Goodyear Tire & Rubber Co (GT) 2001 Q1 法說會逐字稿

Welcome to the Goodyear Tire and Rubber Company first quarter earnings conference call. Just as a reminder today's call is being recorded. And now it is time for opening remarks and introduction. I would like to turn the call over to the Director of Investor Relations, Mrs. Laura Thompson. Please go ahead Mrs. Thompson.

Ok. Thank you Sarah. Good morning, I would like to take just a quick moment to read our safe harbor statement and then I will introduce our participants on the call today. I would like to remind you that this conference call contains certain forward looking statements based on current expectations and its functions for the subject to risk and uncertainties that could cause actual results to differ materially. These risks and uncertainties include price and product competition, customer demand for the company's products, the ability to control cost and expenses, general industry and market conditions and general domestic, and international economic conditions. The company disclaims, any intention or obligation to update or revise any forward looking statement whether as a result of new information, feature events, or otherwise. With that behind us, I would like to introduce our participants on the call today. Here with me I have Sam Gibara, our chairman and CEO, Bob Keegan, our president and COO, Bob Tiekean, our executive vice president and CFO, and Stephanie Bergeron, our vice president and treasurer. With that out of the way, I would like to turn the call over directly to Sam.

Well thank you Laura, and good morning everyone. We are here today to report and comment on our first quarter results, and so that we can do this effectively, I would like to put this into effective and remind you of what we said a couple of months ago in February in New York when we had our meeting to forecast the year and report on 2000. We said that our biggest challenge was going to be the economy, and our biggest opportunity was going to be in the market place. That statement turned out to be very true for us in the first quarter, except we probably didn't measure the magnitude of the challenge and the magnitude of the opportunity, and we did well on both counts in the sense, they were both much bigger than we thought they would be. So the bottom line is that we obviously didn't do well. We didn't do as well as we would have liked to that's for sure, and we are not happy with our results. We did report a loss from operations of 2 cents, which was better then consensus, transformed consensus and as we promised you better than first quarter results. And that's what we told you we would do progressive improvement, and the first quarter did come out better than the last quarter. What I would like to do now is take you through what happens in the economy as we see it by region of the work in which we operate. And then address the business opportunities and how we reacted to the economy, and what we did in the market place. And we will do this first from a global prospective on a corporate basis, and then again by SBU. So let me start with the economy. As you all know in North America, we saw dramatic OE production cuts. This was the steepest decline in OE shipments in 10 years. We saw a replacement business that developed in a fashion that we hadn't seen since 1980, 20 years ago and we saw a complete collapse of the top tire markets especially at OE, but also in the replacement market. In Europe, the EU passenger vehicle sales were down 7%. The replacement market overall was flat. There were rising pressures in certain companies especially in Germany with the slow down of the economy and the EURO continued to be weaker then we had expected it to be in a range of 88 to 90 or 92, but less than we had expected it to be. In Eastern Europe overall the economy was acceptable, was strong, except for Turkey. Turkey that was, as you know and we will get back to that, in complete economic collapse and the Turkish financial crisis of a magnitude that no one had foreseen. The other significant development for us was that the currency in Poland, the zloty, is considerable in the first quarter of 2001. In Latin America, the economy held up pretty well, but there was a severe currency weakness in Brazil, and we will get back to that again with its impact on our operation. In Asia we also saw clear currency weaknesses in many-many markets from Indonesia to Thailand to the Philippines. And a continuation of Chinese imports into the Asian market and everywhere in our operation we saw two specific developments. Raw material prices continued to increase. They are now up 3% from the beginning of the year and an estimated 5% to 6%, maybe 5.5 % from a year ago. On the exchange front, the economic impact of currency movements on our profitability amounted to about $20 million as we reported in our press release this morning. So basically, that is the environment, the economic framework, in which we operated in the first quarter. And let me before we get into business unit discussions, I would like to share with you how we have responded to this economic environment. The first thing we did is to step up our global rationalizations plan that we announced in February. And with booking in the first quarter an additional $79 million for restructuring and rationalization compared to $64 million that we announced earlier. These numbers are all before tax numbers, as you know. And we have stepped up our rationalization program with savings now expected to increase to a $155 million this year, up about $8 million from the previous announcement, and next year to $260 million. And with the rationalization plan our staffing reduction is now scheduled to increase from 7200 people to 7800. Of that 7800 number, I would like to share with you that 2800, already realize that by the end of