Goodyear Tire & Rubber Co (GT) 2013 Q3 法說會逐字稿

Good morning. My name is Tony, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Goodyear Tire and Rubber Company Third-Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to hand the program over to Tom Kaczynski, Goodyear's Vice President of Investor Relations.

Thank you Tony, and good morning everyone. Welcome to Goodyear's Third Quarter 2013 Conference Call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer, and Darren Wells Executive Vice President and Chief Financial Officer. Also with us today is Laura Thompson, who on December 1 will take over responsibility as Executive Vice President and Chief Financial Officer. On today's call, Rich and Darren will discuss their our results for the quarter, along with the outlook for the remainder of the year.

There are also a few items I need to cover before we get started. To begin, supporting slide presentation for today's call can be found on our website at investor. Goodyear.com. A replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning.

If I could now draw your attention to the Safe Harbor statement on Slide 2. I would like to remind you that today's presentation includes some forward-looking statements about Goodyear's future performance. Actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in an earnings release. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, or future events, or otherwise.

The financial results presented are on a GAAP basis, and in some cases a non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to US GAAP equivalent as part of the appendix to the slide presentation. With that, I will now turn the call over to Rich.

Great. Thanks Tom, and good morning everyone. We've had an extremely active few months following our second-quarter call in July. Since then, our new four-year labor agreement with United Steelworkers was ratified, setting us on a path to address our unfunded pension obligation. We held an Investor Day in New York, where we announced the reinstatement of a dividend, and set new three-year earnings targets; and we delivered a strong third quarter on the heels of a record results, or a record second quarter.

But before discussing our third-quarter performance, I'd like to review some of the recently announced changes that will be taking effect over the next few weeks. As you know, Darren Wells will soon be leading our Europe, Middle East, Africa business. So after something like more than 40 consecutive quarterly investor calls, first as treasurer and then as CFO, Darren will be moving on to a new challenge.

Replacing Darren as CFO will be Laura Thompson, who is joining us on the call today. Laura has been a key leader on the finance team for many years, and most recently was the Head of Finance of our North American business unit, where she helped drive its dramatic turnaround. I'm looking forward to Laura and Darren working together on a seamless transition. Laura is certainly excited about helping implement the strategies and capital allocation plan we shared at our September investor meeting. You'll have an opportunity to get to know Laura better over the coming weeks.

I'm also looking forward to having Darren leading the team in EMEA. Darren has spent significant time working in the region this year, helping set priorities, and developing the play book for delivering the profit-improvement plan for that business. While there's been some improvement in the EMEA results over the past few quarters, our goal remains to return to historical levels of profitability, and deliver the consistent value creation we know this business is capable of. While economic head winds in the region remain, I'm confident in Darren's leadership to drive our strategies there.

As Arthur De Bok transitions to his new role, I would like to recognize his many accomplishments during his 12 years in EMEA, including several years of record earnings, and numerous industry-leading product innovations. We thank him for his leadership with associates, customers, and in the business.

Turning now to our third-quarter results, I'm pleased that following our successful Investor Day in September, the team has delivered another strong quarter. This morning I'll provide some highlights of the quarter, and then come back and further discuss a few areas of the investor meeting that I believe deserve more attention. Then I'll turn the call over to Darren to go through the financials in detail, and review our outlook for the remainder of the year.

As you saw in our release this morning, our third-quarter segment operating income of $431 million reflected another period of strong year-over-year improvement. In our investor meeting, we talked about our focus on consistent growth in segment operating income, and Q3 certainly delivered this, with 24% growth in segment operating income overall, and year-over-year growth in every business unit.

Though we are certainly pleased with these results, I'll remind you that our emphasis remains on the long-term execution of our strategy road map. Ultimate success will not be measured by the quarter or the year, but by continued progress toward our destination of creating sustainable economic value. A good quarter or a more challenging one won't deter us from that.

As noted in our press release, we now expect to deliver record segment operating income of more than $1.5 billion in 2013, along with positive cash flow, excluding the pension pre-funding of earlier this year. In our long-term context, these results indicate that we have improved our capability to be profitable throughout the economic cycle.

Though there were signs of volume stabilization in most of our businesses during the quarter, the tire industry remained at stubbornly low volume levels, particularly in mature markets. But consistent with our strategy, our growth came in our targeted market segments, where we leveraged the value of the Goodyear brand to deliver strong performance in price and mix. I'm very proud of what the team delivered, but especially pleased that they have done it with a commitment to our strategy road map, and disciplined execution of our key how-to's.

I'll quickly offer a few comments about our individual businesses, and then I'll come back to some follow-up items from our Investor Day. We continue to deliver record results in our North America business, with another significant improvement from a year ago. You'll remember two years ago we set out our North America earnings target at $450 million by 2013. We exceeded that target a year early and now, through just three quarters of the original target year, we've already delivered $492 million.

