton:]

Well, there you go. You're more than welcome to come over and we'll play Firestone.

[Roy V. Armes:]

All right. Thanks.

[Brett D. Hoselton:]

Brad, congratulations. Well done. And, Ginger, you can see what path you're on. You're going to China next, right? Right? You go fix China...

[Bradley E. Hughes:]

I guess we'll see.

[Brett D. Hoselton:]

And then you're on to the – right, yeah. Okay, so my questions. First question, so raws look like they're slowly drifting down here. And let's assume that they drop down to, let's say, 133 (53

[Bradley E. Hughes:]

Yes, it is. Well, it may prove to be realistic or not. So you went through a lot there and I'll just reinforce a few of, I think, the dynamics that we're looking at. I mean, over time, the industry continues to be very competitive. We are looking down the road at additional capacity in the region and we want to make sure that we've got a business that's structured to succeed in that even more competitive environment. Whether or not we see pricing activity in the first quarter or the second quarter or at all this year, we'll see. But we want to be in a position that we can respond and maintain our competitiveness and most importantly, our customers' competitiveness in the market. Now, you laid out a supposition about what might happen with raw materials that we've not commented beyond the first quarter on. But the dynamics that we continue to see in the industry is there is a lag between the movement in raw material prices and the movement in prices. So to the extent that there were continual or sustained reductions in raw material costs in 2016, at a minimum, I think you'd see a lag between those reductions in cost and the price activity that might occur in response to those changes. And so I think that part of it, you're right. It would be unlikely that if you saw that for the year that you'd see all the pricing activity come into play over the course of the year. So that would be a favorable environment for the industry.

[Roy V. Armes:]

And I think, Brett, I would just add to that, I mean, you can make a lot of assumptions in here, and I think you make a good point. The industry has been fairly disciplined over the last several years. And today, we can't sit here and say that we're seeing a lot of it. But being able to predict anything that goes on in this industry when you have that lower raw material costs is very difficult for us to do. So I understand your point and we'll see how it plays out.

[Brett D. Hoselton:]

Yeah. And now when I think about the back half of the year, I'm thinking LIFO versus FIFO. And I'm thinking that some of your major competitors on FIFO, obviously the benefit lags and therefore potentially the pricing adjustments lag. And it seems like that's maybe the most – the greatest consideration that might lead to a price reduction. Is there – do you – would you agree with that? Or is there something else that you would try to factor into that thought process?

[Bradley E. Hughes:]

Yeah. Clearly, we're on LIFO, so we do see the effects of changes in raw materials sooner than our competitors do and so that is a factor in terms of our profit margins relative. But frankly, Brett, we watch what's happening in the market competitively with regard to pricing. We're now out there independently looking at what's happened to our cost base and then changing prices. We're monitoring where we need to be positioned so that our customers are competitive and succeeding, and that we're earning the margins that we expect to achieve from our business.

[Brett D. Hoselton:]

Yeah. I have to say I'm very impressed with the price discipline in the industry. It certainly has taken me by surprise. Let me ask you a little bit about GRT. And can you talk a little about what kind of investments might you need there? It sounds like you're kind of suggesting from a capacity standpoint. There's probably not a lot of CapEx that needs to go in there. But can you kind of ballpark, give us some flavor as to how much cash needs to go into GRT to bring it up to snuff and so forth?

[Bradley E. Hughes:]

So, we have talked about the approximate US$92 million, that's our initial investment and includes some capital infusions that are required in the near term. And that includes some of the near-term investment requirements at the facility. And we've indicated that we might see over the first couple years another – about half of that amount to get to the initial amount of capacity and capability that we want to see from that facility. So, I think we've put some bookends around that that are reasonably clear.

[Brett D. Hoselton:]

Excellent. Well, I tell you what, congratulations all around, great quarter. Roy, congratulations on 10 years, great career and obviously prior to that. And, Brad, welcome back from China. And, Ginger, just a matter of time; start learning Mandarin, my friend.

[Roy V. Armes:]

Thanks, Brett.

[Ginger M. Jones:]

Thank you, Brett. Operator, I understand we have one more question in queue, so we'll take that as our final question.

[Operator:]

Okay. No problem. Our last question comes from Bret Jordan with Jefferies. Please go ahead.

[Roy V. Armes:]

Hi, Bret.

[Bradley E. Hughes:]

Bret, you still there?

[Roy V. Armes:]

Maybe he dropped off.

[Ginger M. Jones:]

Maybe he dropped off.

[Roy V. Armes:]

Yeah. Well, let me just close by saying, hey, we thank everybody for being on the call today and we do believe that we're in a position to deliver a strong performance in 2016 which is really aligned with our strategic plan. And we stayed focused on the three key parts of our strategy and it's driving top line profitable growth, it's developing competitive cost structure and improving profitability and building the organizational capabilities to be able to deliver on our strategic plan. And I'd like to thank all of our stakeholders, which includes our stockholders, our customers, our employees, our vendors, our partners and the communities where we operate for their continued support. And we have a strong belief in the strength and value of our people as a key to our success. And while we know we have work to do, the future is not without challenges, but we believe that we have the right plan, right team in place to be successful in 2016 and the years ahead. I once again want to congratulate Brad and I'll be working with him over the next six months as we do this transition. I think we've got a very good and talented organization in place and Brad and I are committed to make sure this is a smooth transition. So with that, thank you for being on the call and we'll see you next quarter. Talk to you next quarter.

[Operator:]

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