March 01. And as you know we stepped up the shut down of our Mexican plant, which initially was planned for September of this year. And we have completed in the first half of April and that is impacting an additional 1560 people who will be coming out in the second quarter and will be added to the number that I just mentioned to you. The next action we took to respond to the slow economy was to become a lot more aggressive with our SAG reduction process. And the first quarter of numbers show that we came in $12 million in SAG below last year and $17 million below what we had in our plans for the quarter. And we fully intend to continue to focus on SAG reduction for the next three quarters. This is on the stock side; let me say what we did on the marketing side. We gained market shares in both consumer and commercial products in North America, and our prices for consumer products are sticking. And have been sticking throughout the quarter. We will return to this in more detail when we get to North America tire discussion. We did have to take production cuts, because of the magnitude of the OE drop and the replacement drop, which was not anticipated especially in North America tires. But since the market downturn happened primarily in February and March we were unable to react as quickly as we would have liked to. So even though we took production cuts we didn't take enough. The steep market declines surprised us and we will do considerably more in the second quarter to make sure that we align our inventories by the end of this second quarter. As a result of these actions, I can say that with the exception of North America tires and Eastern Europe if you include Turkey but not if you exclude Turkey, all business units show a margin improvement over the fourth quarter of last year both at the gross level and the net level. And we will share that with you. The next action we took in the quarter was to refinance a billion dollars of short-term debt this year and that's enhancing our liquidity position substantially from what it was in the fourth quarter. We stepped up our marketing plans, as you know we announced in the first quarter that we have hired a new chief marketing officer, the vice president for global marketing in the corporation, and we have retained a new advertising agency and the agency is working with us now on a new campaign. Finally asset sales, we told you in February that we were targeting $150 million of asset sales in the first half. In the first quarter we realized $20 million of these sales, and we fully intend to realize the balance in the second quarter. So that is the overall picture for the first quarter for the corporation, and let me walk you through what happened to our business unit by SBU. North America tires, the consumer market as you know, replacement was down 7% and as I mentioned before this is the biggest drop we have seen in the replacement market in North America since 1980. In spite of that the Goodyear brand sales were up 4%, and that just confirms what we have been saying in terms of flight quality. We see that people want to buy brand named tires, well known brands and premium tires and that obviously is good for us from not only a market shares prospective, but the margin prospective going forward. So in the first quarter we gained almost 2.0 points market share in that quarter in North America in the consumer replacement business. OE business was down 17% and that as I also mentioned is the steepest decline, which we have seen in 10 years. Goodyear cracked the OE market with also being down about 17%, but we expect unit growth and significant unit growth in the second set of the fourth quarter both because of market share gains, industry growth and new platforms that Goodyear is going to participate in. The commercial business, replacement was down 16% and Goodyear all brands were up 1.3%, and we gained over 4 1/2 points market share in the first quarter. And that's mostly due to the [Web-based] acquisition that we made in the last quarter of September of 2000, which gave us coast to coast coverage and the commercial tires systems which we have in place, and that as you know is not a bad business for us, it is a profitable business as all replacement business is. On the OE side, the OE was down 46% and Goodyear was down 44% tracking the market downturn at original equipment. Now as I mentioned before, the good news to us was that prices for consumer products in the replacement business are sticking. And we consider this to be a welcome development not only for Goodyear but also for the industry. It has been the industry's history when faced with such a decline, and we have never faced one with that magnitude, to start trying to buy market shares and reduce prices. While it has not happened this time, this time was seen as an industry that is much more disciplined and every company in this industry has publicly announced production cuts in the first quarter. And so have we and we will continue to do that which makes for a much better picture and profitable picture going forward. So in terms of production cuts in North America as I say we have cut reduction in for the first quarter but clearly we didn't do enough. We ended up with very high inventory. We will cut substantially in the second quarter, and we will bring our inventory units in line with what they need to by the end of June. Turning now to the European union, sales volume increased 3% from 2000 for us and that includes replacement and OE, which was up 3% in a market that was, I will remind you down at OE and flat at replacement. So our market share for auto tires was flat for us. We didn't gain we didn't lose. On light and heavy trucks, we lost some market shares. At OE our market share was up and was up significantly from a year ago and that has helped us to keep our sales volume up