This is clearly a different business than it was five years ago. We've maintained our focus on cost control. We've been disciplined in our target market segment approach, and we have further increased the value of the Goodyear brand through high-value innovative products.

One of those products is the new Wrangler all-terrain adventure, where we introduced last month. This innovative product is for light trucks and SUVs -- a growing passenger segment for both Goodyear and the industry. It has already been well-reviewed by the 4x4 enthusiast media, and is being supported by a full marketing program, including national television, print, and online advertising. We're off to a great start.

Clearly volume remains a focus for our North America business. Darren will elaborate on this a bit more, but our strategy will continue to target the most profitable segments of the market, with an increasing focus on our go-to-market strategies. We see opportunities here, and we're confident in our ability to serve our customers and meet increasing demand for our premium products. Great progress in our North America business, as we continue to execute our strategy, and remain on the path to sustained profitability.

In our EMEA business, we saw continued strong demand for our industry-leading summer tires throughout the third quarter. As was the case with the start of the summer selling season, the winter tire selling season also started slowly; but it's picked up this month. We believe the fourth quarter will reflect solid demand, particularly for products such as our Dunlop Winter Response 2, which has been a leader in magazine tests this year.

Looking longer-term, we continue to make progress in our profit-improvement plan in EMEA. That plan includes increasing share in our targeted market segments, and winning in emerging markets. An example of progress in those areas is our performance with both summer tires and commercial truck tires. Industry-leading label grades and magazine test results contributed to our success in the consumer business.

As you heard in September, we have seen growth in our commercial truck tire business, particularly in the emerging markets. Our combination of premium branded products and fleet service support form a value proposition that is proving to be a real competitive advantage.

While we see some improvement in the overall European economy, excess auto production capacity and slow growth economies will remain structural challenges. But these won't deter us from our goal of returning the region to its historical profit levels.

In Latin America, we continued to deliver strong earnings results by improving our business mix and managing the currency fluctuations that have recently become more of a factor than in the past several years. I'm particularly proud of the team in Latin America for having the courage to make strategic choices to exit certain low-return businesses in our portfolio in favor of targeting profitable market segments. By exiting some unprofitable OE fitments, we saw a drop in unit volumes in the quarter, but we freed up some capability to serve our replacement customers in targeted segments, facilitating future growth and success in the changing Latin America market place.

I'll come back to a refrain of mine, that we are running our business for the long term. This is true for Latin America, as well. We've invested in Latin America, enhancing our manufacturing capabilities to meet the increasing demand for more premium branded tires in the region, and to support our industry-leading distribution network. We will also introduce 15 new products in Latin America between now and 2015. Our mix-up is helping us improve earnings in the near term, but also will be critical to our long-term growth.

Our Asia-Pacific business has faced considerable uncertainty in recent months. While this region boasts markets with some of the leading growth rates in the world, several of our markets there have become more challenging for currency and other reasons.

The bright spot for us in Asia-Pacific continues to be China, where the economy is steadily improving. Our capable team there is performing very well, and production at our state-of-the-art factory in Pulandian is helping us gain share in targeted profitable consumer market segments, and grow our commercial truck tire business.

Our consumer business in China is growing at around twice the pace of the industry. We've stayed in front by responding to the market quickly with high-value products sold through an expanding retail footprint. For example, growth in the China SUV market over the past five years has created an attractive market that's growing post the 35% a year. We are winning with HVA tires in the segment, which didn't even exist four years ago.

During the quarter we also introduced the Assurance Triple Max for the mid-tier passenger segment, which makes up more than 25% of the replacement market in Asia-Pacific. The tire has already been named the 2013 Motor Trend Tire of the Year in China, and is a great example of our strategy in practice. The Assurance Triple Max is already a hit with customers, and we look forward to further robust sales as it becomes available in more countries in the region.

Overall, I'm very pleased with the results of the quarter, and the execution of our plan by the team. I believe our performance in the second half will set us up well for the targets we have for 2014 and beyond.

Now I'd like to go to Slide 7 and revisit three areas discussed at our investor meeting that I believe were particularly important -- first, our capital allocation plan; second, operational excellence, the work we're doing to improve our supply chain from procurement to customer delivery; and third, the question of what it takes to be competitively advantaged in the tire market going forward.

As you're aware, the capital allocation plan we announced last month, including the reinstatement of a dividend after more than 10 years, is a significant milestone for our Company. Our first dividend payment will occur during the fourth quarter, a real symbol of the improvements we've made and the confidence we have in our results going forward.

While the dividend is an important symbol, we remain focused on the actions we need to take to both improve the balance sheet and keep our business competitive over the long term. Our capital allocation plan takes each of these into account, keeping us on a path to our targeted level of leverage, addressing our unfunded pension obligations, and dedicating sufficient cash to invest in our business to better serve our customers. The dividend has received a lot of attention, but the careful balance among these areas will be what delivers shareholder value over the long term.

The second area I want to touch on is our work on operational excellence. As I said at our investor meeting, we use this term to refer to programs that deliver improved efficiency and effectiveness in our end-to-end supply chain. These efforts differ from past efficiency efforts in a couple of key respects.