in North America. Our OE sales were up 12% from a year ago. Net sales in the European union were down $75 million of which $60 million was due to translation and the rest is due mainly to the business mix which is stronger at OE and weaker at replacement. The translation's impact on our profits for the first quarter in the European union is estimated at $4 million. As for prices as I mentioned before, that we have experienced a very mixed picture in Europe. Prices in Germany were soft. There was a lot of rising depression, the market in Germany was down, and there were pricing pressures in Europe, in Germany. On the other hand on the left of the continental Europe and the UK rises from [Dutch] and was slightly higher than a year ago. So it's a mixed picture and we have had mixed results with rising in the first quarter. Turning now to Eastern Europe, before we talk about Eastern Europe, I would like to go ahead and get Turkey out of the way because it does disturb the pictures completely in Eastern Europe. So let me just share with you what we have seen in Turkey when the economic and financial crisis hit on February 22nd. Since that time in two months the lira has devalued 85%. The stock market in Turkey was down 52%. Goodyear has increased prices by 45% and the combination of all of the above was that Goodyear net sales were down 17%. And our operating profit dropped $10 million. And that really explains why Eastern Europe didn't do as well as it did a year ago or even, as well as it did in the first quarter of this year. But if you exclude Turkey, let me share with you our activity elsewhere in that region. Volume was up 7% for consumer product, 2% for truck products and we gained substantial market shares in most major markets in Eastern Europe. In the east European region, as you know covers also the Middle East and Africa and South Africa. And our operating income reflects the Turkish crisis. In Latin America, shipment was up 6% from the first quarter of 2000 and that was mostly driven by original equipment. Sales were flat in dollar terms due to currency translation. The currency impact on our sales in Brazil was $13 million and that obviously is significant for us in a country like Brazil. And the impact of translation on operating income was $5 million in Latin America. But in spite of this our operating margin improved from last quarter and now is at 8.8% and the economy in Latin America is holding fairly well, the concern continues to be currency and exchange in Latin America. Asia, tire shipments were down from the first quarter of 2000 due to stuffed markets and Chinese impulse, which continue into the Asian countries. The economies of Asia are slow and the tire markets are very soft. As a result of that exchange in Asia, as I mentioned before, has been adverse to us. And we have had weak exchange rates down from the first quarter of 2000 the impact was $13 million on sales and $4 million on operating income. Moving on to engineering products, sales were up due to 15% decline OE shipments. And the cost of production savings was not sufficient enough to upset the cost of production cut backs. We had savings from restructuring and rationalization but the cost of production cut backs was high, and we will pursue these production cut backs in the second quarter of this year. Chemical division, which did fairly much better than it had been doing for sometime. Sales were up from a year ago and up from the first quarter substantially due to price increases that now are inflated to recover higher raw materials and energy cost. Our operating income was still down from Q1 of last year, but it was up $13 million from Q4 reflecting the impact of higher prices and the slight easing of raw material cost. So basically that overviews our performance by business units in the first quarter. I would like to take just a couple of minutes to share with you our outlook for Q2, and then I will be more than happy to take your questions as usual. We see the Q2 markets will remain soft but probably less so than Q1. We know that OE is going to continue soft but certainly will look much better than Q1. And the replacement business should also do better than Q1. Raw material cost will remain stable with Q1, meaning that we had a 3% increase in Q1. We see that really continuing in Q2, stabilizing in Q2, and a 3% increase continuing through Q2. In Europe, the Euro will remain at the current levels in a range span between 88 cents and 92. Let me just remind you of what we said in February, our plans are based on a EURO at 92, so we are slightly behind in terms of exchange. And as for the other regions of the world, we don't see currencies strengthening in either Asia or Latin America. Goodyear will continue to pursue aggressively market share gains in the replacement and OE markets. We will pursue aggressively rationalization program and cut reduction programs as we have done in the first quarter and pursue production cut backs to adjust inventories. So basically we will do in the second quarter more of what we have done in the first and more of the same and if the economies are relatively kinder to us. We will hopefully do better. Also asset sales, I mentioned that earlier the completion of $150 million program for this half, we expect to be able to do that by the second half. So I would like just to repeat what we said in February and that the second quarter should show of an improvement from the first. We told you every quarter would show an improvement over the previous quarter. The second quarter should show a continuous improvement over the first quarter. And we are fully committed as we mentioned to deliver $350 million in pre cash flow for the year. And with that I will be happy to take your questions, which concludes my department. And if you have any questions, I will be pleased to answer them.