First, they're being implemented in a consistent way globally. Second, they are being implemented with extensive support from outside experts, using approaches that have been successful elsewhere, but are being adapted for our operating environment.

These programs are changing our capabilities in procurement within the four walls of our factory and in our supply chain. While these changes will certainly improve our cost efficiency, the real advantage will be the ability to provide better and more consistent service to our customers, while experiencing less waste and tying up less capital in inventory. I can tell you that we're just getting started.

The third area I'll spend a moment on is how we think about Goodyear's competitive advantage in the context of the seven mega-trends we discussed last month. I won't repeat the mega-trends, but you'll remember that growth in high-value-added tires is one of them. If the industry is growing at about 45 million units a year, the demand for high-value tires is growing disproportionately, as many markets are converting very quickly.

During our Investor Day presentation, we illustrated this point with a slide showing the increasing OE demands for HVA tires on mid-tier vehicles in Latin America. It's a good snapshot of the trend that we see around the globe. This means that the industry is working to deliver an enormous number of additional complex tires -- a real challenge.

In this context, we see our advantage in a number of areas. The first is our ability to design and develop innovative products. Our experience with OE customers and in developing tires for all applications for more than 100 years, means we have technical capabilities few can match. While others are making progress, we've seen no sign of any game-changers in this area.

Our second advantage is our ability to industrialize and produce these complex products. Even if others could copy our designs, it's an arduous task to mass produce these products consistently and at targeted quality levels. This is an advantage for Goodyear, as our team can clearly handle such complexity.

Third, our established distribution channels are a distinct competitive advantage. Simply, Goodyear products are available to customers wherever they want them and when they want them through tens of thousands of distribution points around the world. Our distribution channels have been developing for decades, and our advantage supply chain is working continuously to raise the game on customer service. We are making great progress.

Finally -- I made this point last month as well -- our biggest competitive advantage is our brand. The strength of the Goodyear brand is felt at every touch point. It attracts consumers, it helps our dealers build their businesses, and it enables us to effectively enter new and emerging markets as a well-known, well-respected global player. We fully understand the value of the Goodyear brand and what it means to us, to our customers, and to consumers.

We spent a lot of time talking about our targets and destination, and rightly so. But the starting point of that journey is the Goodyear brand. It's the single most important asset in our drive to be competitively advantaged in everything we do. It's a crucial ingredient in a winning formula that includes introducing innovative branded products produced from the market back, at a pace that leads the tire industry; selling those products to create value for our customers in highly profitable market segments; serving our customers by supplying those products with continually increasing efficiency and reliability; making the investments to support our business model that generate returns for our shareholders; and executing with the most capable team.

The Goodyear strategy is not just a product or a factory or a distributor. It's all these pieces working in concert as one integrated strategy. That's the Goodyear strategy, and that's Goodyear's competitive advantage, and that's what will keep us on a path to creating sustainable value over the long term.

Now I'll turn the call over to Darren, and then we'll get back to questions and answers. Darren?

Thanks, Rich. As Rich said, we're very pleased with our results for Q3, and we're extremely confident that our team's continued execution will position us to exceed $1.5 billion in segment operating income this year, and set us up for continued earnings growth in 2014.

Turning to the income statement on Slide 15, our third-quarter revenue decreased 5% to just over $5 billion. Volumes improved by 2%, slightly below the Outlook we provided at the end of Q2. Couple of important points here. First, we feel good that the volume growth we achieved was the right volume growth -- that is, focused in the right segments and generating good returns. This disciplined approach ensures we have sustainable earnings growth.

Second, in Asia-Pacific there's no question the environment has weakened --essentially everywhere except China. Third, our Latin America volume was down, reflecting the choices Rick described, especially at OE, to ensure we can better serve our key replacement customers.

Fourth, winter tire volumes in EMEA started slowly. Finally, our North America business showed volume growth for the first time in 10 quarters, a change we were expecting, and where our team delivered, driven by strength in our industry-leading Goodyear brand.

From a revenue perspective, foreign exchange and lower revenue from third-party chemical sales accounted for essentially all of the decline in net sales. Higher volume was offset by lower price mix, partially due to our raw material cost pass-through arrangements with our OE and other customers. We generated gross margin of 21.1% in the quarter, up 310 basis points from the prior year.

Selling, administrative, and general expense increased by $34 million to $686 million during the quarter, partly due to increased value of compensation programs linked to the increase in our stock price. Excluding discrete items, our third-quarter tax rate as a percent of foreign segment operating income was about 22%. For the full year, we expect income tax expense as a percent of foreign SOI to be approximately 25%.

Turning to the segment operating income step chart on Slide 16, you can see the improvement in operating income compared with the prior year. We reported $178 million of reduced raw material cost during the quarter, which were offset partially by lower price mix. Net price mix versus raw materials was $87 million positive for quarter, as we continued a disciplined approach to managing our value proposition amidst currency weakness and inflation in emerging markets.

Higher volumes improved operating income by $14 million, while increased production resulted in $18 million of lower unabsorbed overhead during the quarter. Cost savings of $69 million essentially offset general inflation of $72 million, consistent with the guidance we provided in July.

Turning to the balance sheet on Slide 17, at quarter end our inventory stood at $2.9 billion, down 18% from the prior year, and 9% below year-end 2012. Overall, working capital was down nearly $900 million, or 22% from the prior year. As we've talked about before, these reductions reflect the success we've had in reducing our seasonal working capital, driving lower average working capital as a percent of sales.

Our net debt totaled $4 billion at quarter end. Compared with a year ago, our net debt increased $318 million. This increase is more than explained by our issuing debt in the first quarter to pre-fund nearly $900 million of US salary pension obligations.

Slide 18 shows free cash flow from operations. During the third quarter we generated $19 million of free cash flow from operations, compared with $105 million in the prior year. This difference is essentially timing-related, as we generated significantly better cash flow in Q2 than a year ago. Year to date, free cash flow from operations remains over $600 million above last year.

For the full year, we expect working capital to be neither a source nor a use, even after significant reductions in working capital in 2012. We can see some upside, depending on fourth-quarter sales and collections.

Moving to Slide 19 and individual business units, I'll start with North America. North America reported another record in segment operating income, with SOI totaling $161 million in the third quarter, compared to $130 million in the prior year. This kept our return on sales above 7% for the quarter, with our year-to-date at 7.5%. Our strategy of targeting profitable market segments, mixing up in products through market-back innovation, and pricing for the value of our tires, helped these record results.

North America unit volumes increased for the first time in 10 quarters. The consumer OEM replacement industries were each up approximately 8% in the quarter. You'll recall, however, that much of the year-over-year replacement market growth is explained by the extreme reduction in dealer orders a year ago, ahead of the September 27, 2012, expiration of Chinese tire tariffs. This year's orders returned to normal levels, but looked very robust versus last year.

This year-over-year growth is primarily at the low end of the market, and didn't have much impact on the part of the market where Goodyear's business is focused. You will see the opposite effect in Q4, which I'll discuss more in a minute.

North America realized the benefit from lower raw material costs of approximately $102 million, while price mix for the quarter was lower by $66 million, partially attributable to our raw material cost pass-through arrangements with our OE, fleet, and OTR customers. Mix remained favorable.

Our manufacturing cost benefited from lower profit sharing expense of $14 million and lower pension expense. These improvements were essentially offset by $20 million of one-time costs related to the new four-year USW contract that was ratified in August. North America is consistently delivering strong financial results, and as industry volumes continue to recover, it has the opportunity to create substantial economic value going forward.

Europe, Middle East, and Africa delivered segment operating income of $115 million in the quarter, which compares to $105 million in the same period last year. Q3 is the second consecutive quarter with year-over-year volume and earnings growth after a difficult start the year. European industry volumes in the third quarter continued to show signs of stabilization, although at low levels, with the consumer replacement industry increasing 4%, and commercial replacement increasing 5%.

In the consumer replacement business, the growth was mainly driven by higher summer tire volumes, which were offset partially by a delay in pre-season winter sales. Our volumes were up 400,000 units, or 3% year over year. EMEA performance in Q3 also reflects the continued strength of the commercial truck business, reflecting strong price mix, as well as market share gains, and growth in emerging markets.

In our consumer business, similar to what we experienced for the summer season, the winter selling season has been delayed. While this constrained performance in Q3, it means that dealer inventories remain relatively low, and that any snow will trigger a surge in dealer orders, something we've already seen in some parts of Europe in October. It also means that the weather turns cold quickly, the industry will struggle to keep up with demand.

On the cost side, our factory utilization in EMEA improved in the third quarter, resulting in better cost performance. In addition, our team in France continued to make progress in the consultation process related to the closure of one of our factories in France. This process should be completed in time to close the facility in Q1 2014.

As you may expect, we are continuing in our efforts to drive additional cost productivity, as announced earlier this year; but we are encouraged by the growth in earnings and volumes that we've seen over the last two quarters in EMEA. Needless to say, I will now have a front-row seat as we continue to work on our three-point plan to return EMEA to its historical levels of profitability.

Net sales for Latin America in the third quarter were $527 million, compared to $520 million in the prior year. The net sales increase was driven by positive price mix and the strength of our replacement volumes. These were offset partially by lower OE volumes, and a 14% unfavorable currency effect, mainly related to the devaluation of the Venezuelan bolivar, and the weakening of the Brazilian real.

Total unit volumes decreased 4% during the quarter, reflecting a 21% decline in OE volumes, offset partially by stronger replacement sales. As Rich mentioned, our reduction in OE sales is a consequence of our selectivity strategy, which ensures we get full value for HVA tires, products that are in great demand in Latin America. We are excited to maintain the momentum the business has demonstrated in 2013, with the upcoming launch of three great new consumer products in Q4.