Thank you. The question and answer session will be conducted electronically today. If you do have a question or comment you may signal us by firmly pressing the star (*) key followed by the number 1 on your touch-tone telephone. We will proceed in the order that you signal us and we will take as many questions as time permits. Once again press star (*) 1 if you have a question or comment. And we will pause for just a moment. And our first question itself comes from Ron ??? from Deutsche bank.

Good morning, Sam

Good morning, Ron.

I have a few questions. Two quarters ago you gave us the gross margin in the chemicals business and the engineer products business. It was kind of helpful for us to figure out what's happening to cost structure in tires. Do you have those numbers?

I don't have them with me here, Ron. But Laura would be happy to give you those numbers.

Okay and there wasn't a cash flow statement provided with the release. Could you tell us what operating cash flow was for the quarter? It looks like the debt was up by a couple of $100 million. Can you also tell us what is the unused portion of your revolver right now?

Oh yes, I will be happy to say that. The debt was up, that is correct. And the cash flow, we used $493 million dollars in cash flow and the main reason for that is the inventory increase, as I mentioned in my remarks. And we fully intend to bring that back down. It is almost exclusively due to the inventory increase. We have not used our revolver at all. We still have our revolver we have not used our revolver and are not planning to at this time.

We have a billion and a half dollars left, right?

We have a billion and a half and we have not used it.

The 493 million is that pre cash flow?

That's operating cash flow. Pre cash flow, No.

And how much is the $150 million or so in cost savings would you estimate was reflected in the Q1 results?

Little because as you know, what we did in the first quarter is a big reaction. The results show in the second and third and fourth quarter. So a very small portion was included in the first quarter.

Would you say that it was going to be sort of an evenly spread ramping up into the fourth quarter?

No, No. It will increase throughout the year. It will start slow in the second and move in the third and move in the fourth. And that's because of the program is designed to be completed all over the next three quarters.

OK. Thank you very much.

You're welcome.

Next we will hear from David Bradley with JP Morgan.

Good morning.

Good morning, David.

Two things, one of the inventory effects typically when you produce a little more than you sell, that allows you to spread fixed cost out over more units and has a positive effect on earnings. And I presume, it will be the opposite in the second quarter as you bring inventories down. Could you estimate the dollar impact of that? How much will it help your earnings?

I may have misunderstood David, because in the first quarter we didn't produce more. We cut the production. Our cost went up in the first quarter. They did not come down. We are going to cut more in the second quarter, but compared to the first quarter last year our cut in terms of volumes produced. We cut production in the first quarter and we cut production significantly in the first quarter. There will be more of that in the second quarter but it will be offset as I said before. It will be offset with productivity gains, with overhead cost reduction and with SAG cost reduction. So we have been able in the first quarter to cut inventories and reduce cost. Even though inventory cuts, in and off themselves have increased cost. You will see the same picture in the second quarter.

Okay But didn't you say also in the press release and in the statements that inventories went up in the quarter?

Yes. They went up. They were up because sales were down.

Right

Sure. Sure. Inventories went up.

Doesn't that happen when you produce more than you sale?

Yes sure.

Right. Okay. I was just trying to quantify what that effect might have been in the quarter.

David, one of the things as you know when we announced in the fourth quarter that we moved from a [LIFO system to a FIFO system] so that the impact of these disparities between production and sales have a tendency to roll through the system as the inventory does. So, you don't necessarily see the favorable impact, which you are talking about in the first quarter.

Okay. Second, moving along in terms of industry placing. The signals are pretty mixed our there in terms as to what people are saying. But Conti General released a press release this morning and they have made a statement and I think the quote would be "they see fear as price gauging in the North American market." Are they following a different market than you or is that some sub statement of the market?

Listen, every company is responsible for their own statement. What I can say David is that, we clearly see our unit prices going up and our mountains going up. And the average net selling prices going up at Goodyear. And maybe that's related to flight of quality. And maybe that is a problem that we don't have and some of our competitors may have. I don't know. But I can assure you. And I think I have also seen a very good piece written by you subjecting that the prices are up.

Yeah. OK.

Ah! Ah!

And then finally..........

I can [fight you more, than I can fight] my competitors.

OK. Then primarily this segment reporting is different. Can you tell us what the changes were? Have you reallocated these segments?

No. Not that I know of. Now if any one knows different around the table, we don't know that.

David, the only thing you are going to see if you are looking at the recast data was the impact of the way we treated transportation and sales, and also the change for moving from [LIFO to FIFO].

Okay, because when I look at the year ago numbers for each section they are different.

Now I add, and that's what you are going to see.

And you will give us every quarter on a restated basis going back?

Yeah David, and actually we have two [sawmills] (inaudible) .

Okay. All right. Thank you.

You are welcome.

Next we will hear from Wendy Needham from CS First Boston.

Yes, Good morning.

Good morning, Wendy.

Good morning, Mrs. Thomson. I caught that.

I had to think about that.

You can call her Laura if you want?

Sam, could you give us some help on what you think consumer demand is for tires out there versus the shipments that you and everyone else were dealing with in the quarter, that the fact that replacement shipments were so weak? What do you think consumer demand was? And do think that your customers have now gotten their inventories down or are we going to see more inventory reduction in the second quarter? So I guess I am asking you to take a stab at where you think the industry shipments are going to be in the second quarter?

That is a very good question Wendy. What happened in the first quarter is that, there was pre-buying from distribution in anticipation of the price increases. Because the distribution believed that the price increases were going to stick. So I know some managers did not believe that, but the distribution did. There were some pre-buying and they pre-bought. That's one of the reasons that shipments in the first quarter were as slow as they were. Then it is a clear indication that there has been a lot of restocking, retail sales and sales through have been much better than sales end. So selling gain has been down, selling [out] has been better. We are looking at the end of March at debt inventory levels, much better inventory levels in our distribution. Now to guess what the second quarter is going to look like is difficult. But I think it will be safe to say that it will do better than the first quarter compared to second quarter of last year, it's anybodies guess. I will be very surprised that if it goes down another 8%, I don't think so. I think it probably would be even or slightly up or slightly down.

Okay. I know its tough because you have some stores that you know the whole market. But do you think consumer demand for tires was actually up in the first quarter?

Yeah! I think the consumer demand compared to consumer shipments?

Yeah.

Yes. Bob wants to share with you a moment.

I just wanted to say that remember, we take not only sales through our own stores, but obviously we try to gage what is happening in other key retailers as well. And if we look at that information we are in a situation much as we expected, I think in terms of sale through or sale out at this point, were we flack off a little bit, in turn of those retail sales. And that of course if what as brought our sale measures and our inventories in line to our retail level, here at the end of the first quarter.

And then on a completely different subject. An SAG expense run rate for the rest of the year or what proportion of sales do you think you should be at by year end?

I would say it depends on sales.

Right.

But let me just say that in absolute dollar terms as a percent of sales, it depends on what sales will do. We were targeting about 15% to sales. The objective is to get below 15% to sales. Now let me say that on the dollar basis we fully expect to continue to see SAG under control and reduced. On the percent of sales, I will say it is 15%.

So you think this 548 in the first quarter in actual dollar terms could be the high of the year? What are your expectations?

No. I am not saying that, I have to look at the three quarters. I don't have that with me. Let me say because of the sales volume, you know, sales volume increases. We will see an update, but a small one in the second, third and fourth quarter. Just a small update.

Okay.

Yes, it will be higher. But as the percent of sales it should be less because sales will increase more substantially than what other SAG is going to increase by.

Okay, thank you, Sam.

You are welcome.

Next we will hear from Michael Linsky with McDonald Investments.

Good morning everyone.

Good morning Mike.