Latin America's operating income was $89 million, or 17% of sales during the quarter, $40 million above the prior-year level. The increase was driven by positive price mix, lower raw material costs, and lower un-absorbed overhead. These benefits were partially offset by cost inflation and unfavorable foreign currency exchange.

While we see many of the positives in Latin America's results continuing in Q4, there was some timing of costs that benefited Q3 that will reversed in Q4. I would size this impact at $10 million to $15 million. This includes, among other things, the increased marketing spend in Q4 associated with the new product launches, after very low levels of spend in Q3.

In Asia-Pacific, we saw slowing economic growth in several markets, a declining mining industry, and weakening currencies in key countries like Australia, India, and Indonesia. Despite this, unit volumes of 5.6 million were 7.5% higher than a year ago, given strong growth in China and India.

Asia-Pacific reported segment operating income of $66 million for the quarter, a $2-million increase year over year. Positive price mix versus raw materials, higher volume, and lower start-up expenses associated with our new facility in China were offset partially by unfavorable foreign exchange, higher manufacturing costs, and reduced profits in our Australia retail business.

Turning to Slide 20, you can see our 2013 industry outlook for North America and the EMEA, which remained essentially unchanged from our second-quarter earnings call. You will note for the fourth quarter, however, that North America will be down year over year, again reflecting the aberration of a year ago, when fourth-quarter dealer orders for low-end tires were high post expiration of Chinese tire tariffs.

On Slide 21 we've updated our modeling assumptions for the fourth quarter. Fourth-quarter volume expectations continue to reflect a slow but steady volume recovery in developed consumer replacement markets. Our un-absorbed overhead outlook is consistent with these expectations, with a positive impact in Q4 based on Q3 production.

Finally, on Slide 22, you see other key assumptions for 2013. We refined our assumptions for interest in pension expense, but otherwise these items are unchanged. Overall, we feel good delivering a strong quarter on the heels of our September investor meeting, and believe we can do the same in Q4. With that, we'll open up the call for questions.

Thank you.

(Operator Instructions)

Itay Michaeli, Citi.

Just on clarification on the guidance, I think for last quarter for the un-absorbed overhead from a full-year basis, I think you're calling for a negative $25 million to negative $50 million. I see directionally in the fourth quarter you're looking for positive. Can you kind of size up the full-year range relative to the expectation last quarter?

Itay, let me just address fourth quarter. I think that may be an easier way to do it. Our production was up in Q3, between 2.5 million and 3 million units. What you'll see is the benefit of that third quarter additional production rolling through in Q4.

Okay, that's full-year range, though, from last quarter still guide at $25 million to $50 million, or is that off the table at this point?

Yes. No, I think the full-year range hasn't changed a lot.

Okay, perfect. Then a point of clarification on the OTR piece. I think last quarter you were looking for up about $20 million in Q3. I think you might have comment and upside. Can you talk a little about that in the quarter, and the different movements in that business?

Sorry, Itay, could you repeat your question? Because we missed a couple words there.

Yes, just on the OTR piece, I think last quarter the guidance I believe was about up $20 million impact in Q3. It looked like it came in at up $5 million. Just looking to get a sense of the walk of the delta there. Perhaps talk about the chemicals business and some of the impacts there, and how we should think about that in the next couple of quarters?

Yes. No, I think the -- it's a fair point. We did have some head winds there in the other tire-related businesses that related to our retail businesses, which are in the same category. There was not a big impact for us one way or the other in the chemical business. Net-net, the other tire related came in a little less positive than we had expected. I think if you look at the guidelines that were given for the fourth quarter, I think the $5 million is again similar to what we got in Q3. I think we're expecting some of the same. There are some markets where our retail businesses have not been as strong, and that's a headwind for us. As long as the chemical prices are, in the market place, are pretty steady, then there's not a lot of change one way or the other in the chemical earnings.

Absolutely. Then maybe a big picture question. Could you just -- maybe Rich or Darren can update us on what you're seeing in the overall pricing environment, and remind us what you are baking into for your 2016 SOI growth projections for price mix relative to raw materials, just kind of broadly?

Yes Itay, from a price mix perspective, I'll just go -- take you back to how we think about it. As we look at a world that has had a lot of movements over the course of the past few years, with raw materials increasing as much as 35% in some quarters, and down -- we're forecasting round about 10% for the year at this point. We see a lot of volatility in there, and our philosophy remains that we've shown an ability to manage through those situations very effectively.

We look at this overall in terms of the value proposition that we bring to the market. That's certainly partly price, but it's also service level, it's also our brand, and it's also our customer relations that we have out there. Again, price is really part of that value proposition. The way we look at it, we've got to ensure that our value proposition ultimately and in the aggregate is really very competitive in the market place. In some instances, we need to react to that in order to make sure that that value proposition is fully competitive.