In terms of the market share gains in North America on the consumer side, can you give us a little more color on; did you get in on the light truck side, the passenger car and who are the poor souls out there that you took market share from?

Well, you know. It was pretty much across the board, we did very well. And we did well in almost every segment. It varies by segments, it is not linear, but we did well in consumer products. We did well in commercial products. And it is about 2% of the consumer and its about 4.5 points in commercial as I mentioned before. Now if you look at this by [a lot of categories] it is obviously changing. Goodyear is a big beneficiary and then you have Dunlop and [Relaxo], private brand and Kelly. So another fact, they didn't gain market share, they lost market share. I am talking about Kelly and [private associates] lost volumes but gained market shares. They lost less than the market. So it is all over the place. And I think it's a bit difficult to get ready for this [specific]. Goodyear's gain volumes were up in sales; Kelly associate and private brands were down in sales but less than the market. Who did we take debts from? But I think we took it from everybody. Primarily, I would say it is consistent with what we said before. We took risk away from people. Consumers want quality products. And they want brand named. So brand names have an advantage to do well. And names that are not as well known have not done as well. And we see that's in our own company as I just mentioned.

Do think these market share gains are sustainable going forward? And how much more gain in this market, do you think you can capture for the rest of the year?

All I can say is that the Firestone episode happened at the end of the third quarter. We gained market shares in the fourth quarter. We gained market shares in the first quarter of this year, that is 6 months and that is sustainable for six months and then going forward it is fully our intentions to continue to do that. I said that I believe it's doable. Yes. I believe it's perfectly doable and we will do as much as we can to get as much market shares as we can. I would hate to predict numbers, but we are confident we will continue to get market shares.

Great. And one more question, just because I have been around as long as Saul. You have mentioned the North American replacement, you know, the industry shipments were down 7% last quarter. You said you haven't seen that since the early 80's. How quickly has that recovered in the past?

Well. In the past, we have had, as I have said before, you know, the replacement market is a lot more stable than the OE market, and it doesn't tend to be as typical as OE or as volatile as OE. So in the past it is always come back quickly. And I will tell you something; I have not been around as long as Saul. Maybe you can ask him? Yeah, but I will tell you it has always come back quickly. So we don't expect 8% to be a trend through the year.

Okay. Thank you very much.

And we have time for one final question today. And that question comes Steve Haggerty with Merrill Lynch.

Good morning.

Good morning Steve.

A quick question again about inventories. I think you may have mentioned this Sam, but your sense of replacement dealers inventories in North America, do you think they depleted their inventories during the first quarter and so therefore they will step up their purchases moving into the second quarter or do they have fairly full inventories and they are just waiting to see how pricing goes before they order anymore tires?

No. I think they have depleted inventories Steve. I don't think they are waiting any more for prices to come down, don't forget that price increases have been announced some time ago. They are in the market place where the retailers have passed the price increase on to the consumers. We have done this in our retail stores. So nobody is expecting Goodyear or the industry to cut back on prices. The inventories have been depleted.

And just a one final question on Europe. It looks like you said the replacement market is flat and OE was down 7%. Has your outlook for Europe become more cautious, because it looks like OE car sales or any other car sales were fairly weak in the first quarter? What are your general views on forward on Europe?

Well. Let me tell you about our forecast for Europe. As I said the consumer market in Europe was flat. We expect the next three quarters; I am talking about replacement now, to be up a point or so. So not a big change in the replacement, flats to up a point. For OE, we think the first quarter was also like in North America, had to do inventory adjustment and had somewhat of an obligation of being down 7%. We think that it will do better for the balance of the year. It may not be up. But it will probably get close to being flat or maybe slightly down, but certainly better than the first quarter.

One final question. Do you think the inventories in terms of your working capital, but it looks like your receivables and payables didn't go the right way either. Is there anything particular going on there or is it just the typical seasonal [fluxes] in Europe?

No. There is no reason for that. There is nothing wrong with that. That's a seasonality of our business.

Okay, thank you very much.

You are welcome.

OK. Well. Thank you also for being with us this morning and we will share with you our second quarter results in July once we have them. Thank you again for your interest.

And that concludes today's teleconference. Thank you all for your participation today.