Some cases, with rising raw materials as you saw, as we had to react to that with price increases. As we've had to be competitive, we've had to react the other way as well. I think what we would still tell you very clearly is that we are pursuing a very disciplined strategy around price and mix, and I think our history bodes well for us to manage through those. Darren, you can talk to the projections going forward, which really are not the driver of what we are counting on to hit the targets we set out at our September meeting.

I think Itay, going back to the discussion in the September meeting when we talked about the 10% to 15% earnings growth from 2014 through 2016 -- which, by the way, we are still very confident of -- the view is that's a balanced earnings growth, balancing between growth and cost savings. As we are balancing between growth and cost savings, obviously the work we are doing to target more premium segments of the market is something that's going to be helpful for us, and means that the volume is more valuable than volume may have been for us historically.

But we are focused on the volume and our cost efficiency, which effectively means that we are assuming that our work on price mix offsets raw material costs over that time frame. I think overall we are expecting that raw materials are going to be rising during that three-year time frame, given the increases we expect in global industry volumes.

Terrific. Appreciate all that detail, guys. Thanks again.

Yes. Thanks, Itay

Patrick Archambault, Goldman Sachs

Yes. Good morning, and congrats on a good quarter. Maybe a shorter-term question, and a longer-term. Just following up on that last question, I sort of get the modeling assumptions for the medium-term on pricing versus raw mats, but if we kind of just look out to the -- maybe next year's time horizon as we're trying to figure it out, you guys have carried over a positive variance price mix minus raws for the fourth quarter. How do we think about that for next year? Mix seems to be one of the stable improvers here, but from a pricing perspective, obviously there's increased competition on the lower end, raw materials have started to increase a little bit. Any kind of guidance for maybe the next 12 months would be helpful? Then I have a longer-term question.

Pat, as we think about this for the next year, I think there will be some dependency here on how quickly we see raw materials turning the other way. We've seen some signs here the last couple months of some raw materials coming off the bottom and starting back up. What we're -- what we've been able to do historically over time certainly is manage price mix to offset, or in a lot of cases, more than offset raw material costs. Over the long run, I can still say that is our expectation, that we'll be able to do that.

If we look at times when raw materials increase, when those increases have happened rapidly, I think there have been times when we haven't been able to keep pace. Certainly there are times when that's happened. Over the long-run, and if you take a look at the course of four, six, eight quarters, we've generally been able to catch up. In periods like we've seen of declining raws, we've been able to benefit from that.

I will say this, as you look at 2014, as raw materials increase there will be some lag before the raw material index agreements that we have with certain OE, fleet, and OTR customers kick him. That makes it -- that gives us a little bit of a challenge. I think in the replacement market we're able to react more quickly. I certainly think your point on mix is well taken. We continue to target more premium segments of the market, and that has continued to deliver positive mix for us. To the extent that we are able to manage the equation properly, there have been instances where we have been able to bring the mix to the bottom line.

Okay, yes, that's helpful color. On maybe sort of a longer-term on pricing, there's been a lot said recently about capacity additions in the industry, and the potential to weigh on margins. Could you talk a little bit about your own capacity plans? Can you talk a little bit about what you're seeing in terms of capacity additions in the industry, and whether you're concerned about it at this stage in the cycle, given the volume outlook you have?

Pat, I would tell you as we take a step back and look at this, I think first and foremost we really don't see the supply of HVA tires out-stripping demand in the foreseeable future. I think you can go back again to the investor presentation that we went through in September, and look at the growth that we see coming in those HVA tires, both in mature markets, but also in growth markets or emerging markets, as well. I think that remains our view of the tire industry on a global basis for the future as we look at it.

I'd also say, though, that maybe even more important than that is as we think about our business we think about it very holistically, and I have to say just adding a factory or having a factory doesn't really make one competitive. Certainly Goodyear can make that point, given the capacity that we've taken out. We never would've closed a factory if it was only about having factories and having volume. Our view very much is still remained in the holistic approach to adding values to the customers. You can have a factory, but with that factory you've got to make the tires, you've got to make the right tires, which means you have to have the technical capability, as well as the ability to industrialize those tires. In addition to that, you've got to manage the incremental complexity that comes along with these HVA tires. I say that both within the four walls of the factory, but also relative to the distribution in the channels that you're going to plan in.

Finally, you've got to have aligned distribution in terms of how you're going to sell those HVA tires. It's not a question of just making tires and pushing them out into the marketplace. Our view is that just having a factory doesn't solve these problems. You've got to have a value proposition that gives you a competitive advantage going forward, and we feel very strong that is what the differentiator for Goodyear is in the marketplace.

It is our advantage -- the integrated whole of having innovative new products from the market back, selling those products in the targeted market segments that our customers want, and where we can add value for them and for ourselves, doing it with increasing efficiency along the line of our operational excellence initiatives, as well as making the investments that we see in terms of growth CapEx to support this, while getting the returns that are shareholders deserve; and of course building the team that knows how to do that going forward. That's what it's about. It's not just about having a factory or incremental capacity in place.

Relative to our view of capacity and what have you going forward, again I'll refer you back to our September presentation, where I think Darren did a pretty nice job to walk through our future capital investments. You can see that we do have incremental growth CapEx planned, particularly as we get out to '15 and beyond. We haven't been specific with that at the moment, but I will tell you as evidenced by our discussions then, and again confirmed now, that we do have plans to make sure we are making investments in our business, in line with our ability to win in targeted market segments. That's worked for us, and certainly we believe that's the winning formula going forward.

Okay, great. Thank you very much.

Thanks, Pat

Brett Hoselton, KeyBanc Capital

Two questions here. First, just on volume front, third quarter under-performed your expectations a little bit. What were the one or two primary drivers of that shortfall, in your view?

Brett, I would have to tell you first of all, I'm actually -- I'm pleased with the way our business performed in the quarter, and I think our results show that I'm very happy with the way the business performed and the way the team executed. I actually feel good about the volume we achieved, because it was the right volume. It was focused in the right segments. We made progress, the right progress with the right brands, and we generated the returns that we wanted to. Again, I would tell you we are following a very disciplined approach in line with our strategies to focus on winning in the targeted market segments, and creating that sustainable earnings growth over the long term.

If you take a step back, and you look at volume for the quarter, where we saw -- what we saw is really weaker volumes -- in Asia, in particular. China was strong, but frankly the industry was weak everywhere else. Our Latin America volumes were down. But again, as I think Darren and I both pointed out, that was due to some strategic choices that related to some timing relative to business decisions we had to make. I'm very comfortable with the choices we've made, as they improve our profitability and allow us to serve our key replacement customers better in the region.

Thirdly in Europe, we got off to a slow start. I think the industry got off to a slow start relative to winter tires, primarily driven by weather. We see that trend reversing in October, and we think that will continue on into the fourth quarter. Relative to North America, we saw growth for the first time in ten quarters. We called that, we expected it, and we delivered. You also have to remember we are looking at a flat year-over-year industry in North America.

Maybe one more word on North America. I think it's worth also just taking a quick step back, but we saw growth, or the industry saw growth in North America in the third quarter, really versus a weak comp last year because dealers held off buying tires as the Chinese tariffs fell off. That growth we saw was versus a weak comp, and more importantly at the low end of the market. That's not where we play, I think as we've stressed continually here, and we've acted like that getting out of that business long term.

As we look at the mid and upper segments of the North America market, I'm actually very pleased with how we performed. We saw in an industry in that part of the market that was essentially flat, again -- not very robust growth. I'm very pleased with the share gains we've had in the targeted market segments in the channels that we want, with the customers we want -- and most importantly with the Goodyear brand. So in a flat market in North America overall, and having the performance we did, I would say I am very pleased with the way the business performed.

As I think about -- and this kind of ties into one of your previous questions -- as I think about your longer-term outlook, one of the underlying key assumptions is that your price mix is going to continue to out-perform raw materials, or at least keep pace with the raw materials. I don't see -- you don't seem to see any degradation in that over the longer term.

As I'm thinking about your revenue per tire and I'm comparing it to where we are at today versus where we were at in 2009, revenue per tire is up about 38% in North America on average, and for the entire Company up about 20%. Part of that is mix, probably, part of that is pricing, and so forth. How do you feel the marketplace is going to react to price increases going forward, or do you believe that you can continue to make substantial improvements in your mix going forward to drive that continued out-performance, price mix versus raw materials?

Brett, I'll speak to it from a macro perspective. I think Darren really addressed the price mix versus raw question previously, that we've got a great track record to deal with it, both on the up and down. But Brett, I would tell you we remain probably more optimistic than we ever have relative to the opportunities the market's going to present us with. If we go back to the mega-trends that we reviewed, the market is mixing up. We're, as I mentioned, gaining share in our targeted market segments in a flat market, where those -- that HVA tire growth really hasn't kicked in yet, as we still see pent-up demand out in the marketplace.

As we think about how we continue down a strong path of not only price but mix, it's really around how we can create a value proposition for our customers to do business with us. Again, I would go back to the innovative new products to meet the demands of the HVA trend going on. We have an excellent proven track record at that. We are again focused on those parts of the market where we can add value to customers, and frankly that's what we're seeing. We're winning with customers who value the Goodyear brand, and who are relying on us to help them deliver that going forward. Again, if we look at North America's result in particular, it's working.

As I look at the operational excellence initiatives that we're putting in place, again they're certainly about getting more efficient. But the real halo, the real benefit from it is being a better supplier to our customers, allowing them to meet the demands of the market with lower inventories and more reliable supply. That's a game changer. Again it says the tire business isn't only about building a factory and pushing tire out to put in a dealer's inventory. It's the right tire at the right time in the right place. That's value creation in the market, and that's what's going to continue our business model going forward in a way that allows us to continue to grow this business profitably and sustainably in the future. That's how we think about it. It's not simply a question of price versus raws, or solely just go up and down with industry demand. Certainly we have to react to those things, but that's not what's driving us into the market.

Fair enough. Thank you very much, gentlemen.

Thanks, Brett.

Thank you. Our final question will come from Rod Lache with Deutsche Bank. Please go ahead, your line is open

I was hoping maybe just to take a step back, talking about North America and Europe replacement markets. Presumably the HVA replacement market has been and probably will continue to over time out-perform the LVA market? I understand that there is a weird comp this quarter and probably next quarter as well in North America. But directionally, it makes sense that HVA replacement would be out-performing.

Goodyear at this point, as you guys have said, disproportionately HVA -- I think you guys said 67% HVA North America, even higher than that in Europe. Wouldn't it make sense from your perspective that at some point we would see Goodyear's growth out-perform the market, yes or no? When would you expect start to see that translating into kind of relative performance and market share?

Rod, I think the points you raise are the right points. As we -- those are segments of the market that are growing faster than the market overall. Those are the segments in the market where we are being successful, and that's true in North America. It certainly was true in the summer market in EMEA. The winter market is -- has just been getting started, so there's more to come on that one.

I agree with all those points, but having said that and having looked at what we are going to achieve over the next three years, I think the balance for us is an expected growth rate that is essentially in line with the industry. That's relatively low overall growth in mature markets, higher growth rates in emerging markets, but all of it weighted toward high-value-added. That does say, well, if we are growing faster in high-value-added tires, there is some of the lower-end business that we are doing less volume in, because we can't do it profitably. That's something we have to manage from a cost perspective, and we are. That's one of the things that has caused us to look at structural cost savings in Europe, because we needed to.

I think on balance the expectation that we are going to be in that sort of 2% to 3% unit volume growth category over the course of the next three years -- it's consistent with us growing in HVA. Obviously our HVA unit volumes are growing faster, but it also recognizes that there are, as we make that shift, there are some lower-end business that we walk away from.

Would you think -- North America and Europe are almost 80% of the Company. Would you think that those businesses in the replacement market are growing at this point? I'm just try to reconcile that against the flat replacement market, and past couple quarters have been a little bit lighter.

Yes. Two things, Rod. I think if you look -- if you're thinking about splitting emerging markets from mature markets, I guess it's important to recognize that there are parts of the market in Europe that are emerging markets, as well, and fit in that higher-growth category. For the mature markets themselves, in the third quarter we saw both North America and EMEA with significant growth in the replacement market. In North America, Rich has addressed the fact that that was really more low-end-related growth -- still operating at historically low levels in North America in the replacement market. Even though we may get more than market growth rates in high-value-added tires, it still amounts to very little overall growth.

In Europe, Middle East, and Africa, we did see about a 4% increase in the replacement market in the third quarter. I would say that we were happy with our results in the summer market. We held our share in the summer market. Summer volumes were -- actually performed fairly well year over year. The winter market is off to a slow start. I think the challenge is there a little bit bigger. The good news is we did get -- there was some snow in some markets in October, and we've seen our order volumes pick up in October. The start of the fourth quarter in the winter season is a lot stronger for us than the third quarter was.

Okay. Lastly, you guys have done extremely well in terms of being very disciplined in terms of pricing and mix. At this point, there are companies that are putting out some fairly lofty expectations, like Michelin talking about 20% per year growth, and HVA over the next three years something like that. Is it reasonable to assume that from Goodyear's perspective that your priority is to preserve pricing and maintain that discipline to protect profitability, or are you looking at some objectives for growth in HVA that at some point take priority?

Rod, I think it's a good question. Frankly, I think it's the one that we revisit internally as a Management team, as well. We laid out a strategy about how we wanted to manage the business and how we saw best to do it. We said, and you've heard us repeat often, we don't have a strategy that's just volume for volume's sake. It's not how we're going to manage the business. It's not how we've been managing the business. It's also very tempting just to take tires and move them into the marketplace. That's not the strategy that we've done. That's the discipline you're talking about, and we are committed to doing that. I think in low-industry-volume environments, that's when that strategy is challenged, and we've been very disciplined in how we're going to manage that going forward.

That said, Rod, life -- the industry isn't simple -- we've got to balance things off. That's to say that volume, and volume in the HVA markets in the right -- HVA tires in the right market segments is something that we are very focused on. So it's to say we have to balance those two things off -- that we want to grow in the right markets, we want to invest in the business to be able to do that going forward. Thus you see the discussions about investment in CapEx in '15 and beyond from our September meeting, but we will do it in a very disciplined way. I think that's been our strategy, and our intention is to stick to it.

Thank you.

Thanks, Rod.

Thanks, Rod. Everybody thanks very much for listening. Again, we're very pleased with the results for the quarter, and we look forward to finishing the year strong. Thank you.

Thank you and that does conclude today's conference. You may disconnect at any time, and have a great day.